Reasons for Decision: In the Matter of CCI Capital Canada Limited
R.S.O. 1990, c. S.5, AS AMENDED
AND
CCI CAPITAL CANADA LIMITED
Hearing:
September 9, 1999
Panel:
John A. Geller, QC - Vice-Chair
Morley P. Carscallen, FCA - Commissioner
John F. Howard, QC - Commissioner
Counsel:
For the Staff of the Ontario Securities Commission:
Melanie Sopinka
These proceedings were commenced by Notice of Hearing dated September 8, 1999, pursuant to subsection 127(1) of the Securities Act (the "Act"), based upon the following allegations of the staff ("Staff") of the Commission.
1. The Respondent, CCI Capital Canada Limited ("CCI") is a corporation registered pursuant to Ontario securities law as a mutual fund dealer.
2. On March 10, 1999, the Commission notified CCI of its intention to impose conditions of registration on CCI pursuant to section 105 of the Regulation (the "Regulation") under the Act.
3. The terms and conditions required CCI to file with the Compliance Department of the Commission, within 30 days of the end of each calendar month commencing March 31, 1999,the following (the "Required Reporting"):
a. year-to-date financial statements, including an income statement, a classified balance sheet and a statement of cash flows, prepared in accordance with GAAP;
b. a calculation of excess free capital prepared in accordance with section 107 of the Act and submitted in a prescribed form;
c. a calculation of adjusted liabilities prepared in accordance with Statement C of Form9 of the Regulation; and
d. a reconciliation of all trust bank accounts.
4. These terms and conditions of registration were accepted by CCI on March 15, 1999.
5. For the month ended March 31, 1999, the Required Reporting was due on April 30, 1999.A portion of the Required Reporting was received late at the Commission on May 21, 1999.This filing omitted the trust account reconciliation in contravention of the terms and conditions imposed upon CCI's registration.
6. For the month ended April 30, 1999, the Required Reporting was due on May 30, 1999.Two portions of the Required Reporting were received late at the Commission on June 2,1999 and June 4, 1999. This filing provided incomplete financial statements in contravention of the terms and conditions imposed on CCI's registration.
7. For the month ended May 31, 1999, the Required Reporting was due on June 30, 1999. A portion of the Required Reporting was received late at the Commission on July 9, 1999. This filing omitted the excess free capital calculation, the trust account reconciliation and provided incomplete financial statements.
8. For the month ended June 30, 1999, CCI failed to file the Required Reporting by the deadline of July 31, 1999. The Required Reporting had not been received by the Compliance Department as of September 7, 1999.
9. For the month ended July 31, 1999, CCI failed to file the Required Reporting by the deadline of August 31, 1999. The Required Reporting had not been received by the Compliance Department as of September 7, 1999.
10. As at May 31, 1999, CCI was deficient in its obligation to meet minimum capital requirements under Ontario securities law in the amount of $38,725. This deficiency had not been corrected as of September 7, 1999.
11. The conduct of CCI in failing to abide by the terms and conditions imposed on its registration and in failing to meet minimum capital requirements was contrary to the public interest.
Based upon these allegations, Staff, in the Notice of Motion, requested the Commission to:
a. order that the registration of the Respondent be terminated or suspended or restricted for such period as the Commission might order or that additional terms and conditions be imposed on the Respondent's registration;
b. order that the Respondent submit to a review of its policies and procedures and institute such changes as might be ordered by the Commission; and
c. make such other order as the Commission might deem appropriate.
Ms. Sopinka, on behalf of Staff, did not call any witnesses, but filed, pursuant to section 139 of the Act, the documentary evidence on which Staff relied.
She advised us that, on the basis of financial statements which had now been received by Staff, it appeared that, as of June 30, 1999, the capital deficiency at May 31, 1999 referred to above had been made good. We are satisfied that, on the evidence presented, which was not contradicted by the Respondent, with this exception, and with the exception that the deadline dates set out in paragraphs8 and 9 of the allegations above were each out by one day, Staff has made out its allegations.
As to sanctions, Ms. Sopinka submitted that the Respondent's failure to comply with the terms and conditions of its registration was a serious matter, particularly where, as in this case, the failure had continued over several months and was coupled with a capital deficiency for part of the time. She argued that the Commission ought to impose a regulatory sanction that would reflect the serious nature of the misconduct, and that a sanction of three months would reflect the past conduct and provide a general deterrent to the industry.
She further argued that, in addition to the suspension, measures should be put in place to ensure that the Respondents operated in compliance with Ontario securities law once the suspension had run its course, and requested that we order the Respondents to submit to a review of its practices and procedures and implement such changes as might be ordered by the Commission, with the suspension to remain in force for the longer of three months and the period until the date on which recommended changes were implemented as approved by Staff.
Ms. Sopinka asked that the suspension should be delayed for two weeks to permit the Respondent's clients to be notified and to seek a new mutual fund dealer and the Respondent's registered employees to seek new sponsors, and that the Commission order Respondent to send a letter
to all of its clients to inform them of the Commission order.
Mr. Ashley Cooper, the Respondent's President, appeared on its behalf. The Respondent was not represented by counsel. Mr. Cooper advised us that he was in the process of acquiring the ownership of the Respondent, and that, following the change, the Respondent would have the resources and people to operate properly, and to conduct its business in a prudent and successful manner. He argued that a suspension of the Respondent's registration would "kill" the Respondent (since it would lose its salespeople and clients during the period of suspension), and that no one had been injured as a result of the Respondent's failure to comply with the terms and condition of its registration. Mr. Cooper asked us to give him an opportunity to run the Respondent in the way it ought to be run.
In reply, Ms. Sopinka pointed out that terms and conditions were sometimes imposed as a sanction when a registrant has not been complying with its regulatory obligations. That is what happened in this case. The terms and conditions were imposed as a result of the Respondent's failure to maintain required capital, and file audited financial statements as required, as well as the existence of a shortfall in the Respondent's trust account and other matters. She further argued that when such terms and conditions are not then compiled with, the only appropriate course was to suspend registration. As well, she argued that, if the Respondent was not able to comply with such terms and conditions, she had no comfort in Mr. Cooper's submission that we should trust him and his group of people to put in the appropriate procedures.
Mr. Cooper was the president of the Respondent during the period in which it failed to comply with the terms and conditions to which it had agreed. It was his obligation to ensure that the Respondent complied with such terms and conditions. He failed to do so. We are unable to accept his submission that, if we gave him further time, all would be well and the Respondent would become compliant.
We have to look to the past conduct of the Respondent, and of Mr. Cooper, as the best evidence of what their future conduct was likely to be, absent the corrective action recommended by Staff.
The requirements imposed on registrants for the filing of financial statements and other information with the Commission are imposed for the protection of their customers, and these requirements are necessary for the protection of those customers.
It is no light matter for a registrant to consistently fail to comply with these requirements, and even more serious for a registrant to fail to comply with terms and conditions imposed as a result of failure to comply with the regulatory requirements. It is not good enough to argue that no one has been injured by the failure. It is the possibility of injury with which we have to concern ourselves in matters such as this one.
As a result, we concluded that we should, in the public interest, impose on the Respondent the sanctions recommended by Staff, and made the Order which appears as the Schedule to these Reasons. We did this, not to punish the Respondent, which is not our function in a proceeding of this sort, but to try to ensure that, if the Respondent is to continue as a registrant under the Act, it will do so in the manner required by Ontario securities law. It may be, as argued by Mr. Cooper, that the result of the suspension will be to make it difficult or impossible for the Respondent to remain in business, but the public interest requires that the Respondent, if it is to remain in business, does so only on the basis that it complies with its regulatory requirements, for the protection of its clients.
Although, in our view the order would have been appropriate in any case, it will also, we trust, have an appropriate general deterrence effect, clearly indicating the seriousness with which the Commission regards the failure of a registrant to comply with its obligations to duly and punctually file the financial statements and other material which it is obliged to file under the Act, the regulations made under the Act, and any terms and conditions imposed on its registration. General deterrence is a matter which we are entitled to take into account in subsection 127(1) proceedings. (See In the Matter of Belteco Holdings Inc. et al. (1998), 21 O.S.C.B. 7743; In the Matter of Linden Dornford (1998), 21 O.S.C.B. 7499.)
October 5th , 1999.
"J. A. Geller"
"Morley P. Carscallen"
"J. F. Howard"