Trinity Wood Securities Ltd. and Peter Browning - Opportunity to be Heard

In the Matter of Staff’s Recommendations
for the Refusals of Registration
of Trinity Wood Securities Ltd. and Peter Browning

Opportunity to be Heard by the Director
Section 31 of the Securities Act (Act)

Decision

1. For the reasons outlined below, my decision is to refuse the registrations of Trinity Wood Securities Ltd. (TWSL) and Peter Browning.

Overview

2. By letter dated May 22, 2012, Staff recommended that:

1. TWSL’s application for registration as an investment fund manager (IFM) and exempt market dealer (EMD) be refused, and
2. Browning’s application for registration as ultimate designated person (UDP), chief compliance officer (CCO) and dealing representative of TWSL be refused. On June 4, 2012, TWSL and Browning (the Applicants) requested an opportunity to be heard.

3. The primary reasons given by Staff for its refusal recommendations were the significant outstanding financial obligations owed by Browning and his related or connected companies, and Browning’s failure to disclose these outstanding financial obligations during the time he was previously registered with Trinity Wood Capital Corporation (TWCC).

4. My decision is based on the written submissions by Mark Skuce, Legal Counsel, Compliance and Registrant Regulation Branch of the Ontario Securities Commission for Staff, and by Conrad A. Willemse, counsel to the Applicants.

Suitability for registration and whether registration is otherwise objectionable

5. Subsection 25(1) of the Act states that no person or company shall engage in the business of trading in securities without being registered under the Act as a dealer or dealing representative. Similarly, subsection 25(4) states that no person or company shall act as an IFM unless they are registered under the Act as an IFM. In the recent case of Re Sawh and Trkulja (2012), 35 O.S.C.B. 7431 (Sawh and Trkulja) at para. 142, the Commission reaffirmed the long-standing proposition that “[r]egistration is a privilege, not a right, that is granted to individuals and entities that have demonstrated their suitability for registration”.

6. Subsection 27(1) of the Act provides that the Director shall register a person applying for registration unless it appears to the Director that the person is not suitable for registration or that the registration is otherwise objectionable.

7. The three criteria for determining suitability for registration - integrity, proficiency and solvency - have been explained in numerous decisions of the Director (see, for example, Re John Doe (2010), 33 O.S.C.B. 1371 and Re Ittihad Securities Inc. (2010) 33 O.S.C.B. 10458). Integrity relates to the applicant’s honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law. Proficiency relates to prescribed proficiency requirements, as well as the applicant’s knowledge of the requirements of Ontario securities law. Solvency is an indicator of a firm’s capacity to fulfill its obligations, and can be an indicator of the risk that an individual will engage in self-interested activities at the expense of clients.

8. In Sawh and Trkulja, the Commission discussed the meaning of “otherwise objectionable” in the context of the test for registration:

In our view, a purposive approach should be taken to the analysis of… whether registration would be “otherwise objectionable” in light of the Commission’s mandate, as expressed in section 1.1 of the Act… (a) to provide protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient capital markets…

… [S]ection 2.1 of the Act directs the Commission, [i]n pursuing the purposes of the Act, to have regard to a number of principles, such as requirements for the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants. … [R]egistrants are in a position where they may harm the public, and regulating the conduct of registrants is therefore a matter of public interest…

(Sawh and Trkulja, supra, at paras. 289 and 290)

9. In considering the public interest, the Director should consider the applicants’ past conduct as a predictor of future behaviour. This principle has been set out in numerous Director’s decisions, and also in Sawh and Trkulja at para. 153.

Submissions

Summary of Staff’s submissions

10. Staff argues that TWSL and Browning are unsuitable for registration and that their registrations would be objectionable. The primary reasons for Staff’s recommendations are the significant level of outstanding debts (approximately $2.6 million in total) owed by Browning and companies related or connected to him in the Trinity Wood corporate family, and Browning’s failure to disclose these debts as required. Staff also submits that granting these registration applications would set a troubling precedent that would allow registered firms to become insolvent, lose their registration, and then simply “restart” their operations under a different corporate identity with the same directing minds.

Background

11. Until recently, Browning was the UDP, CCO and dealing representative of TWCC. TWCC was registered as a limited market dealer (then EMD) from 1998 to January 2010, when its registration was suspended for non-payment of fees. In 2012, TWCC’s certificate of incorporation was cancelled.

12. TWSL was incorporated in February 2011. TWSL is indirectly owned by a family trust, whose beneficiaries are Browning, Browning’s spouse, and their three sons. TWSL proposes to manage its own fund and to raise capital for third party mining companies on a commission basis.

13. The following companies are related or connected to TWSL or Browning:

1. TWCC. Browning was the UDP, CCO and dealing representative of TWCC. All of the TWCC shares were indirectly owned by Browning and his spouse.
2. Trinity Wood Strategic Mining 2008-I Inc. (TWSM). TWSM is a wholly-owned subsidiary of TWCC and the general partner of Trinity Wood Mining 2008-I Flow-Through Limited Partnership, which was wound up in 2009. Browning and another individual were the sole officers and directors.
3. Trinity Wood Asset Management Inc. (TWAMI). TWAMI was incorporated for the sole purpose of developing, launching and managing the Trinity Wood Senior Life Settlement Fund, which was never completed. Browning is the sole officer and director of an entity that is the majority shareholder.
4. Liquidity Capital Trinity Wood (LCTW). LCTW carries on a factoring business through a franchise agreement with Liquid Capital Corp. Browning and another individual are the sole officers and directors of a holding company for LCTW.

14. According to the registration applications filed by Browning and TWSL, the following financial obligations are outstanding:

1. Approximately $0.45 million in debt obligations by TWCC, TWAMI, LCTW and Browning, and
2. Approximately $2.12 million in unsatisfied judgments by TWCC, Browning, TWSM, TWAMI. The Applicants submit that substantially all of these debts relate to the unsuccessful launches of two financial products and not the conduct of Browning or TWCC. As such, they argue that these debts are not indicative of future events or the incurrence of future debts.

15. Staff further submits that while almost all of the financial obligations were incurred by Browning while he was registered under the Act with TWCC, Browning did not disclose any of them to Staff by filing an updated Form 33-109F4 – Registration of Individuals and Review of Permitted Individuals (Form F4).

The Applicants are not suitable for registration

16. Staff’s fundamental concerns with the Applicants’ suitability for registration stem from the numerous financial obligations owing by Browning and his related or connected companies, and his failure to disclose these obligations.

17. Staff submits that this case presents the classic situation that the solvency criteria for registration is intended to protect against. Browning and his related or connected companies owe almost $2.6 million in outstanding financial obligations (approximately $1 million of which are owed by Browning himself). Staff argues that these very significant obligations create an undue risk that TWSL and Browning will engage in self-interested activities at the expense of clients, for example, by recommending unsuitable trades as a dealer operating on a commission basis. Browning disagrees with this assessment. He submits that the debts are his personal debts, that TWSL has no debts, and that the debts of the other Trinity Wood companies have no legal impact on Browning or TWSL. He also submits that there is no evidence that he has engaged in self-interested activities in the past and, therefore, it is not reasonable to expect that he will do so in the future.

18. Staff submits that Browning is arguing that TWSL has a “clean slate” and is not tainted by any of the obligations owed by its sister companies or by its proposed UDP, CCO and dealing representative. Staff disagrees with this argument. TWSL is a one-man operation, with Browning as its directing mind and sole applicant for individual registration. Staff submits that Browning’s considerable financial obligations bear directly on his own suitability for registration, and insofar as Browning and TWSL are, for practical purposes, one and the same, those same considerable financial obligations bear directly on TWSL’s suitability for registration. Browning submits that he is applying for registration again so that he can recover the losses he has incurred and earn the money to repay these creditors.

19. Lastly, Staff submits that it is not simply Browning’s personal financial obligations that have a bearing on his suitability for registration, but also those of the other companies in the Trinity Wood corporate family. Items 16.2 and 16.4 of Form F4 both specifically require disclosure of financial obligations over $5,000 and court judgments for firms where the individual applicant was a partner, director, officer or major shareholder (as is the case for Browning’s relationship with TWCC, TWSM, TWAMI, and LTCW).

20. Browning’s past conduct is directly relevant to the current registration application. He incurred substantial debts personally and through his related and connected companies while registered with TWCC. The outstanding financial obligations of Browning and his related or connected companies represent, at least, a very real risk that Browning and TWSL might engage in self-interested activities at the expense of clients.

21. Moreover, the debts were not disclosed as required. All of the financial obligations were incurred while Browning was registered under the Act with TWCC and prior to submitting his application for TWSL, yet none of these obligations were reported to Staff as required. By failing to report these obligations, Browning deprived Staff of the opportunity to consider taking regulatory action (such as terms and conditions or suspension) in respect of his mounting solvency issues. As Staff submits, at best, Browning’s failure to make the required reporting has called into serious question whether he has the proficiency to be the UDP and CCO of a registered firm. In my view, he does not.

22. Browning has advised Staff that he failed to report because he was unaware that he was required to do so. He submits that he delegated the filing of registration documents to a highly qualified office manager, who was also not aware of the requirement to report these obligations. However, he also acknowledges that he was ultimately responsible for making these filings. It is a registrant’s sole responsibility to comply with his or her registration requirements. Browning failed to do this. If Browning willfully failed to report his financial obligations, it would impugn his integrity for registration.

23. Therefore, in my view, neither Browning or TWSL are suitable for registration.

The Applicants’ registrations are objectionable

24. Regardless of the determination as to suitability, the Director has the clear power under the Act to determine that it would be objectionable to approve a registration application on broader public interest grounds. Staff argues that the proposed registrations of Browning and TWSL would be objectionable on public interest grounds. Staff supports this position by asking the following question: Why did Browning not apply to reinstate the registration of TWCC instead of applying for registration for a new company TWSL? Staff submits that it is fair to infer that Browning did not seek the reinstatement of registration of TWCC because he knew that such an application would have little chance of success, as TWCC owed approximately $0.5 million at the time.

25. Staff submits that little, if anything, has changed from TWCC to TWSL, and most importantly, Browning remains the directing mind. Browning submits that if not for the problem of meeting the minimum capital requirement in the short term, the application to reinstate the registration of TWCC would have been made instead.

26. Browning submits that he has had an impeccable career as a Chartered Accountant and senior partner of a mid-size international accounting firm, as a business man and entrepreneur and as a market participant. He argues that it is more objectionable that after an impeccable business and professional career of 42 years that Staff would seek to deprive him of the ability to earn income in his chosen career. He also submits that there is no basis for suggesting that “such problems will re-occur as a result of Mr. Browning’s directing mind”.

27. As Staff submits, TWSL is a one-man operation, with Browning as its directing mind and sole applicant for individual registration. Browning’s considerable financial obligations bear directly on his suitability for registration insofar as Staff submits (and I agree), Browning and TWSL are, for practical purposes, one and the same. Viewed in its entirety, Browning’s past conduct does not provide me with sufficient comfort that he, or TWSL, would be able to achieve the high standards of business conduct required of securities industry professionals. As a result, registering either of Browning or TWSL would not be in the public interest and their registrations are otherwise objectionable.

Decision

28. My decision is to refuse the registrations of TWSL and Browning. In my view, neither Browning or TWSL are suitable for registration under any of the three pillars (proficiency, solvency or integrity) and the registrations of either of Browning or TWSL would be objectionable.

 

“Marrianne Bridge”, FCA
Deputy Director, Compliance and Registrant Regulation Branch
Ontario Securities Commission
October 31, 2012