In the Matter of Staff’s Recommendation
for Terms and Conditions on the Registration
of First Canadian Property Investments Ltd.
Opportunity to be Heard by the Director
Section 31 of the Securities Act (Ontario)
1. For the reasons outlined below, my decision is to impose part one of the terms and conditions set out below on First Canadian Property Investments Ltd. (First Canadian) for a minimum period of six months.
2. By letter dated May 4, 2011, Staff of the Ontario Securities Commission advised First Canadian that it was recommending to the Director that terms and conditions be imposed on First Canadian in relation to the late filing of its annual audited financial statements. The terms and conditions had two parts. Part one required the filing of monthly year-to-date unaudited financial statements and capital calculations for a minimum period of six months. Part two required First Canadian to review its procedures for compliance with Ontario securities law and to file a report with the Commission. The letter also advised First Canadian that the maximum late filing fees of $5,000 were due. The late filing fees have not been paid by First Canadian.
Process for requesting an opportunity to be heard
3. Under section 31 of the Securities Act (Ontario) (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 letter dated May 9, 2011, J. Paul Robinson, President of First Canadian requested an OTBH. My decision is based on the submissions of Staff counsel (Mark Skuce, Legal Counsel, Compliance and Registrant Regulation Branch) and the submissions of Gordon Walker and J. Paul Robinson of First Canadian.
4. First Canadian was initially registered under the Act as a limited market dealer. With the coming into force of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103), First Canadian became registered as an exempt market dealer.
5. The facts in this case are not in dispute. The fiscal year end of First Canadian is September 30, 2010. Under paragraph 12.12(1)(a) of NI 31-103, the annual audited financial statements of First Canadian were due no later than December 29, 2010. First Canadian filed its annual audited financial statements on March 28, 2011, 59 business days after they were due.
6. Subsection 28(a) of the Act provides that the Director may impose terms and conditions on the registration of a company if it appears to the Director that the company is not suitable for registration or has failed to comply with Ontario securities law. Subsection 27(2) of the Act enumerates the factors that the Director shall consider in determining whether a company is suitable for registration, which includes prescribed requirements relating to proficiency, solvency and integrity. Staff argues that the imposition of terms and conditions is appropriate because First Canadian’s late filing of its annual audited financial statements may raise a serious potential concern regarding the firm’s solvency.
7. I was provided with a copy of a letter from First Canadian’s auditors regarding the late filing of First Canadian’s financial statements. The letter advised that normally the auditors meet with First Canadian’s management in late December and “release the audited financial statements shortly thereafter, in time for the Company to meet its reporting deadlines”. However, the auditor points to “family health matters” in December and January as the reason for losing track of the First Canadian audit. The letter goes on to say that “I’m also surprised by the fact that that I wasn’t contacted by First Canadian’s owners to follow up on the delay in releasing the audited financial statements”.
8. Staff referred me to a number of previous OTBH decisions which dealt with the late filing of annual audited financial statements including Re Rampart Investment Management Company (2003) 26 OSCB 7509, Re Chou Associates Management Inc. (2006) 29 OSCB 4773, Re AIG Global Investment Corp. (Canada) (2008) 31 OSCB 4639, Re CR Advisers Corporation (2008) 31 OSCB 6269, Re Counsel Portfolio Services Inc. (2010) 33 OSBC 5316, and Re Minvestec Capital Corp. (2011) 34 OSCB 5475. From these cases, Staff submits the following principles have been established:
- timely filing of annual audited financial statements by registrants is one of the most serious regulatory obligations in the Act,
- the timely filing of annual audited financial statements is the obligation of the registrant alone,
- Staff uniformly recommends the imposition of terms and conditions on the registration of a registrant that does not file its annual audited financial statements on a timely basis,
- only in extremely rare circumstances would Staff not recommend imposing terms and conditions on a registrant that filed its financial statements late, and
- the information needed to prepare the monthly filings proposed by Staff should be readily available to registrants on a monthly basis at minimal cost.
9. I was also advised that First Canadian has maintained a relatively clean regulatory history over the approximately 20 years it has been registered. The only previous issue was the late renewal of First Canadian’s registration in 2004. First Canadian advised me that the late filing was due, in part, to the death of one of the registrant’s key personnel.
10. First Canadian advised me that they expected this decision to include the Staff recommended terms and conditions and a requirement to pay the late fees. First Canadian acknowledged its obligation to file annual audited financial statements on a timely basis and that it was responsible for the late filing of its annual audited financial statements. First Canadian also made the following submissions:
- Staff appears to have a “zero tolerance” for late filing of annual audited financial statements in that terms and conditions are imposed regardless of how late the registrant is in filing its financial statements.
- Unlike as set out in some of the previous OTBH decisions, Staff did not notify First Canadian soon after the due date for the annual audited financial statements that the statements were late.
- A “one size” fits all approach does not work – i.e. they questioned an approach that resulted in large registrants and small registrants all being subject to the same late fees for late filing of annual audited financial statements. They also questioned a one size fits all approach that did not differentiate based on a registrant’s prior regulatory history.
- They also thought that there was a “disconnect” between the filing of annual audited financial statements and the solvency of the registrant. They submitted that, particularly in their case, there was no risk to the public resulting from the late filing of their annual audited financial statements because the firm does not hold client assets.
- Lastly, they advised that in their view, the late filing fees were not a deterrent, but a penalty or punishment for late filing of their financial statements.
Decision and reasons
11. My decision is to impose part 1 of the terms and conditions recommended by Staff on the registration of First Canadian for a minimum period of six months starting June 30, 2011. I was satisfied based on First Canadian’s submissions at the OTBH that they understand the importance of ensuring that the firm complies with the requirements of Ontario securities law. As well, given the firm’s relatively clean regulatory history, it is clear to me that the firm generally understands its compliance obligations.
12. Staff does have, absent rare and extenuating circumstances, a zero tolerance for the late filing of annual audited financial statements by registrants. This is because financial statements are the principal tool enabling Staff to monitor a registrant’s financial viability and capital position (and thus its solvency). The timely filing of annual audited financial statements is the obligation of the registrant and the registrant alone. It is not Staff’s responsibility to remind registrants of any filing obligation.
13. I concur with Staff’s submissions on the principles established by the various decisions cited above. In my view, the rare and extenuating circumstances that would lead me to conclude that terms and conditions should not be imposed are not present in this case. The registrant clearly acknowledged that they understood their regulatory responsibilities and took responsibility for the late filing of their annual audited financial statements.
14. I was also asked to waive the late filing fees. My decision is that the late filing fees will not be waived. As set out above, First Canadian did not file its annual audited financial statements on a timely basis, nor was First Canadian aware that it did not file its financial statements on a timely basis until so advised by Staff. See Re Rampart Investment Management Company (2003) 26 OSCB 7509, which set out the following on the issue of late filing fees:
“The penalty for late filings was intended to reflect the importance that is placed on the obligation that each registrant has to make timely filings and in furthering that notion, to provide registrants with the appropriate incentive to ensure that proper attention is given to the matter and that the registrant does not fail to meet its filing obligations whether deliberately or through inadvertence. Granting an exemption in situations where the failure was not deliberate would remove any incentive for registrants to assume responsibility for meeting their obligations.”
15. The terms and conditions imposed on First Canadian’s registration are as follows:
The Firm shall file on a monthly basis with the Registrant Conduct and Risk Analysis team of the Ontario Securities Commission, attention Financial Analyst, starting with the month ending June 30, 2011 the following information:
no later than three weeks after each month end.
- year-to-date unaudited financial statements including a balance sheet and an income statement, both prepared in accordance with generally accepted accounting principles; and
- month end calculation of minimum required capital;
“Marrianne Bridge” FCA
Compliance and Registrant Regulation Branch
Ontario Securities Commission
June 22, 2011