Claymore Investments Inc. - Opportunity to be Heard
[Update: The terms and conditions imposed by the Director in this decision were removed as at February 26, 2009.]
In the Matter of Claymore Investments, Inc.
Opportunity to be heard by the Director
under Subsection 26(3) of the Securities Act
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
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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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Andrew Aziz For Claymore Investments, Inc.
Osler, Hoskin & Harcourt LLP |
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By letter dated April 22, 2008, staff advised Claymore Investments, Inc. that it was deficient in meeting the minimum capital requirements in Regulation 107(3) under the Securities Act (Ontario) (Act) by $206,843 based on annual audited financial statements as at December 31, 2007. The capital deficiency was rectified early in January 2008.
As a direct consequence of the capital deficiency, staff recommended that terms and conditions be imposed on Claymore’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, Claymore 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. Claymore 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, Osler, Hoskin & Harcourt LLP (on behalf of Claymore) requested an opportunity to be heard through written submissions.
This is the Director’s decision based on staff’s and Claymore’s written submissions.
Submissions
Staff submissions
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 an adviser’s continued suitability for registration. Capital deficiencies, particularly large capital deficiencies as in this case, raise serious potential regulatory concerns and need to be addressed in a serious fashion.
For these reasons, staff generally recommend terms and conditions on registrants that are capital deficient. Staff does this notwithstanding the variety of reasons registrants provide for capital deficiencies including inadvertence/oversight, change in staffing at the registrant or its auditors, misclassification of accounts, or errors. In staff’s opinion, maintaining adequate minimum capital is a serious regulatory obligation for registrants and only in extremely rare circumstances would staff consider not imposing terms and conditions. Staff argues that those circumstances are not present in this case.
Staff further submits that Claymore was well aware of the capital deficiency since the capital deficiency is described in note 9 to its 2007 annual audited financial statements. The note also described a capital deficiency as at December 31, 2006. Terms and conditions were imposed by staff as a result of the December 31, 2006 capital deficiency. Those terms and conditions were removed in December 2007.
Claymore submissions
Claymore argues that the capital deficiency “does not represent a real on-going deficiency in capital”. Claymore is wholly owned by Claymore Group, Inc., a financial services and asset management company based in the United States. Claymore Group, Inc. and its affiliates also have two United States registered investment advisers and one United States registered broker dealer.
Claymore Group supports Claymore and provides it with the necessary capital to support its business and development. Since Claymore’s registration with the OSC in 2005, Claymore Group has funded it as required and has subordinated its loan position as required.
The December 31, 2007 capital deficiency arose because Claymore received a large invoice for services immediately prior to year end when it was practically impossible to remedy. Claymore Group wired funds to Claymore to rectify the capital deficiency after the close of business on December 31. These funds were received by Claymore on the first business day of January 2008.
Claymore has procedures in place to regularly monitor its capital position. If capital is required, Claymore Group transfers funds to Claymore.
Claymore argues that imposing terms and conditions for the 2007 capital deficiency seems a disproportionate response when measured against the facts described above. Claymore also argues that in circumstances where there is no ongoing capital concern, a monthly filing requirement is burdensome as opposed to some less frequent filing requirement.
Claymore further argues that it has always been concerned about and diligent in its undertaking and discharging its responsibilities as a registrant and is taking these matters very seriously. In the circumstances of this case, the capital deficiency was inadvertent and the timing of the events made it practically impossible to remedy for the December 31, 2007 balance sheet date.
As a result, Claymore requests that the terms and conditions not be imposed on Claymore’s registration.
Decision and reasons
My decision is to impose the recommended terms and conditions on the registration of Claymore Investments, Inc. for a minimum six month period. These terms and conditions are as follows:
Claymore Investments, Inc. 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:
(1) year-to-date unaudited financial statements including a balance sheet and an income statement, both prepared in accordance with generally accepted accounting principles; andSince Claymore was capital deficient in both 2007 and 2006 (which represent two of the three years since it was registered), I do not agree with Claymore’s arguments about its concern with and diligence in discharging its registrant obligations. Many of our registrants are organized in a similar manner to Claymore and rely on funding from a parent company or other related entity to finance their ongoing operations and fund capital shortages as needed. As well, Claymore was on terms and conditions for six months in 2008 and should have developed strong policies and procedures for ensuring that it met its capital requirements at all times. As a result, I agree with staff that the rare and unusual circumstances that would justify not imposing terms and conditions are not present in this case.
(2) month end calculation of minimum required capital;
no later than three weeks after each month end.
As an aside, normally staff recommends the imposition of terms and conditions for a minimum period of twelve months in these circumstances because it is the second “strike” – i.e. it is the second consecutive year that Claymore is capital deficient. In my view, a six month period is sufficient given Claymore’s immediate response to, and resolution of, the capital deficiency once it was identified.
May 26, 2008
“Marrianne Bridge”