Table of Contents
Independent Auditor’s Report
1
Balance sheets
2
Statements of revenues and expenses and
changes in fund balance
3
Statements of cash flows
3
Notes to the financial statements
4–10
Independent Auditor’s Report
To the Members of the Board of Directors
of MFDA Investor Protection Corporation
Report on the Financial Statements
We have audited the accompanying financial statements of MFDA Investor Protection Corporation, which comprise the
balance sheets as at June 30, 2011 and 2010, and the statements of revenues and expenses and changes in fund balances and
statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory
information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian
generally accepted accounting principles, and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the
financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of MFDA Investor
Protection Corporation as at June 30, 2011 and 2010, and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Licensed Public Accountants
September 12, 2011
MFDA INVESTOR PROTECTION CORPORATION
1
Balance Sheets
as at June 30
Assets
Current
Cash
Investments (Note 3)
Assessments receivable from the MFDA (Note 4)
Interest and other receivable
Liabilities and Fund Balance
Current
Accounts payable and accrued liabilities
Support costs due to the MFDA (Note 5)
Funding balance
Operating Fund
Unrestricted net assets
The accompanying notes are an integral part of these financial statements.
Approved on behalf of the Board
“David Richards”
Director
“Beat Guldimann”
Director
MFDA INVESTOR PROTECTION CORPORATION
2
2011
$
2010
$
200,652
30,071,976
144,953
30,417,581
244,116
27,462,563
58,109
121,635
27,886,423
130,392
16,969
147,361
81,138
15,878
97,016
30,270,220
30,270,220
30,417,581
27,789,407
27,789,407
27,886,423
Statements of Revenues and Expenses
and Changes in Fund Balance
for the years ended June 30
Operating Fund
Revenues
Assessments of MFDA Members (Note 7)
Investment and other income (Note 8)
Total revenues
Expenses
Consultants
Legal
Bank charges (Note 6)
Board of Directors - fees and expenses
Investment management fees
MFDA support charges (Note 5)
Insurance
Audit fees
Communications and annual report
Office and general
Total expenses
Excess of revenues over expenses and comprehensive income
Fund balance, beginning of year
Fund balance, end of year
2011
$
2010
$
2,568,232
713,294
3,281,526
5,030,220
500,020
5,530,240
193,190
155,604
126,630
94,614
79,311
67,800
47,990
21,159
11,272
3,143
800,713
118,810
61,494
134,035
81,126
63,233
63,000
47,990
19,064
5,894
641
595,287
2,480,813
27,789,407
30,270,220
4,934,953
22,854,454
27,789,407
2011
$
2010
$
2,480,813
4,934,953
58,109
(23,318)
49,254
1,091
2,565,949
(43,009)
(61,393)
17,310
2,264
4,850,125
(2,609,413)
(2,609,413)
1,882,559
(6,686,393)
(4,803,834)
(43,464)
244,116
200,652
46,291
197,825
244,116
The accompanying notes are an integral part of these financial statements.
Statements of Cash Flows
for the years ended June 30
Operating activities
Excess of revenues over expenses and
comprehensive income - Operating Fund
Changes in non-cash working capital
Assessments receivable from the MFDA
Interest and other receivable
Accounts payable and accrued liabilities
Support costs due to the MFDA
Investing activities
Proceeds from sale of investments
Purchase of investments
(Decrease)/Increase in cash during the year
Cash, beginning of year
Cash, end of year
The accompanying notes are an integral part of these financial statements.
MFDA INVESTOR PROTECTION CORPORATION
3
Notes to the Financial Statements
June 30, 2011 and 2010
1. Nature of the organization
The MFDA Investor Protection Corporation (“MFDA IPC”) was incorporated as a not-for-profit corporation on November 14, 2002
under Part II of the Canada Corporations Act. The purpose of the MFDA IPC is to administer an investor protection fund for the
benefit of clients of mutual fund dealers that are Members of the Mutual Fund Dealers Association of Canada (“MFDA”). The MFDA
IPC protects client assets held by a MFDA Member firm in the event that the Member firm becomes insolvent. The securities
commissions approved the creation of MFDA IPC in May 2005, and the MFDA IPC began offering coverage on July 1, 2005.
2. Significant accounting policies
The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles.
Because the precise determination of many assets and liabilities such as accrued liabilities is dependent upon future events, the
preparation of financial statements for a period necessarily involves the use of estimates and approximations that have been made
using judgment. Actual results could differ from those estimates. The financial statements have, in management’s opinion, been
properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below.
Fund accounting
The MFDA IPC uses the deferral method of accounting for not-for-profit organizations in the preparation of its financial statements.
At this time there is only one fund, the Operating Fund. The Operating Fund accounts for the regular business and activities of the
MFDA IPC.
Member assessments
MFDA Members are assessed MFDA IPC dues annually and are invoiced on a quarterly basis. Assessment revenues are recorded
monthly. The assessments are calculated using a defined formula based on each Member’s assets under administration. The
assessments are invoiced and collected by the MFDA on behalf of the MFDA IPC. The funds are subsequently transferred to
the MFDA IPC.
Provision for income taxes
The MFDA IPC is a not-for-profit organization within the meaning of the Income Tax Act (Canada). Accordingly, there is no provision
for income taxes in these financial statements.
Cash
Cash includes cash on hand and balances with banks, net of bank overdrafts and excludes cash balances in investment accounts,
which are presented as investments.
MFDA INVESTOR PROTECTION CORPORATION
4
2. Significant accounting policies (continued)
Investments
The MFDA IPC invests in high rated federal and provincial government and Crown Corporation bonds with short-term to
medium-term maturities and in Canadian provincial and federal treasury bills or notes with short-term maturities.
Investments in bonds are classified as Held to Maturity (“HTM”) and are recorded at amortized cost. Any gains and losses are
recognized in the Statements of Revenues and Expenses in the period that the asset is sold or becomes permanently impaired.
Interest income from the bonds is accrued daily and recorded under Investment and other income in the Statements of Revenues
and Expenses. Interest income includes the amortization of bond premiums or the accretion of bond discounts, calculated using
the effective interest rate method.
Investments in Canadian federal or provincial treasury bills or notes are classified as Held for Trading (“HFT”) and are recorded at
fair value with any unrealized gains and losses being recorded in the Statements of Revenues and Expenses. As these instruments are
short term in nature, cost approximates fair value. Any realized gains and losses are recognized in the Statements of Revenues and
Expenses in the period that the asset matures, is sold or becomes permanently impaired. Interest income from the bonds is accrued
daily and recorded under Investment and other income in the Statements of Revenues and Expenses.
Provision for claims and related expenses
Provision for claims from customers of insolvent MFDA Members and related expenses is made when the MFDA IPC is notified
of potential claims and expects to incur expenses related to the claim. No amounts have been provided for in the current period.
No amounts are provided as a contingency to cover possible losses and customer claims for claims not yet reported.
Future accounting changes
In December 2010, the CICA issued a new accounting framework applicable to Not-for-Profit Organizations. Effective for fiscal
years beginning on or after January 1, 2012, not-for-profit organizations will have to choose between International Financial Reporting
Standards (IFRSs) and Canadian accounting standards for Not-for-Profit Organizations. Early adoption of these standards is
permitted. The MFDA IPC currently plans to adopt the Canadian accounting standards for Not-for-Profit Organizations for its
fiscal year beginning July 1, 2012. The impact of transitioning to these new standards has not been determined at this time.
MFDA INVESTOR PROTECTION CORPORATION
5
3. Investments
The following table lists the investment holdings and their carrying and fair values as at June 30, 2011.
All investments are classified as Level 2.
Investment
Bonds
Canada Housing Trust, 4.60%,
Mat. Sep 15 2011
New Brunswick Provincial, 5.875%,
Mat. Dec 06 2012
Financement Quebec, 4.50%,
Mat. Dec 01 2016
Canada Housing Trust, 3.60%,
Mat. Jun 15 2013
Financement Quebec, 4.25%,
Mat. Mar 01 2014
Ontario Provincial, 4.50%,
Mat. Mar 08 2015
B.C. Provincial, 4.70%,
Mat. Dec 01 2017
Ontario Provincial, 4.40%,
Mat. Jun 02 2019
Canada Government, 4.25%,
Mat. Jun 01 2018
Canada Housing Trust, 3.75%,
Mat. Mar 15 2020
Sub-Total Bonds
Cash on hand for bond investment
Treasury Bills and Notes
Canada Government, 0.986%,
Mat. Aug 4 2011
Canada Government, 0.990%,
Mat. Aug 18 2011
Canada Government, 1.024%,
Mat. Sep 15 2011
Canada Government, 1.23%,
Mat. Sep 29 2011
Sub-Total Treasury Bills and Notes
Cash on hand for T-Bills investment
Par value ($)/
number of units
Designation
Credit
rating
Carrying
value
$
Fair value
$
1,700,000
Held To Maturity
AAA
1,700,210
1 ,711,645
1,600,000
Held To Maturity
Ah
1,633,810
1 ,696,896
1,600,000
Held To Maturity
Ah
1,592,830
1 ,730,832
1,820,000
Held To Maturity
AAA
1,870,775
1 ,887,395
1,730,000
Held To Maturity
Ah
1,804,138
1 ,830,496
1,720,000
Held To Maturity
AA1
1,815,901
1 ,852,457
1,550,000
Held To Maturity
AAh
1,652,572
1 ,697,901
1,580,000
Held To Maturity
AA1
1,632,223
1 ,676,506
1,500,000
Held To Maturity
AAA
1,585,777
1 ,646,220
1,670,000
Held To Maturity
AAA
1,657,284
16,945,520
1 ,724,793
17,455,141
N/A
N/A
N/A
297,242
297,242
3,775,000
Held for Trading
AAA
3,765,034
3 ,765,034
4,375,000
Held for Trading
AAA
4,363,406
4 ,363,406
2,625,000
Held for Trading
AAA
2,618,280
2 ,618,280
2,075,000
Held for Trading
AAA
2,069,999
12,816,719
2 ,069,999
12,816,719
N/A
N/A
N/A
12,495
12,495
30,071,976
30,581,597
Total Investments
MFDA INVESTOR PROTECTION CORPORATION
6
3. Investments (continued)
The following table lists the investment holdings and fair values as at June 30, 2010:
Investment
Bonds
Canada Housing Trust, 4.60%,
Mat. Sep 15 2011
New Brunswick Provincial, 5.875%,
Mat. Dec 06 2012
Financement Quebec, 4.50%,
Mat. Dec 01 2016
Canada Housing Trust, 3.60%,
Mat. Jun 15 2013
Financement Quebec, 4.25%,
Mat. Mar 01 2014
Ontario Provincial, 4.50%,
Mat. Mar 08 2015
B.C. Provincial, 4.70%,
Mat. Dec 01 2017
Ontario Provincial, 4.40%,
Mat. Jun 02 2019
Canada Government, 4.25%,
Mat. Jun 01 2018
Canada Housing Trust, 3.75%,
Mat. Mar 15 2020
Sub-Total Bonds
Cash on hand for bond investment
Treasury Bills and Notes
Canada Government, 0.219%,
Mat. Jul 8 2010
Canada Government, 0.265%,
Mat. Jul 22 2010
Canada Government, 0.399%,
Mat. Aug 05 2010
Canada Government, 0.406%,
Mat. Aug 19 2010
Canada Government, 0.428%,
Mat. Sep 02 2010
Canada Government, 0.552%,
Mat. Sep 16 2010
Sub-Total Treasury Bills and Notes
Cash on hand for T-Bills investment
Par value ($)/
number of units
Designation
Credit
rating
Carrying
value
$
Fair value
$
1,640,000
Held To Maturity
AAA
1,638,147
1 ,706,223
1,600,000
Held To Maturity
Ah
1,656,235
1 ,747,312
1,600,000
Held To Maturity
Ah
1,591,690
1 ,705,520
1,570,000
Held To Maturity
AAA
1,633,894
1 ,637,871
1,590,000
Held To Maturity
Ah
1,682,121
1 ,685,082
1,565,000
Held To Maturity
AA1
1,674,012
1 ,678,744
1,550,000
Held To Maturity
AAh
1,666,564
1 ,671,954
1,580,000
Held To Maturity
AA1
1,637,744
1 ,646,455
1,500,000
Held To Maturity
AAA
1,596,629
1 ,643,700
1,650,000
Held To Maturity
AAA
1,635,830
16,412,866
1 ,676,945
16,799,806
N/A
N/A
N/A
292,767
292,767
3,775,000
Held for Trading
AAA
3,772,056
3 ,772,056
3,775,000
Held for Trading
AAA
3,771,979
3 ,771,979
300,000
Held for Trading
AAA
299,709
299,709
1,350,000
Held for Trading
AAA
1,348,577
1 ,348,577
1,250,000
Held for Trading
AAA
1,248,525
1 ,248,525
300,000
Held for Trading
AAA
299,613
10,740,459
299,613
10,740,459
N/A
N/A
N/A
16,471
16,471
27,462,563
27,849,503
Total Investments
MFDA INVESTOR PROTECTION CORPORATION
7
4. Assessments receivable from the MFDA
The assessments to MFDA Members billed by the MFDA are due to the MFDA IPC upon collection by the MFDA. The amount of
$Nil (2010 - $58,109) represents outstanding amounts from MFDA Members on billings due at June 30, 2011 and 2010. All monies
collected by the MFDA had been transferred to the MFDA IPC at year end.
5. Support costs due to the MFDA
The MFDA provides the MFDA IPC administrative, corporate secretarial and other support to allow the MFDA IPC to operate without
its own staff. The MFDA IPC and the MFDA have entered into a support agreement to define these areas of assistance. The amount
of support costs for the year was $67,800 (2010 - $63,000) and was recorded at the agreed upon amount. Payments are made on a
quarterly basis in accordance with the support agreement. The MFDA IPC owed the MFDA $16,969 (2010 - $15,878) in respect of
support costs as at June 30, 2011.
6. Credit facilities
The MFDA IPC has been granted a credit facility limited to a maximum of $30 million (2010 - $30 million) by the Royal Bank of
Canada (the “RBC”) (2010 - Canadian Imperial Bank of Commerce (the “CIBC”)). The credit facility, in combination with the
investments accumulated by the MFDA IPC, exists to provide protection to customers of Members of the MFDA in the event of
loss resulting from an insolvency of a MFDA Member. The MFDA has guaranteed repayment of the $30 million line of credit
to the RBC (2010 – CIBC). To date, no amount has been drawn on the line of credit.
At June 30, 2011 the interest rate is prime + 0.75% per annum (2010 – prime per annum). In the absence of a drawdown, the RBC
(2010 – CIBC) charges a standby fee on the credit line. This charge is included in Bank charges in the Statements of Revenues and
Expenses in the amount of $106,111 (2010 - $133,356).
7. Assessments of MFDA members
Assessment income for 2011 was $2,568,232 (2010 - $5,030,220). MFDA members were not assessed fees from January 1, 2011 to
June 30, 2011. Assessments resumed July 1, 2011.
MFDA INVESTOR PROTECTION CORPORATION
8
8. Investment and other income
Investment and other income is comprised of the following:
2011
$
-
2010
$
3,145
718,685
(121,308)
521,658
(52,580)
597,377
469,078
102,524
27,797
102,524
27,797
13,393
-
713,294
500,020
Distributions from money market fund
Income from bonds
Coupon interest
Accretion of the bond discount/premium
Income from treasury bills and notes
Coupon interest
Other income
Total investment income
Bank interest earned on bond, treasury bills and notes is subject to a minimum cash balance.
9. Risk management
Risk management relates to the understanding and active management of risks associated with invested assets. Investments can be
indirectly exposed to foreign currency, interest rate, market and credit risk. The MFDA IPC’s investment policy sets out high rated
federal and provincial government and Crown Corporation bonds as the allowable bonds for the MFDA IPC bond portfolio. Only
federal and provincial notes are allowable for Treasury bill and note investments. The MFDA IPC’s investment policy sets limits on
the exposure to individual investments, such as limiting the maximum portfolio exposure to a single province to 20%.
Significant risks that are relevant to the MFDA IPC’s investments are as follows:
Interest rate risk
Interest rate risk refers to the adverse consequences of interest rate changes on the MFDA IPC’s investments. The value of the MFDA
IPC’s investments is affected by changes in both nominal and real interest rates as they have a direct impact on the value of fixed
income securities. The MFDA IPC’s exposure to interest rate risk arises from its holding of medium-term bonds. The MFDA IPC
does not engage in activities to mitigate this risk as it intends to hold these bonds to maturity.
Credit risk
Credit risk refers to the risk of financial loss due to a counterparty failing to meet its contractual obligations. The MFDA IPC is
exposed to credit risk indirectly through its investment in bonds, treasury bills and notes. Credit risk is managed by these funds by
limiting exposure to any single counterparty to a small percentage of net assets. Limiting investments to Canadian federal and
provincial government bonds and notes and federal and provincial Crown Corporation bonds helps to mitigate the credit risk by
investment in high grade investments. In addition, credit risk is managed by the MFDA IPC through dealing with reputable
counterparties. As at June 30, 2011 and 2010, the MFDA IPC’s investments in fixed income securities are held with a Tier 1
banking institution.
MFDA INVESTOR PROTECTION CORPORATION
9
9. Risk management (continued)
Market risk
Market risk is the risk that the value of an investment will fluctuate as a result of changes in market conditions, whether these
changes are caused by factors specific to the individual investment or factors affecting all securities traded in the market. This risk is
mitigated by the MFDA IPC’s policy of diversification of the investment portfolio as well as the narrow field of acceptable high grade
investments. Market risk is considered to be minimal.
Fair value
The fair value of cash, assessments receivable from the MFDA, interest receivable, accounts payable and accrued liabilities, and
support costs due to the MFDA, approximates their carrying values due to their short-term nature.
The fair value of investments in fixed income securities is based on quoted prices from active markets.
10. Claims paid from Investor Protection Fund
There were no claims paid from the MFDA Investor Protection Corporation during the year (2010 - $Nil).
11. Funding and management of assets
The MFDA IPC’s capital is its unrestricted net assets.
The MFDA IPC’s objectives when managing its unrestricted net assets are:
• To safeguard the MFDA IPC’s ability to continue as a going concern, so it can provide protection for the benefit of clients
of MFDA Members, and
• To work toward Operating Fund reserve targets as set out by the MFDA IPC Board.
The MFDA IPC bills MFDA Members annually to ensure operations are funded and to allocate the balance toward the accumulation
of the investor protection fund. Prior to the current year, when assessments were not collected for six months (see Note 7), the MFDA
IPC billed MFDA Members approximately $5 million annually. Commencing July 1, 2011, the annual fee assessments will be reduced
to approximately $2,850,000. As at June 30, 2011, the value of the operating fund unrestricted net assets was $30,270,220
(2010 - $27,789,407).
There are no external restrictions on the MFDA IPC’s capital.
MFDA INVESTOR PROTECTION CORPORATION
10