Pro-Financial Asset Management Inc.

February 28, 2014

Attention: Rene Sorell

Re: Pro-Financial Asset Management Inc. (PFAM) and the Pro-Index Funds Pro Forma Simplified Prospectus filed January 27, 2014 (the Pro Forma Prospectus) -- SEDAR Project No. 2158032

This letter sets out my decision as Director in respect of the recommendation of staff (Staff) of the Ontario Securities Commission (the Commission) that I refuse to issue a receipt for the final simplified prospectus (the Final Prospectus) of the Pro-Index Funds (as defined below). Staff's recommendation is made in a letter of Staff dated February 10, 2014 to counsel for PFAM (the Recommendation Letter).

I understand that, on February 25, 2014, counsel for PFAM and the Pro-Index Funds waived the right of PFAM and the Pro-Index Funds to an opportunity to be heard on this matter under subsection 61(3) of the Securities Act (Ontario) (the Act). Accordingly, I have not received any submissions from PFAM or the Pro-Index Funds with respect to this matter, and the only submission by Staff is the Recommendation Letter.

Based on the Recommendation Letter, I accept Staff's recommendation that a receipt not be issued for the Final Prospectus for the reasons set out below.

This decision is being issued ahead of PFAM's hearing before the Commission, scheduled to take place on March 3, 2014. Accordingly, this decision highlights the key policy considerations that form the basis of my determination.

Finally, I note that the Recommendation Letter makes reference to "substantive concerns with the disclosure in the [Pro Forma Prospectus]", which were not included in the Recommendation Letter, given they did not form part of Staff's decision to recommend that a receipt not be issued for the Final Prospectus. While any decision to issue a receipt for the Final Prospectus would require resolution of these substantive disclosure concerns, resolution of these concerns is outside the scope of my decision and I have made no determination with respect to the disclosure in the Final Prospectus.

I. Background

The Pro-Index Funds are currently distributing securities under a simplified prospectus dated January 14, 2013. Accordingly, under section 62 of the Act, distribution of securities of the Pro-Index Funds would not be lawful after January 14, 2014 (the Lapse Date), unless a pro forma simplified prospectus was filed by December 15, 2014. PFAM and the Pro-Index Funds failed to file a pro forma simplified prospectus by December 15, 2014 and, accordingly, securities of the Pro-Index Funds could no longer be lawfully distributed after January 14, 2014.

On January 21, 2014, PFAM obtained an order of the Commission which extended the Lapse Date for the Pro-Index Funds to February 24, 2014 subject to conditions (the Lapse Date Order). Accordingly, under the Lapse Date Order distribution of securities of the Pro-Index Funds could continue until that date.

On January 27, 2014, counsel for PFAM filed the Pro Forma Prospectus on behalf of Pro FTSE RAFI Canadian Index Fund, Pro FTSE RAFI US Index Fund, Pro FTSE RAFI Global Index Fund, Pro FTSE RAFI Hong Kong China Index Fund, Pro FTSE RAFI Emerging Markets Index Fund, Pro FTSE NA Dividend Index Fund, Pro Fundamental Bond Index Fund, Pro Fundamental Balanced Index Fund and Pro Money Market Fund (each, a Pro-Index Fund, and collectively, the Pro-Index Funds). Each Pro-Index Fund is an open-end mutual fund established under the laws of Ontario.

As a result of the filing of the Pro Forma Prospectus, the distribution of securities of the Pro-Index Funds may continue until March 6, 2014 under paragraph 62(2)(b) of the Act. In order for the Pro-Index Funds to continue distributing securities beyond March 6, 2014, the Final Prospectus must be filed on or prior to that date.

On February 10, 2014, Staff sent the Recommendation Letter to PFAM's counsel via SEDAR. In the Recommendation Letter, Staff stated that they were not able to recommend that a receipt be issued for the Final Prospectus, for the reasons described below.

On February 25, 2014, at a pre-hearing conference before the Commission, counsel for PFAM and the Pro-Index Funds waived their right to an opportunity to be heard under subsection 61(3) of the Act.

II. Issues

In the Recommendation Letter, Staff express their view that a receipt should not be issued for the Final Prospectus as a result of subsection 61(1) and subparagraphs 61(2)(d)(iii) and (e)(iii) of the Act. I have classified Staff's reasons in the following three categories:

(A) PFAM's ongoing compliance issues and the failure to keep the Pro-Index Funds' simplified prospectus from lapsing;

(B) PFAM's financial condition; and

(C) public interest concerns, including PFAM's failure to become registered as an investment fund manager.

Staff submit that, as a result of the above elements, issuing a receipt for the Final Prospectus would be contrary to the public interest. Furthermore, Staff take the position that the Pro-Index Funds cannot reasonably be expected to be financially responsible in the conduct of their business because of the financial condition of PFAM, and that the business of the Pro-Index Funds may not be conducted with integrity and in the best interest of securityholders of the Pro-Index Funds because of the past conduct of PFAM, or its officers, directors or control persons.

For the reasons set out below, with respect to each of the elements above, I accept Staff's recommendation that a receipt not be issued for the Final Prospectus.

III. Applicable Provisions and the Standard of Proof

The Recommendation Letter engages the Director's jurisdiction under subsection 61(1) and subparagraphs 61(2)(d)(iii) and (e)(iii) of the Act.

Subsection 61(1) of the Act states that, subject to specified exceptions, the Director shall issue a receipt for a prospectus "unless it appears to the Director that it is not the public interest to do so".

Subsection 61(2) of the Act states in part that the Director

"shall not issue a receipt for a prospectus or an amendment to a prospectus if it appears to the Director that,

(d) the issuer cannot reasonably be expected to be financially responsible in the conduct of its business because of the financial condition of,

[...]

(iii) the investment fund manager of the issuer [...]; [and]

(e) the business of the issuer may not be conducted with integrity and in the best interests of the security holders of the issuer because of the past conduct of

[...]

(iii) the investment fund manager of the issuer or any of the investment fund manager's officer, directors or control persons.

Standard of Proof

The standard of proof applicable to Commission proceedings, including those before the Director, is the balance of probabilities.{1} That is, in respect of the issue before me, "whether it is more likely than not" that the issuance of a receipt would be contrary to the public interest, that the Pro-Index Funds cannot be expected to be financially responsible in the conduct of their business because of the financial condition of PFAM, or that the business of the Pro-Index Funds may not be conducted with integrity and in the best interest of securityholders of the Pro-Index Funds because of the past conduct of PFAM.

IV. Discussion of the Issues

As identified above, in my view, Staff have raised three grounds for refusing to issue a receipt for the Final Prospectus. I accept Staff's recommendation that each of these grounds is sufficient on its own for refusing a receipt, for the reasons set out below. Alternatively, even if any of the grounds would not be sufficient in itself to refuse a receipt, in my view their cumulative effect is sufficient to find it is not in the public interest to issue a receipt for the Prospectus. A discussion of each of the issues follows.

A. Ongoing Compliance Issues and Failure to File a Prospectus before the Lapse Date

Staff's Recommendation

In the Recommendation Letter, Staff note that PFAM has compliance issues that have engaged staff in the Compliance and Registrant Regulation Branch (CRR) of the Commission, and that these issues have been ongoing for some time and are now the subject of a temporary order of the Commission (the Temporary Order), which was most recently extended on January 21, 2014.

The Recommendation Letter further states that the issues that have given rise to the Temporary Order include the unresolved working capital deficiency at PFAM as well as PFAM's application for registration as an investment fund manager, and the Recommendation Letter also provides other examples of serious deficiencies found by CRR staff and described in a December 21, 2012 letter of CRR staff to PFAM.

The Recommendation Letter also notes that PFAM, as manager and trustee of the Pro-Index Funds, has twice allowed the simplified prospectus of the Funds to lapse (in 2008 and in 2014) and has had to seek relief on behalf of the Pro-Index Funds to keep the simplified prospectus current.

Staff conclude that, as a result of these compliance issues and PFAM's past deficiencies (described in the December 21, 2012 letter), the business of the Pro-Index Funds may not be conducted with integrity and in the best interests of the security holders of the Pro-Index Funds. Therefore, according to Staff, the Director may not issue a receipt for the Final Prospectus under subparagraph 61(2)(e)(iii) of the Act.

Determination

In my view, PFAM's ongoing compliance issues, which are the subject of the Temporary Order, are very serious and raise concerns about whether the business of the Pro-Index Funds may be carried on with integrity and in the best interests of their securityholders and in a way that would foster confidence in the capital markets.

I agree with Staff's position in the Recommendation Letter that ensuring "that the prospectus of a mutual fund which is distributing securities to the public does not lapse is [...] a very basic aspect of managing the mutual fund". For PFAM to have twice allowed the prospectus of the Pro-Index Funds to lapse raises questions about the adequacy of PFAM's internal controls and its ability to ensure that the Pro-Index Funds are operating in compliance with Ontario securities law.

On the basis of the past actions described above, and the serious ongoing compliance issues of PFAM, which are the subject matter of the Temporary Order, I am unable to conclude that, on a balance of probabilities, the business of the Pro-Index Funds can be carried on with integrity and in the best interests of the securityholders of the Pro-Index Funds. Accordingly, I conclude that, under subparagraph 61(2)(e)(iii) of the Act, a receipt may not be issued for the Final Prospectus.

In reaching my determination on this matter, I note that the integrity that is at issue here is not the integrity of PFAM or any of its directors or officers.{2} Rather, my focus is on whether, as stated in subparagraph 61(2)(e)(iii) of the Act, "the business of the issuer may not be conducted with integrity and in the best interests of the security holders of the issuer". I find that, as a result of the serious ongoing compliance issues of PFAM, as well as PFAM's failure to prevent the prospectus of the Pro-Index Funds to lapse twice, on a balance of probabilities, the business of the Pro-Index Funds may not be carried on with integrity and in the best interest of securityholders.

In my view, the seriousness of PFAM's compliance issues is evidenced by the existence of the Temporary Order, which places strict limitations on the businesses in which PFAM may engage and suspends its registration as an exempt market dealer.

B. PFAM's Financial Condition

Staff's Recommendation

The Recommendation Letter describes a number of factors which concern Staff regarding the financial condition of PFAM. In particular I note two of Staff's observations:

• PFAM, in its capacity as a registered firm, is capital deficient and, to Staff's knowledge, other than a proposed transaction with Kingship Capital Corporation (KCC), PFAM does not have a proposal to become compliant with its capitalization requirement under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

• PFAM currently has outstanding debt which appears to threaten the financial condition and viability of PFAM.

Therefore, Staff conclude that the Pro-Index Funds cannot reasonably be expected to be financially responsible in the conduct of their business because of the financial condition of PFAM and that, therefore, under subparagraph 61(2)(d)(iii) of the Act, a receipt may not be issued for the Final Prospectus.

Determination

In my view, the financial viability of a manager is crucial to the question of whether a receipt should be issued for the prospectus of an investment fund. A manager is the person or company that directs the business, operations and affairs of an investment fund. The manager has ultimate responsibility for the investment fund and makes decisions regarding its operations.

Accordingly, where there is a serious question about the financial viability of a manager, I have a concern about any investment fund managed by that manager, as retail investors will be investing their money with a fund whose "directing mind" may cease to exist due to financial difficulties.

I find that, on a balance of probabilities, the financial condition of PFAM is such that the continued distribution of securities of the Pro-Index Funds to the public should not continue. Should the financial condition of PFAM change, PFAM may file a preliminary prospectus on behalf of the Pro-Index Funds and seek a receipt at that time. However, given the current financial condition of PFAM, I find that a receipt may not be issued for the Final Prospectus under subparagraph 61(2)(d)(iii) of the Act.

C. PFAM's Not Registered as IFM and Public Interest Concerns Generally

Staff Recommendation

Staff take the view, in the Recommendation Letter, that to issue a receipt for the Final Prospectus would be contrary to the public interest under subsection 61(2) of the Act. Staff reach this conclusion on the basis of PFAM's ongoing serious compliance and financial viability issues, as well as the fact that PFAM has still not been registered as an investment fund manager by staff of the CRR Branch.

Determination

1. Extent of the Director's Public Interest Jurisdiction

It is generally acknowledged that the Director's public interest jurisdiction under subsection 61(1) is broad and gives the Director some degree of "blue sky" discretion.{3} Furthermore, in order for the Director to make a determination that the issuance of a receipt is contrary to the public interest, it is not necessary that the Director find a breach of the Act or related instruments, or that, in the absence of a breach, the matter be "abusive".{4}

However, the public interest power is not unlimited. It must be exercised with reference to the purposes of the Act as set out in section 1.1 of the Act.{5}

The purposes of the Act as detailed in section 1.1 of the Act are,

(a) to provide protection to investors from unfair, improper or fraudulent practices; and

(b) to foster fair and efficient capital markets and confidence in capital markets.

The prospectus of an investment fund can give rise to concerns about whether the product is consistent with the purposes and animating principles of the Act, beyond the quality of the disclosure in the prospectus. In a dynamic market environment, it is important for the Director to have broad discretion when it comes to determining whether it is in the public interest to issue a receipt for a prospectus.

In exercising the broad public interest discretion, I recognize that this jurisdiction must be exercised with some caution and restraint,{6} and that caution needs to be exercised where intervention in the public interest would amount to an amendment of the existing law or policies.{7} I note that I do not consider the public interest jurisdiction I have exercised in this decision to constitute intervention that would amount to any amendment of existing law or policies.

2. Application of Public Interest Jurisdiction to PFAM

In making my decision that the issuance of a receipt for the Final Prospectus would be contrary to the public interest, I have kept in mind the two purposes of the Act cited above. In a previous decision, I stated that, in a retail-focused context such as the mutual fund industry, confidence in capital markets and investor protection are paramount considerations in determining the public interest.{8}

As described earlier in this decision, PFAM has serious compliance and financial viability issues that, in my view, engage the public interest jurisdiction of the Director under subsection 61(2) of the Act.

Furthermore, as Staff note in the Recommendation Letter, PFAM continues to not be registered as an investment fund manager. In the ordinary course, registration as an investment fund manager is a condition to managing investment funds, and I am unable to conclude that an entity which, to date, has not been registered as an investment fund manager should be permitted to continue distributing investment fund securities to the public.

I note that a decision that a receipt not be issued for the Final Prospectus does not mean that the Pro-Index Funds have to be wound up or that securityholders of the Pro-Index Funds are not permitted to continue holding securities of the Pro-Index Funds. I agree with Staff that, as National Instrument 81-102 Mutual Funds requires the portfolio assets of a mutual fund to be well diversified and liquid, the Funds should be in a position to honour redemption requests at all times. Therefore, in terms of investor protection, securityholders of the Pro-Index Funds will not be materially harmed by a decision not to issue a receipt for the Pro-Index Funds as they may continue holding their securities, or redeem those securities at a price equal to their net asset value.

However, if a receipt were issued for the Final Prospectus, the result is that new securities of the Pro-Index Funds would be sold to the public in the midst of PFAM's ongoing serious compliance and financial viability issues, which call into question its ability to manage the Pro-Index Funds with integrity and in the best interest of the Pro-Index Funds' securityholders. In this context there is, in my view, a real possibility of harm to the public and to confidence in our capital markets.

In light of the foregoing, I agree with Staff that to issue a receipt for the Final Prospectus, would be contrary to the public interest.

This determination has been made independently of any consideration of PFAM's proposed transaction with KCC, as this transaction has not been completed at this time. I do not believe that my decision will have a material negative impact on the proposed transaction with KCC, as the refusal to issue a receipt does not necessitate the termination of the Pro-Index Funds; it only stops the distribution of new securities. Furthermore, I believe any limited negative impact to the KCC transaction is outweighed by the potential harm to the public interest that would arise as a result of a receipt being issued for the Final Prospectus.

Finally, I note that a decision to not issue a receipt for the Final Prospectus is consistent with a term of the Temporary Order, which states that "PFAM shall not accept any new clients or open any new client accounts of any kind in respect of the Managed Accounts". In my view, the situation with respect to the Pro-Index Funds is very similar to that of the Managed Accounts. That is, on the same basis as with the Managed Accounts, PFAM should not accept any new clients in respect of the Pro-Index Funds until such time as all the outstanding issues affecting PFAM, which Staff have raised in the Recommendation Letter, are resolved.

Staff also note in the Recommendation Letter that they have recently become aware of an issue related to the accuracy of the management expense ratios (MERs) of certain Pro-Index Funds as reported for the periods ended December 31, 2012 and June 30, 2013 and that the extent of these issues and their impact on other figures reported in the Pro-Index Funds' continuous disclosure documents is currently unclear. While I have not made a determination with respect to this issue, given that so many of the facts regarding the accuracy of the Pro-Index Funds' reported MERs are currently unknown, I would be concerned if the Pro-Index Funds were to distribute securities to the public without this issue being resolved.

V. Conclusion

In summary, having considered the Recommendation Letter, and the issues being faced by PFAM, I find that a receipt for the Final Prospectus should not be issued.

I note that this decision does not preclude PFAM from filing a preliminary simplified prospectus on behalf of the Pro-Index Funds should its situation improve in a way that addresses my reasons to not issue a receipt for the Final Prospectus.

Yours truly,

{1} Maple Leaf Investment Fund Corp. (Re), (2011), 34 OSCB 11551 at paras 42-43.

{2} In this way, the facts underlying my decision in this case differ from those that formed the basis of the Commission's decision in Citadel Income Fund and Energy Income Fund (Re) (2011), 34 OSCB 8554 to order the issuance of a receipt. In that decision, the integrity of the President of the investment fund manager, which was the subject of an ongoing Commission enforcement proceeding, partially formed the basis of the Director's original decision to not issue a receipt for the prospectus. In this case, the integrity of PFAM is not a consideration in my decision that a receipt not be issued for the Final Prospectus under subparagraph 61(2)(e)(iii) of the Act.

{3} Biovail Corp. (Re), (2010), 33 OSCB 8914 at paras 388-389 [Biovail]; Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37 at paras 39-41 [Asbestos]; Guard Inc., Re, (1996), 19 OSCB 3737 at 3743 [Guard].

{4} Biovail, supra note 2 at paras 382, 388-389; Guard supra note 2 at 3743.

{5} Asbestos, supra note 2 at paras 41.

{6} Biovail, supra note 2 at para 374.

{7} Financial Models Co. (Re), (2005), 28 OSCB 2184 at para 54.

{8} ONE Financial Corporation and ONE Financial All-Weather Profit Family Corp. (Re), (2012), 35 OSCB 3083 at 3085.