Securities Law & Instruments


[Update: The terms and conditions imposed by the Director in this decision were removed as at August 31, 2007.]

In the Matter of the Registration of
Pente Investment Management Ltd.


Opportunity to be heard by the Director
Section 26(3) of the Securities Act


Date:
August 16, 2006
 
Director:
David M. Gilkes
Manager, Registrant Regulation
  Capital Markets Branch    
 
Submissions:
Isabelita Chichioco
For the staff of the Commission
 
Robin J. V. Fielding
For Pente Investment Management Ltd.

          Background
  1. Pente Investment Management Ltd. (PIM) has been registered in Ontario in the categories of Limited Market Dealer, and Investment Counsel and Portfolio Manager since March 1990.
  2. On June 30, 2006 the Ontario Securities Commission (OSC) received PIM’s audited financial statements for the year end March 31, 2006. The financial statements revealed that as of March 31, 2006 PIM had a capital deficiency of $3,500. Based on unaudited financial statements as at June 30, 2006, the capital deficiency had been rectified.
  3. On July 17, 2006 staff of the OSC wrote PIM indicating that it had recommended that standard terms and conditions be imposed on PIM’s registration for a period of six months.
  4. On July 25, 2006 PIM requested an Opportunity to be Heard (OTBH) by the Director pursuant to subsection 26(3) of the Securities Act that states:

    (3) Refusal – The Director shall not refuse to grant, renew, reinstate or amend registration or impose terms and conditions thereon without giving the applicant an opportunity to be heard.
  5. The OTBH was conducted through written submissions.

    Submissions
  6. OSC staff focus on three criteria in determining whether an applicant is suitable for registration: proficiency, integrity and financial solvency.
  7. Financial statements are the principal tool used by the OSC to monitor a registrant’s financial viability and its capital position.
  8. Regulation 1015 made under the Act requires:

    Every adviser shall maintain a minimum free capital of the maximum amount, if any, that is deductible under any clause of the bonding or insurance policy required under section 108 plus $5,000 of working capital calculated in accordance with generally accepted accounting principles or such greater amount as the Director considers necessary where the adviser exercises control over clients’ funds or securities.
  9. Mr. Fielding, President of PIM explained that the capital deficiency was the result of declaring a retroactive bonus paid to Mr. Fielding to reduce taxable income. The amount of bonus led to the capital deficiency. The deficiency was recognized by PIM after the financial statements had been prepared. The capital position had been rectified by the time the financial statements were filed with the Commission on June 30, 2006.

    Decision
  10. All registrants are required to meet the capital requirements of the Act. Maintaining minimum free capital is a serious regulatory obligation placed on registrants. This requirement helps to protect investors from insolvency fostering confidence in Ontario’s capital markets. The dollar amount of free capital needed is not a prohibitive expense.
  11. When this obligation is not met, OSC staff has regularly recommended that terms and conditions to monitor the financial situation of the firm be imposed on its registration. Only in rare circumstances would this course of action not be followed. PIM’s tax planning is not a persuasive reason not to impose monitoring terms and conditions.
  12. Therefore, the terms and conditions as set out in Schedule A are imposed on the registration of PIM. PIM must continue to meet all requirements under the Act that apply to it as a registrant.

    August 16, 2006


David M. Gilkes
Manager, Registration Regulation
Capital Markets Branch


Schedule A

Terms and Conditions on the Registration of
Pente Investment Management Ltd.

  1. Pente Investment Management Ltd. shall file on a monthly basis, for a period of six months effective with the month ending August 31, 2006, the following information:

    a.       year-to-date unaudited financial statements, which includes a balance sheet and income statement prepared in accordance with generally accepted accounting principles;

    b.       month end calculation of excess free capital.

    This information shall be filed no later than three weeks after each month end with the Compliance section of the Ontario Securities Commission, attention Financial Analyst.