IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c. S.5, AS AMENDED AND IN THE MATTER OF STAFF'S RECOMMENDATION TO IMPOSE INTERIM TERMS AND CONDITIONS ON THE REGISTRATION OF W.A. ROBINSON ASSET MANAGEMENT LTD.
OPPORTUNITY TO BE HEARD BY THE DIRECTOR UNDER SECTION 31 OF THE SECURITIES ACT (Ontario)
Decision of the Director
Having reviewed and considered the joint recommendation (Joint Recommendation) signed by staff of the Ontario Securities Commission (Staff) and Matthew Robinson, Ultimate Designated Person of W.A. Robinson Asset Management Ltd. (WARAM) on July 31, 2020, a copy of which is attached as Annex A to this Decision, and on the basis of the Joint Recommendation, I, Debra Foubert, in my capacity as Director under the Securities Act, R.S.O. 1990, c. S.5 (the Act), accept the Joint Recommendation of the parties and herby impose on the registration of WARAM the Interim Terms and Conditions (the Interim Terms and Conditions) set out in Schedule A to the Joint Recommendation.
Furthermore, upon the agreement of Staff and WARAM, I am also inserting, at the end of paragraph 9 of these Interim Terms and Conditions, the following additional condition:
In its first Progress Report, WARAM will include as an Appendix a copy of its updated suitability determination policy and procedures incorporating the Concentration Methodology.
August 7, 2020
IN THE MATTER OF STAFF'S RECOMMENDATION TO IMPOSE INTERIM TERMS AND CONDITIONS ON THE REGISTRATION AS AN ADVISER IN THE CATEGORY OF PORTFOLIO MANAGER, AN INVESTMENT FUND MANAGER AND A DEALER IN THE CATEGORY OF EXEMPT MARKET DEALER OF W. A. ROBINSON ASSET MANAGEMENT LTD.
1. This joint recommendation (the Joint Recommendation) relates to the registration status of W. A. Robinson Asset Management Ltd. (WARAM or the Firm) as an adviser in the category of portfolio manager (PM) under the Securities Act (Ontario) (the Act).
2. The Firm is the manager of a mortgage investment entity, the Frontenac Mortgage Investment Corporation (FMIC). Common shares of FMIC are offered under prospectus but are not exchange-traded. FMIC's first prospectus as a corporate issuer was receipted on May 29, 2020, its previous prospectuses having been receipted as an investment fund. The executive officers of FMIC are the same as the executive officers of WARAM and FMIC is located in the same offices as WARAM.
3. Staff's concerns are not related to WARAM's management of FMIC as an issuer. Staff's concerns are related to the operation of WARAM as a PM.
4. WARAM has been registered pursuant to the Act since October 22, 2002, aside from a brief period at the outset of 2006 when the registration expired due to non-renewal. The Firm was registered in the category of investment counsel from October 22, 2002 to September 10, 2004. From September 10, 2004 until September 28, 2009 the Firm was registered in the categories of investment counsel and portfolio manager (ICPM) and limited market dealer (LMD). On September 28, 2009 the Firm's registration as an ICPM became registration as a PM and its LMD registration became registration in the category of EMD. The Firm was registered as an investment fund manager on December 11, 2009. WARAM's office is located at 14216 Road #38, Sharbot Lake, Ontario.
5. As of March 31, 2019, the Firm had 622 managed account clients with $92,081,177 in assets under management. Of the Firm's 622 managed account clients, 563 have invested only in FMIC common shares.
6. FMIC has consistently reported a net profit and Staff has received no complaints from investors.
WARAM Compliance Review
7. Staff conducted a compliance review of WARAM, which commenced on June 11, 2019 (the Compliance Review). Staff identified two main deficiencies during their review:
(a) A majority of WARAM clients are overly concentrated in shares of FMIC; and
(b) WARAM does not have an adequate suitability process.
8. Staff found that when WARAM's advising representative recommended an investment in FMIC shares of more than 10% of the client's net financial assets for the client's managed account, there was no documented analysis setting out why that investment was suitable for the client in their circumstances. Section 19(1) and 32(1)(e) of the Act and s. 11.5(2)(l) of National Instrument NI 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) require that registrants document the suitability analyses performed for their clients.
9. Staff also found that WARAM's compliance manual does not include any policies and procedures for monitoring and managing the concentration risk in their clients' portfolios. Staff noted that there is nothing in the compliance manual that sets a reasonable concentration threshold to ensure that a client's investment in a security, sector or industry does not exceed thresholds which would make the security or the portfolio potentially unsuitable for the client. Section 32(2) of the Act and s. 11.1 of NI 31-103 require registrants to have written policies and procedures establishing a system of controls and supervision sufficient to ensure compliance with Ontario securities law.
Staff's Recommendation to the Director and WARAM's Request for an OTBH
10. On January 24, 2020 Staff recommended to the Director that interim terms and conditions be imposed on WARAM's registration to prevent the further concentration of WARAM's managed account clients in FMIC while an appropriate concentration risk analysis is completed for each client.
11. On February 7, 2020 WARAM requested an opportunity to be heard (OTBH).
12. The Firm does not agree with Staff's findings as set out in the Compliance Review, or admit to non-compliance with Ontario securities law. However, the Firm consents to having the interim terms and conditions set out in Schedule "A" (Interim Terms and Conditions) attached to the Firm's registration at this time.
Joint Recommendation on Interim Terms and Conditions
13. Therefore, in order to resolve the matter of WARAM's request for an OTBH, Staff and WARAM jointly recommend to the Director that the Interim Terms and Conditions shall be imposed on the registration of WARAM pursuant to s. 28 of the Act.
14. Staff and WARAM acknowledge that the Interim Terms and Conditions are an interim measure only, and that further regulatory action may be initiated by Staff in order to fully address the deficiencies noted by Staff in the Compliance Review, including but not limited to addressing any over-concentration issues.
15. Staff and WARAM acknowledge that if the Director does not accept this Joint Recommendation:
(a) this Joint Recommendation and all discussions and negotiations between Staff and WARAM in relation to this matter shall be without prejudice to the parties; and
(b) WARAM will be entitled to an OTBH in accordance with s. 31 of the Act in respect of any recommendation that may be made by Staff regarding its registration status.
16. The parties agree that this Joint Recommendation, and any Director's decision approving of it, will be published on the OSC's website and in the OSC Bulletin.
July 31, 2020
I approve the attached Joint Recommendation.
Dated this th day of August, 2020.
Interim Terms and Conditions on the Registration of W. A. Robinson Asset Management Ltd.
The registration of W. A. Robinson Asset Management Ltd. (the Firm) as an adviser in the category of portfolio manager, an investment fund manager, and a dealer in the category of exempt market dealer is subject to the interim terms and conditions set out below. These interim terms and conditions were imposed by the Director pursuant to section 28 of the Securities Act (Ontario) (the Act).
Retention and Mandate of Consultant
1. Within forty-five (45) days of the date these terms and conditions are imposed on the Firm's registration, the Firm shall, at its own expense, retain an independent consultant (Consultant) approved by a Deputy Director or Manager in the Compliance and Registrant Regulation Branch (the OSC Manager), to prepare a reasonable, appropriate and empirically supported methodology for determining an appropriate level of investment concentration (Concentration Methodology) for investors of common shares in the Frontenac Mortgage Investment Corporation (FMIC) for use in suitability assessments for clients of the Firm who hold FMIC common shares as part of their portfolio.
2. The Consultant shall prepare a report setting out the Consultant's recommended Concentration Methodology, which shall include the basis for the Consultant's recommendation and references to the empirical support relied upon by the Consultant in support of the Consultant's recommendation (the Concentration Methodology Report). The Concentration Methodology Report shall be submitted to the OSC Manager within sixty (60) days of the Consultant being approved by the OSC Manager.
3. The Concentration Methodology Report, without limitation, shall include the following:
a. Where the Consultant refers to external reference materials and industry guidance in developing the Concentration Methodology, the Consultant shall provide a summary of these materials in the Concentration Methodology Report;
b. Empirical evidence demonstrating that the investment concentration level set out in the Concentration Methodology is reasonable and appropriate in the circumstances;
c. If the Concentration Methodology does not use the client's net financial assets, an analysis of why the metric used in lieu of net financial assets is appropriate in the circumstances; and
d. A statement that, in the opinion of the Consultant, the Concentration Methodology is reasonable to meet the suitability obligations of the Firm to its managed account clients.
Review of Consultant's Report
4. The Concentration Methodology Report must be reviewed and approved by the Firm's ultimate designated person (UDP) and chief compliance officer (CCO) and signed by the UDP and CCO as evidence of their review and approval before being submitted to the OSC Manager. The OSC Manager shall review the Concentration Methodology Report and the Consultant and the Firm shall respond to any questions posed by the OSC Manager respecting the Concentration Methodology Report. When the OSC Manager's questions, including any follow-up questions, have been satisfactorily addressed, the OSC Manager shall provide the Consultant and the Firm with a notice of non-objection (the Notice).
Firm's Suitability Assessment
5. Upon receiving the Notice, the Firm shall perform a suitability assessment for each of its clients that have entered into a managed account relationship with the Firm (Firm Client) and who hold common shares in FMIC, in order to determine a suitable level of investment concentration for each Firm Client's investment in common shares of FMIC using the Concentration Methodology (the Client Concentration Review).
6. Other than for reporting insiders of FMIC, as such term is defined by applicable securities laws, the Firm shall not accept or direct any further investment in common shares of FMIC, whether through a purchase of FMIC common shares or through a dividend reinvestment plan, for any Firm Client until the Client Concentration Review for that Firm Client has been completed by the Firm.
7. If, following each Client Concentration Review, the Firm determines that a specific Firm Client's current investment in common shares of FMIC is overconcentrated, the Firm will not accept any further investment in FMIC common shares by that Firm Client, either through a purchase of FMIC common shares or through a dividend reinvestment plan, until the Firm determines that the portfolio of the specific Firm Client is no longer overconcentrated in common shares of FMIC.
8. For so long as these terms and conditions are in effect, the Firm may not rely on subsection 13.3 (2) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to accept an unsuitable investment in common shares of FMIC by any existing or new Firm Client, whether through a purchase of securities or through a dividend reinvestment plan.
Firm's Progress Reports
9. Within sixty (60) days of receiving the Notice, the Firm shall provide a progress report to the OSC Manager documenting the details of the Client Concentration Reviews and any clients who are overconcentrated, as set out in paragraph 5 above (Progress Report). Every sixty (60) days following the receipt of the Progress Report, the Firm shall provide a further Progress Report to the OSC Manager documenting the Client Concentration Reviews and any overconcentrated clients until the Client Concentration Review is complete. Each Progress Report shall be attested to by the Firm's UDP and CCO. The Firm shall make substantial progress towards completing all of the Client Concentration Reviews within each sixty (60) day reporting period.
Firm's Attestation Letter
10. These terms and conditions shall remain in place until they are removed by Staff of the Ontario Securities Commission (Staff). Upon completion of all of the Client Concentration Reviews, the Firm shall submit an attestation letter (the Attestation Letter) to the OSC Manager signed by the UDP and CCO attesting that the Client Concentration Reviews have all been completed in accordance with these terms and conditions. The OSC Manager shall review the Attestation Letter and the Consultant and the Firm shall respond to any questions posed by the OSC Manager respecting the Attestation Letter.
Other Procedural Matters
11. The Firm shall immediately submit to Staff a direction from the Firm giving unrestricted permission to Staff and the Consultant to communicate with one another regarding the development of the Concentration Methodology and the items addressed in the Concentration Methodology Report
1. The Firm shall provide the Consultant with reasonable access to all of the Firm's books and records necessary for the Consultant to complete its mandate and will allow the Consultant to meet privately with the Firm's officers, directors and employees. The Firm shall require its officers, directors and employees to cooperate fully with the Consultant with respect to the Consultant's mandate under these terms and conditions.
2. The Firm shall not terminate the Consultant's retainer without the prior written authorization of the OSC Manager.
These terms and conditions of registration constitute Ontario securities law, and a failure by the Firm to comply with these terms and conditions may result in further regulatory action against the Firm, including a suspension of its registration.
July 31, 2020
Signature of Ultimate Designated Person
Print Name of Ultimate Designated Person