Calculation of excess working capital and the use of subordination agreements

Delivered by e-mail

September 9, 2013

Calculation of excess working capital and the use of subordination agreements

The purpose of this e-mail is to remind registrants of the obligations surrounding the execution and reporting of subordination agreements as required by Section 12 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Recently, we observed that firms are not executing and reporting subordination agreements appropriately for the purposes of Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1). This e-mail outlines these obligations. 

Executing subordination agreements and delivery to the regulator

When firms subordinate long-term related party loans for the purpose of excluding related party debt from Line 5 of Form 31-103F1 in the calculation of excess working capital, firms are to execute a subordination agreement in the form and content prescribed in Appendix B of NI 31-103 and deliver a copy of the agreement to the Ontario Securities Commission (OSC or we). If a copy of the subordination agreement is not delivered to the OSC, the loan is not considered to be subordinated for the purpose of calculating excess working capital on Form 31-103F1. 

When delivering a new subordination agreement, firms should only report the incremental increase of the amount of the related party loan, rather than the full balance. We may request firms to provide a schedule reconciling the total outstanding subordinated loan balance.

Repaying subordinated loans

Section 12.2 of NI 31-103 requires a firm to notify its principal regulator 10 days before the full or partial repayment of a subordinated loan, or the termination of the agreement. We may request further supporting documentation, such as updated interim financial information and Form 31-103F1, to assess whether the firm will have sufficient excess working capital following the loan repayment. If a repayment is made and the repayment causes the firm to have insufficient excess working capital, we may take regulatory action. 

After a partial repayment of a loan, the firm should provide an updated schedule to us indicating the updated outstanding subordinated loan balance.

Questions

If you have any other questions with respect to this e-mail, please contact: 

Isabelita Chichioco
Financial Analyst, Compliance and Registrant Regulation
Ontario Securities Commission
[email protected]