A guide to financial filing requirements

Along with the annual financial statements and interim financial information, all registered firms are required to deliver a completed Form 31-103F1 showing the calculation of the firm’s excess working capital as at the end of the financial year or interim period, as applicable, and as at the end of the immediately preceding financial year or immediately preceding interim period, as applicable. This requirement is set out under subsections 12.12(1), 12.13 or 12.14(1) and 12.14(2) of NI 31-103 for firms registered as a dealer, adviser or investment fund manager, respectively.

See a copy of Form 31-103F1.

Section 12.1 of NI 31-103 sets out the capital requirements. The minimum capital requirement for each category of registration is set out in subsection 12.1(3) of NI 31-103. and are as follows: 

• $25,000, for a registered adviser that is not also a registered dealer or a registered investment fund manager
• $50,000, for a registered dealer that is not also a registered investment fund manager
• $100,000 for a registered investment fund manager.

Firms are required to know their excess working capital at all times. This may require a firm to calculate its working capital every day. The frequency of working capital calculations depends on many factors, including the size of the firm, the nature of its business and the stability of the components of its working capital.  

If, at any time, the excess working capital of a registered firm, as calculated in accordance with Form 31-103F1, is less than zero, the registered firm must notify the regulator as soon as possible (subsection 12.1(1) of NI 31-103). The excess working capital of a registered firm, as calculated in accordance with Form 31-103F1, must not be less than zero for 2 consecutive days (subsection 12.1(2) of NI 31-103). 

The following section outlines each line item of Form 31-103F1 and provides examples of what to take into account: 

Form 31-103F1 line item	Examples of what to take into account
Line 1 – Current Assets	Current assets include current assets as defined in IAS 1 Presentation of Financial Statements. This line item typically includes all current assets recognized on the audited financial statements. Line 1 should not include any non-current assets, such as property, plant and equipment, intangible assets, long-term receivables, subordinated receivables, or restricted cash.
Line 2 – Less current assets not readily convertible into cash (e.g., prepaids)	Any receivables that are included on Line 1 and that cannot be converted into cash in a prompt and timely manner should be deducted on Line 2. Examples include the following: Related party receivables – Related party debt should have a contract in place with bona fide terms, including payment terms. This is a higher risk line item on the financial statements since firm may loan funds to related parties with solvency issues and these related parties may not be able to pay back the funds. Firms should be able to provide evidence to us that if the related party receivable was called upon by the firm, the amount could be promptly received. Evidence may include, among other items, a copy of the most recent audited financial statements of the related party or a bank statement supporting the amount of cash available. Any cash committed to serve a specific purpose (e.g. for collateral or as a security deposit) that is considered not readily available for use by the registrant for its current business purposes or to settle its current liabilities is considered to be restricted cash and should be deducted on Line 2.
Line 3 – Adjusted current assets, Line 1 minus line 2 =	--
Line 4 – Current liabilities	Current liabilities include current liabilities as defined in IAS 1 Presentation of Financial Statements. This line item typically includes all current liabilities recognized on the audited financial statements. Line 4 should not include any non-current liabilities, such as long-term deferred revenue, long-term debt, deferred employee compensation, etc.
Line 5 – Add 100% of long-term related party debt unless the firm and the lender have executed a subordination agreement in the form set out in Appendix B and the firm has delivered a copy of the agreement to the regulator	The reason for including long-term related party debt back in the calculation is that many smaller registrants often finance their operations from related party transactions. If the firm is having cash flow problems, the firm would likely pay off the related parties before other creditors. This may put investor assets at risk. As a result, registrants must maintain capital for these transactions, unless a subordination agreement in the form set out in Appendix B has been executed and a copy delivered to the OSC. The registrant must notify the regulator 10 days before it repays the loan or any part of the loan, or terminates the agreement (section 12.2 of NI 31-103). Only subordination agreements executed in the format outlined in Appendix B (or tailored for the purposes of preferred shares) comply with the requirements of Line 5. Related party debt subordinated in any other format is not considered to be subordinated for the purposes of determining excess working capital. Subordinated loan agreements allow us to make sure registrants have enough capital after the repayment of the debt to continue to meet their minimum capital requirements. Note that arrangements with lenders regarding revolving lines of credit, where the firm is able to draw upon and repay at any time, are not eligible to be subordinated for the purposes of calculating excess working capital and must be included on Line 5 of Form 31-103F1. Preferred shares issued to related parties may be classified as a financial liability as well if there is an option for the holder to redeem the preferred shares for cash or other consideration. If the preferred shares are classified as a long-term liability on the financial statements, the full amount is considered to be long-term related party debt and must be included on Line 5 unless a subordinated preferred share agreement is executed (using the subordinated loan agreement in Appendix B to NI 31-103F1 as a basis to tailor the agreement to the terminology of the preferred shares).
Line 6 – Adjusted current liabilities, Line 4 plus line 5 =	--
Line 7 – Adjusted working capital, Line 3 minus line 6 =	--
Line 8 – Less minimum capital	There are various levels of excess working capital required by registrant firms. The level depends on the category of registration since different types of registered firms pose more risks and therefore should maintain higher levels of capital. The minimum capital required for firms are as follows: $25,000 for a registered adviser $50,000 for a registered dealer $100,000 for a registered investment fund manager If a firm is registered in more than one category, the minimum capital requirement to be included on Line 8 of Form 31-103F1 is the highest amount. For example, if a firm is registered as a portfolio manager, exempt market dealer and an investment fund manager, the firm would be subject to a minimum capital requirement of $100,000 (not $175,000). The capital requirement of $100,000 does not apply to a registered investment fund manager that is exempt from the dealer registration requirement under section 8.6 of NI 31-103 [investment fund trades by adviser to managed account] in respect of all investment funds for which it acts as adviser. In this situation, the capital requirement would then be $25,000, which is the capital requirement for an adviser. For this exemption to apply, the firm must have notified the OSC with its intention to rely on this exemption.
Line 9 – Less market risk	For firms with holdings in securities (i.e. bonds, debentures, treasury bills, bank paper, mutual funds, stocks, mortgages, etc.), there is a chance that market conditions may affect the value of securities and the firm may not be able to realize the full value when liquidating the securities. As a result, registrants are required to put up additional capital to account for this risk. The additional working capital acts as a buffer in the event something happens in the market that affects the ability of the firm to readily convert the full value of the security into cash to meet the firm’s short term obligations. Depending on the type of security, a specific margin rate is applied to the fair value of the security based on the criteria outlined in Schedule 1 to Form 31-103F1. The individual margin amounts are added up to calculate the total market risk. In general, riskier securities require a higher margin rate. For example, the margin rate on a penny stock trading in the OTC market is higher than the margin rate on the shares of a large bank trading on a North American stock exchange. Similarly, Canadian government bonds guaranteed by the Government of Canada have a lower margin rate than a corporate bond.
Line 10 – Less any deductible under the bonding or insurance policy required under Part 12 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations	Registrants are required to maintain bonding or insurance with prescribed clauses, along with other insurance requirements. The bonding or insurance policy will indicate a deductible amount that will not be covered by the policy in the event of a claim. As a result, the amount of the deductible is required to be included on Line 10 of Form 31-103F1 when determining the excess working capital.
Line 11 – Less Guarantees	If the registrant is guaranteeing the liability of another party, the total amount of the guarantee must be included in the capital calculation. If the amount of a guarantee is included in the firm’s statement of financial position as a current liability and is already reflected in Line 4 of Form 31-103F1, do not include the amount of the guarantee on Line 11. The reason for including this line item is that if the guarantee were called upon, the firm should still have enough to meet the guarantee requirements and meet all of their other financial obligations.
Line 12 – Less unresolved differences	Any unresolved differences that could result in a loss from either firm or client assets must be included in the capital calculation. The examples below provide guidance as to how to calculate unresolved differences: If there is an unresolved difference relating to client securities, the amount to be reported on Line 12 will be equal to the fair value of the client securities that are short, plus the applicable margin rate for those securities. If there is an unresolved difference relating to the registrant's investments, the amount to be reported on Line 12 will be equal to the fair value of the investments (securities) that are short. If there is an unresolved difference relating to cash, the amount to be reported on Line 12 will be equal to the amount of the shortfall in cash.
Line 13 – Excess working capital	--

 

All registered firms must maintain bonding or insurance that contains certain specific clauses and coverage. See sections 12.3 to 12.5 of NI 31-103 for details on how to calculate the amount of bonding and insurance required for a dealer, adviser or investment fund manager. A registered firm must, as soon as possible, notify the regulator in writing of any change in, claim made under, or cancellation of any insurance policy (section 12.7 of NI 31-103). 

Annual financial statements

All registered firms are required to deliver annual financial statements to the regulator no later than the 90th day after the end of its fiscal year. The deadlines are outlined under subsections 12.12(1), 12.13 or 12.14(1) of NI 31-103 for firms registered as a dealer, adviser or investment fund manager, respectively. 

The annual financial statements must be audited. 

The annual financial statements must include the items outlined in section 12.10 of NI 31-103 as follows: 

• A statement of comprehensive income, a statement of changes in equity and a statement of cash flows, each prepared for the most recently completed financial year and the financial year immediately preceding the most recently completed financial year, if any
• A statement of financial position, signed by at least one director of the registered firm, as at the end of the most recently completed financial year and the financial year immediately preceding the most recently completed year, if any
• Notes to the financial statements.

The annual financial statements must also be prepared in accordance with the acceptable accounting principles and auditing standards outlined in National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107).  

Domestic registrants (i.e. firm incorporated or organized in Canada) Paragraph 3.2(3)(a) of NI 52-107: Domestic registrants are required to prepare annual financial statements in accordance with Canadian Generally Accepted Accounting Principles (GAAP) applicable to publicly accountable enterprises, except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in International Accounting Standard 27 Separate Financial Statements (IAS 27).  

Canadian GAAP applicable to publicly accountable enterprises refers to International Financial Reporting Standards (IFRS). Separate financial statements are sometimes referred to as non-consolidated financial statements. 

Additionally, the annual financial statements must: 

• Include the following statement:

  These financial statements are prepared in accordance with the financial reporting framework specified in paragraph 3.2(3)(a) of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards for financial statements delivered by registrants.

• Describe the financial reporting framework used to prepare the financial statements.

Foreign registrants (i.e. firm incorporated or organized outside Canada) Section 3.15 of NI 52-107: The term “foreign registrant” is defined in section 1.1 of NI 52-107 and means a registrant that is incorporated or organized under the laws of a foreign jurisdiction with limited exception. Despite paragraph 3.2(3)(a) of NI 52-107, foreign registrants may prepare annual financial statements in accordance with one of: 

• IFRS, except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in IAS 27
• U.S. GAAP, except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in IAS 27
• Accounting principles that meet the disclosure requirements of a foreign regulatory authority to which the registrant is subject, if it is a foreign registration incorporated or organized under the laws of that designated foreign jurisdiction.

Separate financial statements are sometimes referred to as non-consolidated financial statements. 

Additionally, the annual financial statements must: 

• Include the following statement:

  These financial statements are prepared in accordance with the financial reporting framework specified in section 3.15 of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards for financial statements delivered by registrants.

• Describe the financial reporting framework used to prepare the financial statements.

Interim financial information

Firms registered as an investment fund manager or as a dealer in the category of scholarship plan dealer are required to deliver interim financial information to the regulator no later than the 30^th day after the end of its interim period. The deadlines are outlined under subsections 12.12(2) and 12.14(2) of NI 31-103 for firms registered as an investment fund manager or as a dealer in the category of scholarship plan dealer, respectively. 

The interim financial information does not need to be audited. 

Interim financial information must include the items outlined in section 12.11 of NI 31-103 as follows: 

• A statement of comprehensive income for the 3-month period ending on the last day of the interim period and for the same period of the immediately preceding financial year, if any
• A statement of financial position, signed by at least one director of the registered firm, as at the end of the interim period and as at the end of the same interim period of the immediately preceding financial year, if any.

Notes to interim financial information are not required. 

The interim financial information must also be prepared in accordance with the acceptable accounting principles and auditing standards outlined in National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107).  

Domestic registrants (i.e. firm incorporated or organized in Canada) Paragraph 3.2(3)(a) of NI 52-107: Domestic registrants are required to prepare interim financial information in accordance with Canadian Generally Accepted Accounting Principles (GAAP) applicable to publicly accountable enterprises, except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in International Accounting Standard 27 Separate Financial Statements (IAS 27).  

Canadian GAAP applicable to publicly accountable enterprises refers to International Financial Reporting Standards (IFRS). Separate financial statements are sometimes referred to as non-consolidated financial statements. 

Additionally, the interim financial information must: 

• Include the following statement:

  These financial statements are prepared in accordance with the financial reporting framework specified in paragraph 3.2(3)(a) of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards for financial statements delivered by registrants.

• Describe the financial reporting framework used to prepare the financial statements.

Foreign registrants (i.e. firm incorporated or organized outside Canada) Section 3.15 of NI 52-107: The term “foreign registrant” is defined in section 1.1 of NI 52-107 and means a registrant that is incorporated or organized under the laws of a foreign jurisdiction with limited exception. Despite paragraph 3.2(3)(a) of NI 52-107, foreign registrants may prepare interim financial information in accordance with one of: 

• IFRS, except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in IAS 27
• U.S. GAAP, except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in IAS 27
• Accounting principles that meet the disclosure requirements of a foreign regulatory authority to which the registrant is subject, if it is a foreign registration incorporated or organized under the laws of that designated foreign jurisdiction.

Separate financial statements are sometimes referred to as non-consolidated financial statements. 

Additionally, the interim financial information must:

• Include the following statement:

  These financial statements are prepared in accordance with the financial reporting framework specified in section 3.15 of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards for financial statements delivered by registrants.

• Describe the financial reporting framework used to prepare the financial statements.

Net Asset Value (NAV) Adjustments

Along with the annual financial statements and interim financial information, firms registered as investment fund managers must also deliver to the regulator a description of any net asset value adjustment made in respect of an investment fund managed by the investment fund manager during the financial year or the interim period, as applicable. This requirement is set out under subsections 12.14(1) and 12.14(2) of NI 31-103.

Subsection 12.14(3) specifies that a description of a net asset value adjustment must include the following:

(a) the name of the fund;

(b) assets under administration of the fund;

(c) the cause of the adjustment;

(d) the dollar amount of the adjustment;

(e) the effect of the adjustment on net asset value per unit or share and any corrections made to purchase and sale transactions affecting either the investment fund or security holders of the investment fund.

A NAV adjustment is necessary when there has been a material error and the NAV per unit does not accurately reflect the actual NAV per unit at the time of computation. Please refer to section 12.14 of 31-103CP for some examples of the causes of NAV errors.

As set out in section 12.14 of 31-103CP,investment fund managers are expected to have policies that clearly define what constitutes a material error that requires an adjustment, including threshold levels, and how to correct material errors.

All registered firms that have executed a subordination agreement, the effect of which is to exclude an amount from its long-term related party debt as calculated on Form 31-103F1, must notify the regulator 10 days before it repays the loan or any part of the loan, or terminates the agreement (section 12.2 of NI 31-103). Further documentation may be requested by the regulator after receiving this notice. 

Investment dealers and mutual fund dealers that are a member of the Canadian Investment Regulatory Organization (CIRO) (formerly New Self-Regulatory Organization of Canada (New SRO)) should refer to the CIRO website to determine the financial reporting requirements that apply to them. 

CIRO member firms that are also registered in other categories that do not require membership in a self-regulatory organization (SRO) must still comply with the financial filing requirements in Part 12 Financial condition of NI 31-103 in accordance with the requirements of the other categories, even if they are relying on the exemptions in sections 9.3 and 9.4 of NI 31-103.  

Insurance

If your firm is a member of an SRO and is also registered in other categories, it is required to maintain adequate insurance, as applicable, in accordance with the requirements of the other categories. 

Working capital 

Provided certain conditions are met, CIRO members that are registered in other categories may be permitted to calculate their working capital in accordance with the SRO forms and file the SRO forms instead of Form 31-103F1. 

Investment dealer and dual-registered member firms: 

Provided criteria from section 12.14(4) of NI 31-103 are met, firms may file a completed Investment Dealer and Partially Consolidated Rules Form 1 that shows the calculation of the firm’s risk adjusted capital as at the end of the current period and as at the end of the immediately preceding period, if any. Form 1 is filed in lieu of Form 31-103F1.

Mutual fund dealer member firms: 

Provided criteria from subsections 12.12(2.1) and 12.14(5) of NI 31-103 are met, firms may file a completed Mutual Fund Dealer Rules Form 1 that shows the calculation of the firm’s risk adjusted capital as at the end of the current period and as at the end of the immediately preceding period, if any. Form 1 is filed in lieu of Form 31-103F1.  

Annual financial statements and interim financial information 

If your firm is a member of an SRO and is also registered in other categories, it is required to file annual financial statements and interim financial information, as applicable, in accordance with the requirements of the other categories. 

Registered firms that are late in filing any of the above-outlined requirements may be subject to regulatory action, including: 

• Receipt of a warning letter
• Terms and conditions imposed on the firm’s registration
• Levy of late fees
• Suspension of registration