A hearing panel of the Canadian Investment Regulatory Organization (CIRO) has accepted a settlement agreement with Pollitt & Co. Inc., wherein the firm agreed to sanctions and costs totalling $190,000. Broken down, the firm was fined $175,000 and ordered to pay costs in the amount of $15,000.
Between January and December 2020, the firm failed to have and maintain risk adjusted capital greater than zero and failed to notify the regulator when it was less than zero. It failed to establish and maintain adequate internal operational and financial reporting controls; it is also being sanctioned for failing to keep and maintain a proper system of books and records.
Among the firm’s transgressions, it entered into underwriting commitments without the required capital capacity, had deficient risk adjusted capital (RAC) on a number of occasions, did not assign appropriate bond trader limits, assigning order limits that were excessive given the firm’s RAC, overstated and understated a number of measures (these are itemized in the regulator’s settlement agreement with Pollitt & Co.) and failed to maintain books for related party transactions.
The deficiencies were noted in firm’s 2020 field examinations and again in January 2022.
“Several of the findings made during FinOps’ (CIRO’s Financial & Operations Compliance department) field exam were repeat findings that the respondent had failed to correct notwithstanding FinOps’ prior reports and recommendations and the respondent’s representations to FinOps that it would correct such deficiencies,” the settlement agreement states.
Regarding the bond trading activity, the regulator reportedly warned the firm on multiple occasions about its obligation to report, but since the inception of the firm’s bond trading desk in September 2018, it failed to report bond trades on the Market Trade Reporting System, as required, until 2022 when it received notice that CIRO was considering terms and conditions on the firm’s membership. Those conditions include a provision that a financial monitor review the accuracy and completeness of the firm’s financial reporting.
Those reporting deficiencies, highlighted by the regulator, included Pollitt & Co. commingled its trading activities with activities in its parent company’s account, failing to appropriately value and report all transactions. It failed to appropriately value and report all transactions related to promissory notes and loans between the two companies. It is also being sanctioned for a variety of general ledger deficiencies. Finally, the firm paid compensation in the way of broker warrants to Doug Pollitt, a compensation expense that was not properly recorded. In addition, the firm’s bookkeeping failed to consider International Financial Reporting Standards, as required, in five instances in 2021 related to revenue from new issue financing.
Balances were also not reconciled and unresolved differences were not reported. In one example, month-end reconciliation in December 2020 from one broker showed an unresolved cash difference of approximately $1.1-million, which had existed since October 2018. The matter was not resolved until October 2021.
Later, between May 2021 and January 2022, while the firm was designated in Early Warning Level 2, it made payments to its parent company without obtaining written consent from CIRO. While in early warning level 2, the firm also failed to deliver requisite filings. “The respondent filed its MFR (monthly financial report) late every month from July 2020 to December 2021. The respondent was also repeatedly late in filing its weekly capital reports,” the settlement agreement states.
Ahead of reaching the settlement agreement with Pollitt & Co., CIRO imposed terms and conditions on the firm’s membership on February 3, 2023.
