Counsel Portfolio Services Inc. - Opportunity to be Heard

Overview

Section 12.13 of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103) requires that annual financial statements be delivered to the Commission within 90 days after the end of a registered adviser’s financial year. Section 12.10 of NI 31-103 requires that annual financial statements delivered to the Commission be audited.

CPSI filed its audited financial statements for the year ended December 31, 2009 on April 5, 2010, 2 business days after they were due. By letter dated April 21, 2010, staff recommended to the Director that terms and conditions be imposed on CPSI’s registration. The terms and conditions had two parts. Part one required the filing of monthly year-to-date unaudited financial statements and capital calculations be imposed for a minimum period of six months. Part two required CPSI to review its procedures for compliance with Ontario securities law and to provide a report with the Commission no later than May 21, 2010.

Process for requesting an opportunity to be heard

Under section 31 of the Act, if a registrant wants to oppose staff’s recommendation for terms and conditions, the registrant may request an opportunity to be heard. A registrant can choose to be heard either through written submissions to the Director or through a personal appearance before the Director. In either case, notice is required.

By letter dated May 3, 2010, CPSI requested a personal appearance before the Director. The opportunity to be heard occurred on June 1, 2010.

Submissions

Staff submits that the filing of annual audited financial statements by registrants is one of the most serious regulatory requirements in the Act. Financial solvency is one of the essential components of a portfolio manager’s continued suitability for registration. Financial statements are the principal tool enabling staff to monitor a registrant’s financial viability and its capital position. As a result, the late filing of audited financial statements raises serious potential regulatory concerns and needs to be addressed in serious fashion.

For these reasons, staff uniformly recommends the imposition of terms and conditions on the registration of registrants that don’t file their financial statements on a timely basis. In staff’s opinion, the filing of audited financial statements is a serious regulatory obligation that belongs with the registrant, and only with the registrant, and only in extremely rare circumstances would staff not recommend imposing terms and conditions on a registrant that filed its financial statements late.

CPSI argues that the late filing of its annual financial statements resulted from a clerical error. While I have some sympathy for CPSI’s argument, my view is that it is solely the responsibility of the registrant and its registered individuals to ensure that the annual audited financial statements of CPSI are filed on a timely basis.

Decision and reasons

My decision is to impose part one of the recommended terms and conditions on the registration of CPSI for a period of six months starting April 30, 2010. However, I decided not to impose part two of the recommended terms and conditions on the registration of CPSI. In my view, CPSI clearly now understands its obligation to file annual financial statements on a timely basis and no substantial additional regulatory benefit would be derived in these circumstances from requiring the preparation and filing of the report contemplated by part two of the recommended terms and conditions.

The terms and conditions imposed on CPSI’s registration are as follows:

The Firm shall file on a monthly basis with the Registrant Conduct and Risk Analysis team of the Ontario Securities Commission , attention Financial Analyst, starting with the month ending April 30, 2010 the following information:

1. year-to-date unaudited financial statements including a balance sheet and an income statement, both prepared in accordance with generally accepted accounting principles; and
2. month end calculation of minimum required capital;

no later than three weeks after each month end.

It is staff’s longstanding position that it is the responsibility of the registrant, and only the registrant, to ensure that its annual audited financial statements are filed on a timely basis. As set out above, staff’s view is that the filing of annual audited financial statements is the most important of a registrant’s ongoing filing obligations. Only in rare and extenuating circumstances will a registrant be permitted to file its financial statements late and not be placed on the recommended terms and conditions. In my view, these rare and extenuating circumstances are not present in this case.