Fund manager Pro-Financial Asset Management Inc. (PFAM) of Oakville, Ont., has announced that it is suffering a capital deficiency, and has miscalculated the management expense ratios (MERs) on its funds, in some cases by a wide margin.
Pro-Financial, which championed fundamental indexing in Canada, issued an update on March 6, revealing that it has filed audited financial statements and regulatory capital calculations to the Ontario Securities Commission (OSC), which show that it has a working capital deficit of $611,433, and a regulatory capital deficiency of $792,643.
The firm has been trying to sell its investment-management agreements with the nine investment funds it offers to Kingship Capital Corp. of Burlington, Ont., as a way of partially reducing its capital deficiency, it notes. (See Investment Executive, Trouble leads to sale, Mid-November 2013.)
However, the regulators have yet to approve the deal, which was announced by the firm this past October. The firm reports that on Feb. 10, directors at the OSC objected to the proposed transaction, and that the OSC has refused to issue a final receipt for its funds’ prospectus, which was filed on Jan. 27.
It says that the firm and the prospective buyer are currently in discussions with OSC staff “concerning a hearing process in which unresolved issues as to the sale transaction and offering of PFAM’s Index Funds can be decided expeditiously.”
Following a hearing on March 3, the firm says that the commission ruled that the distribution of index fund units could continue to existing unitholders until April 7, but not to new investors. The buyer is seeking permission to allow distributions to new investors to continue until April 7, and the OSC has scheduled a hearing for March 11 to consider that application.
Additionally, the firm reports that it made calculation errors in the MERs of its funds, which were disclosed in fund performance reports for period ending December 2012 and June 2013. In a couple of instances, the actual MER was lower than the reported MER. However, in most cases, it was higher; in some cases, much higher.
For example, the actual MER for the class A units of the Pro Fundamental Bond Index Fund was more than double the reported MER, it reported a 1.43% MER, but now says that the actual MER was 3.17%. For the class B units of the same fund, the reported MER was 1.63%, but it now says the actual MER was 3.53%.
Similarly, for the Pro FTSE RAFI Global Index Fund, the published MER for the F class units in June 2013 was 0.75%, but the actual MER was 3.59%.
The firm doesn’t provide an explanation for the discrepancies, however, it does note that it is currently involved in a commercial dispute with its registrar, transfer agent, fund accountant and record keeper, which, it says, “has negatively affected the service offering and the flow of information to PFAM.”