52 Private Capital Markets | Fall 2014 | www.pcmacanada.com
from Chair of the Board to a consultant pending the conclusion
of the investigation, the applicants addressed a major objection
of Staff. This allowed the Commission to focus the hearing on
the terms of the proposed transaction without the need to hear
potentially extensive evidence called by Staff concerning alleged
PFAM compliance deficiencies.
In addition, KCC called evidence that it had retained North
Star Compliance and Regulatory Solutions, an experienced
compliance consultant, to implement the appropriate compliance
policies and procedures. KCC also called the evidence of the
proposed new owner to give the Commission comfort that he was
committed to the success of the business and that KCC would be
properly capitalized after the transaction. The principal of PFAM
also testified about his planned role with KCC.
In the result, the hearing and review offered an opportunity for
KCC and PFAM to have the key issues in the proceeding heard
and considered in a relatively streamlined and efficient manner.
They were able to satisfy the Commission that Staff’s concerns
would be addressed, notwithstanding Staff’s continued objection.
Citadel and Energy Income Funds
In this case, the Director of Investment Funds refused to issue
a receipt for a prospectus for a warrants offering due to Staff’s
purported concerns about the integrity of the President of the
Investment Fund Manager (IFM) based on prior merger transactions
that had been undertaken with other investment funds, with which
Staff disagreed. Reflective of the polarized positions that had
developed between the IFM and Staff, Staff of the enforcement
branch launched an enforcement proceeding days before the
scheduled hearing and review. Staff then sought to stay the hearing
and review pending the conclusion of the enforcement proceeding.
The Commission refused to grant the stay.
Detailed affidavit evidence was filed by the President of the
IFM concerning the motivation for and business rationale for the
prior merger transactions as well as for the proposed offering
objected to by Staff. Evidence of a member of the independent
review committee was summonsed. In a pivotal moment in the
hearing, he was asked directly by a Commissioner whether he had
any concerns about the integrity of the President. He testified that
he did not. In overturning the Director’s decision and granting the
receipt, the Commission found that Staff’s unproven allegations did
not provide a sufficient basis to conclude that the business of the
fund manager could not be conducted with integrity. This decision
was made without prejudice to the findings that the future hearing
panel could make on the enforcement proceeding. In the result, the
Commission did not accept that a pending enforcement proceeding
had to hold up a legitimate business activity or transaction.
Achieving a positive outcome before the Commission on a
hearing and review is possible. A hearing and review presents an
opportunity to call and receive fresh consideration of evidence
regarding the probity of the transaction or application at issue
and to address investor protection concerns. In both cases the
Commission had a chance to hear the testimony and ask direct
questions of the key individuals involved.
A hearing and review can, therefore, be a practical forum for
facilitating the approval of an application or proposed transaction
if an impasse is reached with Staff. Having said that, the process
is not for the weak of spirit or the light of wallet. Staff have shown
a propensity to throw considerable resources at these cases to
oppose applications. There is a risk that the hearing and review
will be converted into a de facto enforcement proceeding with an
unwieldy evidentiary record. Nonetheless, there is a road out of
the quagmire, albeit one that is heavily guarded by Staff.
For more information contact:
1. Citadel Income Fund and Energy Income Fund (Re) (2011), 34 OSCB
2. Kingship Capital Corporation et. al. (Re) (2014), 37 OSCB 6923