Meadowbank Asset Management Inc. - Opportunity to be Heard
[Update: The terms and conditions imposed by the Director in this decision were removed as at October 31, 2008.]
In the Matter of the Registration of
Meadowbank Asset Management Inc.
Opportunity to be Heard by the Director
Section 26(3) of the Securities Act
Meadowbank Asset Management Inc.
Opportunity to be Heard by the Director
Section 26(3) of the Securities Act
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Date:
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April 21, 2008
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Director:
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David M. Gilkes
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Manager, Registrant Regulation
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Ontario Securities Commission
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Submissions: Trevor Walz
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For the staff of the Commission
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Garth Foster
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For Meadowbank Asset Management Inc.
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1. Meadowbank Asset Management Inc. (Meadowbank) has been registered in Ontario in the categories of Investment Counsel and Portfolio Manager since October 11, 2006. It obtained registration as a Limited Market Dealer on January 16, 2007.
2. OSC staff attended the premises of Meadowbank on February 14, 19 and 20, 2008 to conduct a compliance field review. During the review OSC staff found that Meadowbank had not been calculating its minimum free capital in accordance with requirements of the subsection 107(3) of the General Regulation (the Regulation) under the Securities Act (the Act). Similarly, Meadowbank did not maintain proper books and records as required under section 113(3)(10) of the Regulation.
3. As a result staff’s findings in the compliance field review, OSC staff advised Meadowbank by letter dated February 21, 2008, that they would recommend terms and conditions be imposed on Meadowbank’s registration.
4. On March 6, 2008, Meadowbank requested an Opportunity to be Heard (OTBH) by the Director pursuant to subsection 26(3) of the Act. The OTBH was conducted through written submissions.
Submissions
5. On February 14, 2008, OSC staff attended the premises of Meadowbank to conduct a compliance field review of Meadowbank. The review covered the period from February 1, 2007 to January 31, 2008. Following standard procedure, OSC staff conducted an opening interview with Rawn Lakhan, President, Chief Executive Officer, and Ultimate Responsible Person for Meadowbank and Charles Bastyr, Chief Investment Officer, Portfolio Manager and Chief Compliance Officer for Meadowbank.
6. During the opening interview OSC staff asked whether Meadowbank had ever been capital deficient. Mr. Lakhan responded that Meadowbank had not met the minimum free capital requirements for four to five months of the review period. Meadowbank did not report the capital deficiency to the OSC and Mr. Lakhan said he was not aware of the reporting requirement. In addition, he understood that free capital requirements only applied at the fiscal year-end for the firm.
7. OSC staff reviewed the monthly capital calculations prepared by Meadowbank and found that they had not been calculated in accordance with requirements of the Act. Meadowbank had calculated the excess or deficiency in minimum free capital by comparing the ending cash balance in the firm’s bank account to its required capital. Moreover, Meadowbank was not able to provide copies of monthly financial statements, trial balance and general ledger.
8. OSC staff provided Meadowbank with 48 hours to prepare minimum free capital calculations. On February 15, 2008, Meadowbank provided OSC staff with capital calculations supported by trial balances for the review period. The calculations demonstrated that Meadowbank met the free capital requirements as at February 14, 2008 and throughout the period of the review.
9. Counsel for Meadowbank submitted that the firm has revised its policies and procedures to ensure its monthly capital calculations are completed in a timely manner. Meadowbank has also enlisted the assistance of an external accountant to verify its monthly capital calculations.
10. Counsel noted that Meadowbank is still in the start up phase of its operations and has not yet provided advice to any external clients. In addition, since Meadowbank was never in a capital deficient position, terms and conditions would be unduly harsh. Counsel suggested an undertaking as an alternative.
Suitability for Registration
11. OSC staff consider three criteria in determining whether an applicant is suitable for registration: proficiency, integrity and financial solvency.
12. The failure to make monthly capital calculations and to maintain proper books and records is an important factor in determining the continuing suitability of a registrant. This failure raises concerns in relation to the criteria of proficiency and financial solvency.
13. Financial statements and capital calculations based on these statements are the principal tool used by the OSC to monitor a registrant’s financial viability. The experience of OSC staff has been that failure to maintain these statements can be indicative of a serious underlying financial problem with the registrant.
Decision
14. All registrants are required to maintain proper books and records and to meet the capital requirements at all times and not just at year-end. This is a serious regulatory obligation placed on registrants.
15. When these obligations are not met, OSC staff has regularly recommended that terms and conditions to monitor the financial situation of the firm be imposed on its registration. Only in rare circumstances would this course of action not be followed. Meadowbank’s concern that the terms and conditions will be posted on the OSC website is not a persuasive reason to not impose monitoring terms and conditions.
16. Therefore, I have determined that the terms and conditions as set out in Schedule A should be imposed on the registration of Meadowbank. Also, Meadowbank must continue to meet all requirements under the Act that apply to it as a registrant.
April 21, 2008
David M. Gilkes
Manager, Registrant Regulation
Ontario Securities Commission
Schedule A
Terms and Conditions on the Registration of
Meadowbank Asset Management Inc.
Terms and Conditions on the Registration of
Meadowbank Asset Management Inc.
Meadowbank Asset Management Inc. shall file on a monthly basis with the Compliance section of the Ontario Securities Commission, attention Financial Analyst, effective with the month ending April 30, 2008, the following information:
1. year-to-date unaudited financial statements, which includes a balance sheet and income statement prepared in accordance with generally accepted accounting principles; andThis information is to be filed no later than three weeks after each month end.
2. month end calculation of excess free capital.