GMP Investment Management L.P. - Opportunity to be Heard
[Update: The terms and conditions imposed by the Director in this decision were removed as at January 22, 2009.]
In the Matter of GMP
Investment Management L.P.
Opportunity to be heard by the Director
under Subsection 26(3) of the Securities Act
Investment Management L.P.
Opportunity to be heard by the Director
under Subsection 26(3) of the Securities Act
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Date:
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May 26, 2008 (as amended October 10, 2008)
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Director:
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Marrianne Bridge, CA
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Manager, Compliance
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Ontario Securities Commission
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Submissions:
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Isabelita Chichioco for Ontario Securities Commission staff
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Krista Coburn for GMP Investment Management L.P.
Goodmans LLP |
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By letter dated April 22, 2008, staff advised GMP Investment Management L.P. (GMP) that it was deficient in meeting the minimum capital requirements in Regulation 107(3) under the Securities Act (Ontario) (Act) by $154,054 based on annual audited financial statements as at December 31, 2007. The capital deficiency was rectified as at January 31, 2008.
As a direct consequence of the capital deficiency, staff recommended to the Director that terms and conditions be imposed on GMP’s registration for a minimum period of six months. The terms and conditions require the filing of monthly year-to-date unaudited financial statements (including a balance sheet and an income statement prepared in accordance with generally accepted accounting principles) and monthly capital calculations.
Prior to a decision being made by the Director, GMP had the option to oppose staff’s recommendation for terms and conditions by requesting an opportunity to be heard under section 26(3) of the Act. GMP had two options – it could either be heard through written submissions or through a personal appearance before the Director. By letter dated May 6, 2008, Goodmans LLP (on behalf GMP) requested an opportunity to be heard through written submissions.
This is the Director’s decision based on staff’s and GMP’s written submissions.
Submissions
Staff submissions
Staff submits that maintaining adequate minimum capital by registrants is one of the most serious regulatory requirements in the Act. Financial solvency is one of the essential components of a portfolio adviser’s continued suitability for registration. A capital deficiency, particularly a large capital deficiency such as in this case, raises potential serious regulatory concerns and needs to be addressed in a serious fashion.
For these reasons, staff uniformly recommends terms and conditions when registrants are capital deficient. It does this notwithstanding the wide variety of reasons provided by registrants for capital deficiencies including inadvertence/oversight, changes in staffing (either at the registrant or its auditors), misclassifications of accounts, or errors. Only in extremely rare circumstances would staff consider not recommending terms and conditions. Staff argues that these circumstances are not present in this case.
Submissions on behalf of GMP
GMP was registered as a portfolio adviser and limited market dealer in December 2007. It was capitalized with a non-interest bearing inter-company loan from an affiliate. The loan had no specified term. The capital deficiency of $154,054 arose as a result of the reclassification of the loan to a current liability in GMP’s annual audited financial statements as at December 31, 2007. As at December 31, 2007, the amount of the loan was $157,761. The loan was repaid in February 2008 following a sale by GMP of its securities.
GMP argues that for internal purposes, GMP viewed the loan as long-term financing. It also argues that GMP was in a “pre-operation” period as at December 31, 2007 and that it was not actively engaged in providing advisory services to clients until early April 2008.
Decision and reasons
My decision is to impose the recommended terms and conditions on the registration of GMP for a minimum six month period. These terms and conditions are as follows:
GMP Investment Management L.P. shall file on a monthly basis with the Compliance team of the Ontario Securities Commission, attention Financial Analyst, starting with the month ending May 31, 2008 the following information:I concur with staff’s argument that the rare and unusual circumstances that would result in terms and conditions not being imposed following a capital deficiency (in this case a significant capital deficiency) do not exist in this case. As a relatively new registrant, I would have expected GMP to be particularly careful to ensure that it was meeting the requirements of its registration, particularly the capital requirements.
(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.
I was also concerned with GMP’s argument that, notwithstanding that GMP (with the concurrence of its auditors) recorded the loan as a current liability in its annual audited financial statements, GMP “viewed the [affiliate] loan as a long-term financing”. Despite GMP’s view of the loan, it was shown as a current liability in GMP’s annual audited financial statements and the result was the large capital deficiency that is the subject of this decision and reasons.
October 10, 2008
“Marrianne Bridge, CA”