Trafalgar Associates Limited - Opportunity to be Heard
In the Matter of Staff’s Recommendation
For Terms and Conditions on the Registration
of Trafalgar Associates Limited
Opportunity to be Heard by the Director
Section 31 of the Securities Act (Ontario)
Decision
1. For the reasons outlined below, my decision is to impose the recommended terms and conditions on Trafalgar Associates Limited (TAL) for a minimum period of six months.
Overview
2. TAL is a dealer registered under the Securities Act (Act) in the category of exempt market dealer.
3. The fiscal year end for TAL is December 31. Under paragraph 12.12(1)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), the annual audited financial statements of TAL for the fiscal year ending December 31, 2011 were due no later than March 30, 2012. TAL delivered its annual audited financial statements on December 18, 2012, 181 business days after they were due.
4. By letter dated December 20, 2012, Staff of the Ontario Securities Commission (OSC) advised TAL that it was recommending to the Director that terms and conditions be imposed on TAL’s registration in relation to the late delivery of its annual audited financial statements. The terms and conditions (Terms and Conditions) required (a) the delivery of monthly year-to-date unaudited financial statements and capital calculations for a minimum period of six months starting January 31, 2013, and (b) TAL to review its procedures for compliance with Ontario securities law and to provide a report to the OSC by February 22, 2013.
5. A similar letter was sent to TAL on May 9, 2012. No response was provided by TAL by May 24, 2012, which would normally have resulted in the Director imposing terms and conditions on TAL’s registration immediately thereafter. However, since there was some confusion regarding whether TAL had requested an OTBH on a timely basis, the May terms and conditions were not imposed.
Process for requesting an opportunity to be heard
6. 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 (OTBH). By email dated January 3, 2013, Ron Olsthoorn, the Chief Compliance Officer of TAL, requested an OTBH. The in person OTBH occurred on January 28, 2013. My decision is based on the oral submissions of Michael Denyszyn (Senior Legal Counsel, Compliance and Registrant Regulation Branch) and Ron Olsthoorn on behalf of TAL.
Submissions
7. Staff submits that the delivery of annual audited financial statements by registrants is a serious regulatory obligation placed on registrants and that financial statements are the principal tool enabling Staff to monitor a registrant’s financial viability and capital position. For these reasons, Staff regularly recommends the imposition of terms and conditions on the registration of registrants that do not deliver their annual audited financial statements on a timely basis. Only in rare and extenuating circumstances would Staff not recommend imposing terms and conditions on a registrant that delivered its financial statements late.
8. TAL explained that the late delivery of its financial statements was due to its auditor waiting for the completion of a Canada Revenue Agency (CRA) audit. In May 2012, TAL’s auditor (AL) advised Staff that she had been “unable to complete the audited financial statements as the company is waiting for the completion of a CRA audit”, that the CRA audit “is likely to have a significant and material affect [sic] on the financial statements”, and that “[w]ithout this information I have a serious scope limitation that precludes me from expressing an opinion.”
9. Staff contacted AL in early November 2012 and advised her that, rather than waiting until the CRA audit process is complete, she should prepare TAL’s audited financial statements with appropriate disclosures under Canadian Auditing Standard 570 – Going Concern (CAS 570). She advised that she had completed the audit and agreed to deliver TAL’s financial statements to the OSC within a few days. After further correspondence between Staff and AL, TAL’s financial statements were finally delivered to the OSC on December 18, 2012.
Decision and reasons
10. My decision is to impose the recommended Terms and Conditions on the registration of TAL (as set out in the letter from Staff dated December 20, 2012), except that the date in the first Term and Condition is February 28, 2013 instead of January 31, 2013 and the date in the second Term and Condition is March 1, 2013 instead of February 22, 2013.
11. 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 delivered to the OSC on a timely basis. In this case, the audited financial statements were delivered 181 business days late. Thus the delivery requirements of section 12.12(1)(a) of NI 31-103 have not been met and, in accordance with decided cases, including Re Hill Harris Hunt Capital Limited (2011) 34 O.S.C.B. 6753, and Re AIG Global Investment Corp (Canada) (2008) 31 O.S.C.B. 4639, the Terms and Conditions (as modified in paragraph 10) should be applied to the registration of TAL.
12. Staff submitted, and I agree, that the explanation provided by TAL does not constitute rare and extenuating circumstances such that the Terms and Conditions should not be imposed. Although there is a CRA audit in progress, this should not preclude an AL from preparing annual audited financial statements for TAL. CAS 570 clearly sets out that if adequate disclosure of a material uncertainty (in this case the CRA audit) is made in the financial statements, the auditor shall express an unmodified opinion and include an “Emphasis of Matter” paragraph in the auditor’s report. Staff stated that AL did not seem to be aware of CAS 570. And, although TAL’s audited financial statements include a subsequent events note about the CRA audit, there is no Emphasis of Matter paragraph in the auditor’s report. As well, no notice of reassessment from CRA had been received as at December 10, 2012 (the date of the auditor’s report on TAL’s annual audited financial statements). Nor had it been received as of the date of the OTBH.
_______________________________
“Marrianne Bridge” FCPA, FCA
Deputy Director
Compliance and Registrant Regulation Branch
Ontario Securities Commission
February 1, 2013