Financial Filings and Working Capital
You are now registered with the BCSC as a portfolio manager, dealer, or investment fund manager (IFM). What are some of financial filings and capital monitoring requirements you should know as a registrant?
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations†(NI 31-103) is the key instrument for registrants to reference for financial and capital related requirements. Please refer to Part 12 of NI 31-103 for details on registrant financial condition requirements.
This article is for registrants that are not members of self-regulatory organizations (SRO), such as the Investment Industry Regulatory Organization of Canada or the Mutual Fund Dealers Association of Canada. SRO member firms should contact their SRO for their financial filing requirements.
Annual financial information
A registrant must file audited annual financial statements and a†Form 31-103F1 Calculation of Excess Working Capital†(Form 31-103F1) within 90 days of its fiscal year end date. If the 90th day falls on a weekend or statutory holiday, the registrant can file the statements on the next business day.
As required by†National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, for financials years beginning on January 1, 2011, the audited annual financial statements must be in accordance with International Financial Reporting Standards (IFRS).
The audited annual financial statements must include:
- A statement of comprehensive income
- A statement of changes in equity
- A statement of cash flows
- A statement of financial position, which must be signed by at least one director of the registrant
- Notes to the financial statements
IFMs must also submit a description of any net asset value adjustment made in respect of an investment fund managed by the IFM for the preceding fiscal year.
Interim financial information
Registrants registered in the category of IFM must file unaudited interim financial statements and a Form 31-103F1 with the BCSC within 30 days of the end of the first, second, and third quarters. If the 30th day falls on a weekend or statutory holiday, the registrant can file the statements on the next business day. Note that there is no requirement to file interim statements for the fourth quarter; the IFM files its annual audited financial statements instead.
IFMs must also submit a description of any net asset value adjustment made in respect of an investment fund managed by the IFM for the preceding quarter.
Dealers also registered in another category must file interim financial statements similar to the requirement described above for IFMs.
Working capital is a litmus test for a registrantís ability to cover its short-term obligations. Registrants must use the Form 31-103F1 to calculate the excess working capital.
If the excess working capital is less than zero, the registrant must immediately notify the BCSC. NI 31-103 states that a registrant must not allow the excess working capital to be less than zero for two consecutive days. This requirement obviously requires that a registrant must be aware of its working capital position at all times.†
The minimum capital requirement for registrants is:
|$25,000||Adviser (Portfolio Manager)|
Registrants registered in multiple categories must have the higher minimum capital requirement for the categories of registration. For example, a firm registered as an adviser and as a dealer, must have a minimum of $50,000 working capital. A firm registered in all three categories, must have a minimum of $100,000 working capital.
An exemption from the higher working capital requirement is available to advisers that are also IFMs and are using the exemption available in section 8.6 of NI 31-103. Section 8.6 allows advisers that manage proprietary pooled funds and distribute the units of the pooled funds only to the advisersí fully managed accounts, to maintain minimum capital of $25,000 instead of $100,000 as an IFM. Section 8.6 also exempts the adviser from having to register as a dealer for the purpose of distributing units of the pooled funds.
Note that the minimum capital amounts discussed above are threshold amounts and that Form 31-103F1 requires the subtraction of the firmís financial institution bond (FIB) deductible to calculate the excess working capital. Depending on the nature of a registrantís current assets (for example, if the firm invests in securities), Form 31-103F1 may require additional deductions.
While registrant should be aware of its working capital levels at all times, we expect at a minimum, a formal monthly calculation of excess capital. The firmís chief compliance officer should review and approve the monthly calculations and there should be evidence of the calculation, review, and approval.
Some firms have related party debt, for example, loans from shareholders. Often, the firm will classify the related party debt as a long-term liability; however, Form 31-103F1 requires a deduction of related party debt from the registrantís working capital unless the debt (or portions of it) have been subordinated.
Due to the Form 31-103F1 deduction, registrants may find that the related party debt will make the firm working capital deficient. Subordinating the related party debt will allow the firm to remove the debt from the working capital calculation. If the firm does not subordinate the debt, shareholders may have to inject more capital into the registrant.
In order for a registrant to remove related party debt from the calculation of working capital, a current copy of the subordination agreement must be on file with the BCSC. Registrants wishing to repay any portion of subordinated debt must notify the BCSC at least 10 days before the registrant makes the payment. The BCSC may request evidence that the registrant will have positive working capital after repayment.
The subordination agreement is not a formal form, such as the Form 31-103F1. The subordination agreement is Appendix B to NI 31-103, which the BCSC makes conveniently available as a†Word document††on our website.
Every registrant must maintain current bonding or insurance. The requirements are set out in sections 12.3 to 12.5 of NI 31-103 and respectively cover the bonding parameters for dealers, advisers, and IFMs.
|Clauses||A to E||A to E||A to E|
|Coverage||Double aggregate limit or full reinstatement†||Double aggregate limit or full reinstatement†||Double aggregate limit or full reinstatement†|
|Amount Ė higher of||a.†$50,000 per employee, agent and dealing representative or $200,000, whichever is less†
b.†one per cent of the total client assets that the dealer holds or has access to, as calculated using the dealerís most recent financial records, or $25,000,000, whichever is less†
c.†one per cent of the dealerís total assets, as calculated using the dealerís most recent financial records, or $25,000,000, whichever is less
d.†the amount determined to be appropriate by a resolution of the dealerís board of directors, or individuals acting in a similar capacity for the firm†
Advisers that do not hold or have access to client assets can maintain bonding for $50,000 per clause. See section 12.4 of the†Companion Policy to NI 31-103†for guidance on holding or having access to client assets.
b.†one per cent of the adviserís total assets, as calculated using the adviserís most recent financial records, or $25,000,000, whichever is less†
|a.†one per cent of assets under management, as calculated using the investment fund managerís most recent financial records, or $25,000,000, whichever is less
b.†one per cent of the investment fund managerís total assets, as calculated using the investment fund managerís most recent financial records, or $25,000,000, whichever is less
d.†the amount determined to be appropriate by a resolution of the IFMís board of directors or individuals acting in a similar capacity for the firm