The Progressive Financial Strategy Capital Group Corp. has been fined $10,000 after acknowledging it transferred money to its parent company, causing the firm’s risk adjusted capital to fall below zero.
In making its decision, the hearing panel of the Mutual Fund Dealers Association (MFDA) noted that the calculation for risk adjusted capital (RAC) is key to monitoring the financial viability of mutual fund dealers. The RAC calculation, derived from the MFDA member’s working capital, is the primary means of financial reporting to the MFDA. Its purpose is to measure the firm’s liquidity and its ability to withstand any adverse fluctuations in operations. In addition to a minimum amount of capital required by MFDA rules, certain provisions or “cushions” are taken into consideration to assess the firm’s capacity to manage its obligations and protect its clients. Basically, the capital formula seeks to assess the firm’s ability to continue as a going concern.
Transferring funds led to problems
The firm admitted that it transferred funds either to, or on behalf of, the firm’s parent company, Progressive Financial Strategy (Canada) Inc., causing the minimum capital to fall below $50,000 and its RAC to below zero.
Progressive Financial acknowledged it did not notify the MFDA before it sent the funds to its parent company, nor did it contact the MFDA when its RAC fell below zero, contrary to MFDA rules that the company monitor and evaluate its capital to ensure its RAC is positive at all times.
“The Respondent’s failure to maintain a RAC greater than zero is serious misconduct,” the hearing panel said in making its decision. “When a Member’s financial viability is threatened, its clients are put at significant risk, and accordingly it is critical that Members maintain a positive RAC at all times.”
In addition to the fine, the company paid costs of $5,000.
