Demystifying Capital calculations. October 23, 2008

Transcription

1 Demystifying Capital calculations October 23, 2008

2 Agenda Re-cap of OSC s findings related to capital calculations Overview of OSC s capital calculation requirements for ICPMs Regulatory Implications Common Pitfalls Suggested Best Practices Looking Forward National Instrument Questions

3 Re-cap of OSC s findings related to capital calculations A third of all ICPMs reviewed in 2008 had significant deficiencies with respect to capital calculations. Observation: Larger ICPMs tend to have adequate processes and procedures for calculating monthly capital. The following were some of the common issues found by the OSC relating to capital calculations: Capital calculations were prepared using financial statements that were not in accordance with Canadian GAAP Capital calculations were not prepared on a monthly basis or were not prepared at all Lack of evidence that someone independent of the preparer 2

4 Capital Calculations Requirements (1) All ICPMs are required to prepare monthly capital calculations within a reasonable period of time after each month end. Capital calculations must be based on monthly financial statements prepared in accordance with generally accepted accounting principles (GAAP). Regulation 107(3) under the Act requires every ICPM to maintain minimum free capital of the maximum amount, if any, that is deductible under any clause of the bonding or insurance policy required under Regulation 108(3) plus $5,000 of working capital calculated in accordance with GAAP. i.e. If you have an insurance deductible of $25,000, at minimum, you are required to maintain a capital amount of $30,000 ($25,000 + $5,000) ICPMs who have access to or take possession of client funds or securities are required to maintain minimum free capital of the maximum insurance deductible plus $25,000 of working capital calculated in accordance with GAAP. i.e. If you have an insurance deductible of $25,000, at minimum, you are required to maintain a capital amount of $50,000 ($25,000 + $25,000) 3

5 Capital Calculations Requirements (2) In addition, ICPMs are required under Regulation 113(3)(10) to maintain a record of a reasonable calculation of required capital for each month within a reasonable time after the month. Registrants who do not meet the prescribed capital requirement for any given month should inform the OSC immediately of the deficiency and take corrective measures within 48 hours. 4 Presentation name

6 Regulatory Implications OSC can impose terms and conditions on a registrant s registration in all circumstances where the OSC becomes aware of a capital deficiency. The terms and conditions are generally imposed for a six month period and include requirements to: File year-to-date unaudited financial statements with the OSC every month, File a capital calculation for each month end; Review their policies and procedures for compliance with Ontario Securities Law and have to file a compliance report that includes: (a) the reasons for the registrant s failure to meet the capital requirement as required under Ontario securities law; (b) a certification from its compliance officer to the effect that the registrant has reviewed its system for on-going compliance with Ontario securities law and rectified the problem (s) that led to its failure to satisfy the capital requirement; and (c) details of the specific measures that will be taken to ensure that the capital requirement will be satisfied at all times in the future. End Result Heightened Scrutiny 5

7 Common Pitfalls 1. Financial statements are not in accordance with GAAP Ex: Revenue recognitions principle Book revenue and expenses to the period that they were incurred Put up accruals up when not sure Ex: Long-term assets and liabilities were incorrectly included in the calculation of working capital and/or current assets and liabilities were incorrectly excluded Learn and get comfortable with your Balance Sheet 2. The insurance deductible on the financial institution bond is not included in the calculation or is incorrect. Review your FIB policy to ensure that (1) you are aware what your highest deductible amount is check for Riders in the policy and (2) include it in your calculation 3. The minimum capital deduction is not used or is incorrect Determine whether you have to deduct $5,000 or $25,000 Include it in your calculation 6

8 Common Pitfalls (2) 4. Capital calculations are not performed on a monthly basis Make it a habit to perform the calculations on a monthly basis Do not skip any months Plan to complete it within a reasonable time 5. Capital calculations are not reviewed by anyone independent Always have a 2nd person review the calculations A senior officer of the firm should evidence the review of the calculations 6. Copies of the monthly capital calculations were not maintained Need to have proper controls around maintaining books and records Keep everything Ensure that capital calculated for each month has adequate supporting documentation available 7

9 Suggested Best Practices Learn and become comfortable with your Financial Statements. Understand what the capital calculation formula/requirements are. Calculate the capital position on a monthly basis and prepare it using financial statements prepared in accordance with Canadian GAAP. Maintain copies of the capital calculations. Have someone independent of the preparer review the calculations for accuracy. Keep a record to evidence the secondary review. Inform the OSC immediately if the capital position becomes deficient. 8

10 Looking Forward National Instrument On February 28, 2008, the Canadian Securities Administrators published for second comment proposed NI NI will affect the minimum capital requirements for registered firms who are not members of a self regulatory organization (SRO) including portfolio managers. The proposed changes are meant to more closely link the minimum capital with the associated risks of a particular category of registration. Key changes to the proposed capital requirements, some of which may impact ICPMs, include: an increase in the minimum capital requirement for most non-sro members; an increase in the frequency of filings for most non-sro members; and an enhanced capital calculation formula to better reflect the firm s business model. 9

11 Questions? 10

12 Your Contacts at Deloitte Don Wilkinson, Partner Chair, Canadian Asset Management Practice Phone: Naveen K. Balakrishnan, Manager Enterprise Risk Services Direct:

13 Deloitte, one of Canada s leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,600 people in 56 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people excel. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms have any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names Deloitte, Deloitte & Touche, Deloitte Touche Tohmatsu, or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.