Investment Allocation International Inc. and Marshall Miller
IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
AND IN THE MATTER OF THE RECOMMENDATION BY STAFF
OF THE ONTARIO SECURITIES COMMISSION TO SUSPEND
THE REGISTRATION OF
INVESTMENT ALLOCATION INTERNATIONAL INC. AND
1. This settlement agreement (the Settlement Agreement) relates to the registration status under the Securities Act (Ontario) (the Act) of Investment Allocation International Inc. (IAI) and Marshall Miller (Miller) (the Registrants).
Agreed Statement of Facts
2. Staff (Staff) of the Ontario Securities Commission (the OSC) and the Registrants agree to the facts as stated herein.
3. Except for a period of approximately one year in the mid-1990s, IAI has been registered under the Act continuously since 1990, first as an adviser in the category of investment counsel and portfolio manager, and since 2009, as an adviser in the category of portfolio manager.
4. Miller is IAI’s president, majority shareholder, ultimate designated person, chief compliance officer, and sole registered advising representative.
5. At the time of the events described in this Settlement Agreement, IAI and Miller managed investment accounts for eighteen clients, all on a discretionary basis.
6. Except for the matters referred to in this Settlement Agreement, neither IAI nor Miller has been the subject of any regulatory proceedings by the OSC.
The Compliance Review
7. In 2012, Staff conducted a compliance review of IAI pursuant to section 20 of the Act (the Compliance Review).
8. The Compliance Review found that IAI had an insufficient compliance system that did not meet the requirements of section 11.1 of National Instrument 31-103 – Registration Requirements, Exemptions, and Ongoing Registrant Obligations (NI 31-103).
9. Staff found the following deficiencies in IAI’s compliance system, which the Registrants acknowledge:
(a) Certain client accounts were not invested in accordance with the governing investment policy statement.
(b) IAI did not have a process for updating its clients’ know-your-client (KYC) information.
(c) Some of IAI’s KYC forms did not record the client’s age, investment knowledge, or financial circumstances, or whether they were an insider of a reporting issuer.
(d) The Registrants were unable to locate the investment management agreement for one of their clients, and were unable to locate the investment policy statement for a number of other clients.
(e) The Registrants did not deliver account statements to their clients, but instead relied on the custodian of the client’s securities to send account statements.
(f) Miller did not disclose to the OSC his outside business activity regarding a company known as iCanTrade Corporation (iCanTrade) on the National Registration Database on a timely basis.
10. The Compliance Review also found issues regarding the financial condition of IAI, and Miller’s sale of securities of iCanTrade to his portfolio management clients. These issues are described below.
11. On November 9, 2012, IAI provided Staff with a Form 31-103F1 – Calculation of Excess Working Capital (the Form F1) as at September 30, 2012, which included among the firm’s current assets certain receivables from iCanTrade and Miller totaling $244,949 (the Receivables).
12. The Receivables are not readily convertible into cash for the purposes of the Form F1 and therefore should have been deducted from the current assets for the purpose of calculating IAI’s excess working capital in the Form F1.
13. When the Receivables are deducted from the current assets for the purpose of calculating excess working capital in the Form F1, the firm has an excess working capital of negative $113,451 as at September 30, 2012.
14. IAI’s capital deficiency has not been rectified, and the firm continues to have an excess working capital of less than zero.
15. IAI entered into an agreement with another registered adviser to transfer its clients to that firm (the Acquiring Firm). Notice of this transaction was provided to the OSC on March 12, 2013 in accordance with section 11.9 of NI 31-103, and on April 23, 2013 the Director provided notice that the Director did not object to the transaction.
16. Miller is the founder of iCanTrade, a small company developing a product known as “iCanTrade.com”, which it advertises as a web-based personal portfolio management system.
17. Miller is the president and majority owner of iCanTrade.
18. As of the date of this Settlement Agreement, iCanTrade.com is in the development stage and has no paying customers or other revenue.
19. Miller raised approximately $500,000 to fund the operations of iCanTrade by selling common and preferred shares of the company to sixteen of his portfolio management clients.
20. The sale of iCanTrade securities proceeded in two rounds. In the first round, Miller sold common shares of iCanTrade, and in the second round he sold preferred shares of the company.
21. The sale of iCanTrade securities constituted a distribution of securities for the purpose of section 53 of the Act, and no preliminary prospectus or prospectus for iCanTrade was filed with the OSC or a receipt issued for them by the Director. In order to sell securities of iCanTrade to his portfolio management clients, Miller relied on the fully managed account component of the accredited investor exemption to the prospectus requirement (the AI exemption), as provided for in paragraph (q) of the definition of “accredited investor” in section 1.1 of National Instrument 45-106 – Prospectus and Registration Exemptions.
22. Miller’s sale of iCanTrade securities to his portfolio management clients constituted a material conflict of interest (the Conflict of Interest) for the purposes of Division 2 of Part 13 of NI 31-103.
23. In accordance with subsection 13.4(2) of NI 31-103, IAI was required to respond to the Conflict of Interest. Miller responded to the Conflict of Interest by disclosing it, as described below. It is the position of Staff that the appropriate response to the Conflict of Interest in the circumstances of this case was to avoid it by not trading in securities of iCanTrade with clients of IAI or not advising such clients with respect to the buying, selling, or investing in securities of iCanTrade.
24. If one of his portfolio management clients was interested in investing in iCanTrade, Miller generally required the client to sign a document acknowledging the Conflict of Interest and providing their consent to the transaction (the Notice and Consent) pursuant to subsection 13.5(2) of NI 31-103.
25. Miller did not obtain a separate Notice and Consent for the second round of sales of iCanTrade securities (i.e., the sale of preferred shares), and instead relied on the client’s Notice and Consent given in the first round of sales (i.e., the sale of common shares).
26. For Miller’s portfolio management clients who invested in securities of iCanTrade, those securities represented, on average, 6.7% of their portfolio managed by Miller.
27. The securities of iCanTrade constituted a speculative and high-risk investment. It is Miller’s position that he properly explained the risks associated with iCanTrade to his clients before they invested. Having interviewed some of these clients, it is Staff’s position that Miller did not properly explain the risks associated with iCanTrade to some of his clients.
28. To date, iCanTrade has earned no revenue from any business operations, and its sole source of funding has been investor capital.
29. On May 17, 2011, iCanTrade and IAI entered into a management services agreement whereby iCanTrade would pay IAI management fees in the amount of $7,500 per month (the Management Fees).
30. During the period July 1, 2011 to September 30, 2012, IAI earned $99,558 in Management Fees from iCanTrade, which amounted to 14.6% of all investment monies received during that period. Some of the Management Fees were paid by iCanTrade to IAI, and others were accrued but not paid.
31. Miller prepared written business plans for iCanTrade, which he made available to investors if they were interested in receiving the document. The business plans identified five uses of investor funds, and the Management Fees were not among these uses.
32. It is Miller’s position that at the time IAI accrued the Management Fees, he did not consider the Management Fees to be a specific use of investor funds, but rather a normal operating expense that did not call for disclosure in the business plans. However, Miller now acknowledges and agrees that the Management Fees should have been disclosed in the business plans.
33. The success or failure of iCanTrade as a going concern has yet to be determined. In addition, Staff has raised concerns with Miller that the activities of iCanTrade require registration under the Act, and these concerns have yet to be addressed to the satisfaction of Staff.
34. As of the date of this Settlement Agreement, Staff is not aware of any complaints from any investor in iCanTrade.
Staff Recommends Suspension of Registration
35. On January 24, 2013, Staff sent a report to the Registrants setting out its findings from the Compliance Review, including the issues relating to IAI’s financial condition and Miller’s sale of securities of iCanTrade.
36. Also on January 24, 2013, Staff sent a letter to the Registrants informing them that as a result of the findings of the Compliance Review, Staff had recommended to the Director that their registrations be suspended pursuant to section 28 of the Act, and informing them of their right to request an opportunity to be heard (an OTBH).
37. On February 5, 2013, the Registrants notified Staff in writing that the Registrants wished to have an OTBH before the Director made a decision regarding Staff’s recommendation.
38. An OTBH was convened before the Director on April 2, 2013.
39. At the OTBH, Miller advised that he consented to the suspension of IAI, but that he wished to be able to carry on as a registered advising representative in the future with another registered adviser. As the Registrants were not represented by counsel at the OTBH, the Director adjourned the OTBH to permit Miller the opportunity to discuss his position with counsel, and to afford Miller and Staff a further opportunity to discuss whether a resolution of Miller’s individual registration status could be reached.
Admission of Non-Compliance with Ontario Securities Law
40. On the basis of the Agreed Statement of Facts, the Registrants admit the following:
(a) IAI did not adequately establish, maintain, and apply policies and procedures to establish a system of controls and supervision sufficient to provide reasonable assurance that the firm and each individual acting on its behalf complied with securities legislation and to manage the risks associated with its business in accordance with prudent business practices, contrary to section 11.1 of NI 31-103.
(b) Miller did not adequately discharge the duties of an ultimate designated person, contrary to section 5.1 of NI 31-103.
(c) Miller did not adequately discharge the duties of a chief compliance officer, contrary to section 5.2 of NI 31-103.
(d) IAI has excess working capital that is less than zero, and which has been less than zero since at least September 30, 2012, contrary to section 12.1 of NI 31-103.
(e) By failing to adequately disclose that iCanTrade would use investor proceeds to fund the Management Fees, the Registrants did not comply with section 2.1 of OSC Rule 31-505 – Conditions of Registration.
41. With respect to Miller’s sale of securities of iCanTrade to his portfolio management clients, it is the position of Staff that the appropriate response to the Conflict of Interest in the circumstances of this case was avoidance, and it is the position of Miller that he properly responded to the Conflict of Interest by disclosing it in accordance with subsection 13.4(2) of NI 31-103.
Undertakings by Miller
42. Miller gives the following undertakings to Staff:
(a) The payment or accrual of Management Fees shall cease immediately.
(b) Within fourteen days of the Director’s approval of this Settlement Agreement, Miller will deliver to Staff an accounting of all amounts for the period May 17, 2011 to the date of the Director’s approval of this Settlement Agreement:
(i) paid to IAI by iCanTrade as Management Fees;
(ii) accrued by IAI as Management Fees but not yet paid;
(iii) paid by Miller or IAI to iCanTrade as capital contributions; and
(iii) paid by Miller or IAI on behalf of iCanTrade for iCanTrade’s normal operating expenses.
This accounting shall be in a form acceptable to Staff, shall be prepared by IAI’s auditor, shall be accompanied by appropriate supporting documentation, and shall be subject to comment and approval by Staff.
(c) Within a time period to be agreed upon by Miller and Staff, Miller will:
(i) for the period May 17, 2011 to the date of the Director’s approval of this Settlement, reimburse iCanTrade for the Management Fees paid to IAI, net of any capital contributions to iCanTrade by Miller or IAI and any amounts paid by Miller or IAI on behalf of iCanTrade for iCanTrade’s normal operating expenses, as determined by IAI’s auditor and approved by Staff;
(ii) for the period May 17, 2011 to the date of the Director’s approval of this Settlement, cause IAI to forgive iCanTrade’s debt to IAI related to the Management Fees accrued but not yet paid and discharge iCanTrade from any obligation to pay such Management Fees; and
(iii) provide Staff with written evidence of this reimbursement and debt forgiveness.
(d) Within fourteen days of the Director’s approval of this Settlement Agreement, Miller will deliver to each investor in iCanTrade written evidence of the client’s investment, including the date of the investment, the amount invested, the number of securities acquired by the client, the name of the entity with custody of the client’s securities, and the terms of the investment, and shall furnish Staff with written evidence that this notice has been provided.
(e) Within fourteen days of the Director’s approval of this Settlement Agreement, Miller will deliver to each investor in iCanTrade a copy of this Settlement Agreement and the Director’s decision approving it, and shall furnish Staff with written evidence that this has been done.
43. Miller acknowledges that his failure to comply with the spirit and intent of any of these undertakings may impugn his suitability for registration in the future.
Joint Recommendation to the Director
44. In order to resolve the OTBH, and on the basis of the Agreed Statement of Facts, the admission of non-compliance with Ontario securities law, and the undertakings by Miller set out in this Settlement Agreement, Staff and the Registrants (the Parties) have agreed to the following terms, and make the following joint recommendation to the Director:
(a) IAI’s registration as an adviser in the category of portfolio manager shall be permanently suspended pursuant to section 28 of the Act;
(b) Miller’s registration as an ultimate designated person shall be permanently suspended pursuant to section 28 of the Act;
(c) Miller’s registration as a chief compliance officer shall be permanently suspended pursuant to section 28 of the Act;
(d) Miller’s registration as an advising representative in the category of portfolio manager will be suspended pursuant to section 28 of the Act, and he may apply for a reinstatement of registration as an advising representative in the category of portfolio manager after a period of six months from the effective date of the suspension, and Staff will not recommend to the Director that his application be refused, unless Staff becomes aware after the date of this Settlement Agreement of conduct impugning Miller’s suitability for registration, and provided he meets all other applicable criteria for registration at the time he applies for registration. Miller currently has discretionary relief from the proficiency requirements for an advising representative in the category of portfolio manager as set out in NI 31-103. Miller agrees that if he applies for a reinstatement of registration later than two years from the effective date of his suspension, he shall not rely on any discretionary relief previously granted to him or apply for any new discretionary relief;
(e) Miller shall successfully complete the Conduct and Practices Handbook Course before applying for a reinstatement of registration; and
(f) In order to facilitate an orderly transfer of client accounts to the Acquiring Firm or to another registered firm, the Parties recommend that the suspensions of the Registrants become effective at 5:00 p.m. on the tenth business day after the date the Director approves this Settlement Agreement.
45. The Parties submit that their joint recommendation is reasonable, having regard to the following factors:
(a) The Registrants have not previously been the subject of any regulatory action by the OSC relating to allegations of misconduct;
(b) Staff is not aware of any complaints to the OSC by investors regarding their investment in iCanTrade or about Miller’s management of their investment portfolios generally;
(c) Miller has co-operated with Staff, in particular during the Compliance Review process;
(d) Miller voluntarily entered into an agreement to transfer his book of business to the Acquiring Firm; and
(e) By agreeing to this Settlement Agreement, the Registrants have saved the Director the time and resources that would have been required to complete the OTBH.
46. The Parties acknowledge that if the Director does not accept this joint recommendation:
(a) This joint recommendation and all discussions and negotiations between the Parties in relation to this matter shall be without prejudice to the Parties; and
(b) The Registrants will be entitled to resume the OTBH in accordance with section 31 of the Act.
47. The Registrants acknowledge that they have consulted, or have had the opportunity to consult, with legal counsel regarding this Settlement Agreement.
|" Mark Skuce "
Mark Skuce, Legal Counsel,
Compliance and Registrant
|" M.E. Miller "
Marshall Miller, on his own behalf
and on behalf of Investment
Allocation International Inc.
|June 3, 2013
|May 31, 2013
Decision of the Director
Having reviewed and considered the agreed facts, admissions, representations, submissions, and undertakings contained in the settlement agreement (the Settlement Agreement) entered into between Investment Allocation International Inc. (IAI), Marshall Miller (Miller), and staff of the Ontario Securities Commission (Staff), and on the basis of those agreed facts, admissions, representations, submissions, and undertakings, I, Erez Blumberger, in my capacity as Director under the Securities Act (Ontario) (the Act), accept the joint recommendation of the parties, and make the following decision:
(a) IAI’s registration as an adviser in the category of portfolio manager is permanently suspended pursuant to section 28 of the Act;
(b) Miller’s registration as an ultimate designated person is permanently suspended pursuant to section 28 of the Act;
(c) Miller’s registration as a chief compliance officer is permanently suspended pursuant to section 28 of the Act;
(d) Miller’s registration as an advising representative in the category of portfolio manager is suspended pursuant to section 28 of the Act, and he may apply for a reinstatement of registration after a period of six months from the date of this decision; and
(e) The suspensions of the Registrants shall be effective at 5:00 p.m. on the tenth business day after the date of this decision for the purpose of facilitating an orderly transfer of client accounts to a different registered firm.
|June 4, 2013
|" Erez Blumberger "
Compliance and Registrant Regulation