On November 17, 2023, the B.C. Securities Commission (the BCSC) issued a $12,000 administrative penalty to Capstone Asset Management Inc. (Capstone) for alleged contraventions of sections 12.5(2) and 11.1(1) of NI 31-103. This marked the first administrative penalty issued by the BCSC under its new enforcement tool — Administrative Penalties Issued by Notice (APIN) — since its introduction on April 26, 2023.
As we reported here, the APIN regime was created to strengthen the BCSC's enforcement powers and streamline processes by providing a mechanism for dealing with less serious securities contraventions. Under section 162.01 of the Securities Act, R.S.B.C. 1996, c. 418 (the Act), the executive director may provide a written notice requiring a person to pay an administrative penalty if, based upon information from a review, investigation or any source, the executive director considers that a person has contravened the Act, regulation or a decision of the BCSC or executive director, or considers it to be in the public interest. Despite this sweeping power, not all securities contraventions can be enforced by the APIN tool. Currently, use of the tool is limited to contraventions of regulations (including instruments and rules), or decisions of the BCSC or the executive director.
The $12,000 administrative penalty issued to Capstone is for two contraventions combined. First, the executive director found Capstone violated section 12.5(2) of NI 31-103 by failing to maintain adequate insurance coverage. As Capstone's Assets Under Management exceeded $480 million in the relevant periods, it was required to maintain insurance coverage in excess of $4.8 million. However, it only had coverage of $4.8 million. Second, the executive director found that Capstone contravened section 11.1(1) of NI 31-103 by failing to maintain adequate policies and procedures at the time of the insurance coverage contravention. Specifically, the compliance manual in place at the time did not detail who was expected to do what, when and how with respect to ensuring compliance with the insurance requirements of NI 31-103. Rather, the manual simply indicated "see subsection 12.5(2) of NI 31-103".
In determining the amount of the penalty, the executive director considered several factors including the following:
- This was a repeat deficiency that warranted something more than a direction and agreement to comply.
- As there was no client or market harm, the seriousness of the violation was low.
- While Capstone cooperated with the BCSC's review, this was not a mitigating factor as cooperation is expected of registrants.
- In order to encourage deterrence, it was important for the industry and Capstone to see that failing to remedy a compliance deficiency the first time may lead to more serious consequences.
- Capstone is a relatively small firm and a penalty in the thousands of dollars would be significant in the context of its financials.
Capstone had various appeal mechanisms open to it to challenge the APIN but appears to have chosen not to exercise them as on July 8, 2024, the BCSC issued a news release confirming that Capstone paid the penalties which are the first imposed without a hearing before a panel of commissioners.
As expected, this first penalty was issued in respect of minor infractions in the nature of routine noncompliance. However, this was the first time that the APIN tool has been used and it will be interesting to see how the BCSC continues to exercise its broad discretion under this regime.
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