MFDA Investor Protection Corporation Corporation de protection des investisseurs de l ACFM. MFDA Investor Protection Corporation Financial Statements

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1 MFDA Investor Protection Corporation Corporation de protection des investisseurs de l ACFM MFDA Investor Protection Corporation Financial Statements 2010

2 Table of Contents Auditors 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

3 Auditors Report To the Members of the Board of Directors of MFDA Investor Protection Corporation We have audited the balance sheets of MFDA Investor Protection Corporation ( MFDA IPC ) as at June 30, 2010 and 2009 and the statements of revenues and expenses and changes in fund balance and of cash flows for the years then ended. These financial statements are the responsibility of MFDA IPC s management. 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 plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of MFDA IPC as at June 30, 2010 and 2009 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 August 20, 2010 MFDA Investor Protection Corporation 1

4 Balance Sheets as at June $ $ Assets Current Cash 244, ,825 Investments (Note 3) 27,462,563 22,658,729 Assessments receivable from the MFDA (Note 4) 58,109 15,100 Interest receivable 121,635 60,242 27,886,423 22,931,896 Liabilities and Fund Balance Current Liabilities Accounts payable and accrued liabilities 81,138 63,828 Support costs due to the MFDA (Note 5) 15,878 13,614 97,016 77,442 Operating Fund Balance Unrestricted net assets 27,789,407 22,854,454 27,789,407 22,854,454 27,886,423 22,931,896 The accompanying notes are an integral part of these financial statements. Approved on behalf of the Board Lawrence A. Wright Director Donald H. Page Director 2 MFDA Investor Protection Corporation

5 Statements of Revenues and Expenses and Changes in Fund Balance for the years ended June 30 Operating Fund Revenues $ $ Assessments of MFDA Members 5,030,220 5,139,406 Investment income (Note 7) 500, ,104 Total revenues 5,530,240 5,685,510 Expenses Bank charges (Note 6) 134,035 54,446 Consultants 118, ,285 Board of Directors - fees and expenses 81,126 83,024 Investment management fees 63,233 50,468 MFDA support charges (Note 5) 63,000 63,000 Legal 61, ,128 Insurance 47,990 50,055 Audit fees 19,064 18,365 Communications and annual report 5,894 8,611 Office and general 641 3,845 Claims paid from Invertor Protection Fund - 63,300 Ontario Securities Commission application fee - 5,000 Total expenses 595, ,527 Excess of revenues over expenses and comprehensive income 4,934,953 5,033,983 Fund balance, beginning of year 22,854,454 17,820,471 Fund balance, end of year 27,789,407 22,854,454 Statements of Cash Flows for the years ended June 30 Operating activities Excess of revenues over expenses and other $ $ comprehensive income - Operating Fund 4,934,953 5,033,983 Changes in non-cash working capital Assessments receivable from the MFDA (43,009) (58) Interest receivable (61,393) (7,383) Accounts payable and accrued liabilities 17,310 (888) Support costs due to the MFDA 2,264 (1,947) 4,850,125 5,023,707 Investing activities Proceeds from sale of investments 1,882,559 6,088,000 Purchase of investments (6,686,393) (11,003,419) (4,803,834) (4,915,419) Increase in cash during the year 46, ,288 Cash, beginning of year 197,825 89,537 Cash, end of year 244, ,825 The accompanying notes are an integral part of these financial statements. MFDA Investor Protection Corporation 3

6 Notes to the Financial Statements June 30, 2010 and 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, 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. Investments The MFDA IPC invests in 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 and are recorded at amortized cost. Any gains and losses are recognized in the Statement 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 income in the Statement 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. 4 MFDA Investor Protection Corporation

7 2. Significant accounting policies (continued) 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 Statement 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 Statement 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 income in the Statement 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. Adoption of accounting policies Series of Sections 4400 Not-for-profit organizations In September 2008, the Canadian Institute of Chartered Accountants ( CICA ) issued amendments to several of the existing sections on accounting, measurement and financial reporting by not-for-profit organizations contained in the Section 4400 series of the CICA Handbook. On July 1, 2009, the MFDA IPC adopted these amendments. The adoption of these amendments has not resulted in any change in how the MFDA IPC accounts for its transactions. Section 1000 Financial statement concepts On July 1, 2009, the MFDA IPC adopted the amendments made to Section 1000, Financial Statements Concepts. The amended section requires an entity to demonstrate that any amount that is presented as an asset meets the conceptual definition of an asset or is permitted to be recorded as assets under specific CICA Handbook sections. The adoption of these amendments has not resulted in any change in how the MFDA IPC accounts for its transactions. Section 1400 Going concern On July 1, 2009, the MFDA IPC adopted the amendments made to Section 1400, Going Concern. The amended section requires management to assess the entity s ability to continue as a going concern for a period of at least 12 months from the balance sheet date and disclose if the going concern assumption is no longer appropriate. The adoption of these amendments did not have a significant impact on the MFDA IPC s financial position or results of operations. Section 3855 Financial Instruments Recognition and Measurement In August 2009, the CICA issued various amendments to CICA 3855, Financial Instruments Recognition and Measurement including changes in the categories to which debt instruments are required or are permitted to be classified. Loans and receivables that an entity intends to sell immediately or in the near term, of which the MFDA IPC has none, must be classified as HFT. The adoption of these amendments did not have a significant impact on the MFDA IPC s financial position or results of operations. EIC-173 Credit risk and the fair value of financial assets and financial liabilities In January 2009, the Emerging Issues Committee issued EIC-173, Credit risk and the fair value of financial assets and financial liabilities. This abstract requires that an entity s own credit risk (for financial liabilities) and the credit risk of the counterparty (for financial assets) should be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments. The new guidance did not have any impact on the valuation of the MFDA IPC s financial assets and liabilities, or its net assets. MFDA Investor Protection Corporation 5

8 3. Investments The following table lists the investment holdings and their carrying and fair values as at June 30, Par value ($)/ Credit Carrying Investment number of units Designation rating value Fair value $ $ Bonds Canada Housing Trust, 4.60%, Mat. Sep ,640,000 Held To Maturity AAA 1,638,147 1,706,223 New Brunswick Provincial, 5.875%, Mat. Dec ,600,000 Held To Maturity Ah 1,656,235 1,747,312 Financement Quebec, 4.50%, Mat. Dec ,600,000 Held To Maturity Ah 1,591,690 1,705,520 Canada Housing Trust, 3.60%, Mat. Jun ,570,000 Held To Maturity AAA 1,633,894 1,637,871 Financement Quebec, 4.25%, Mat. Mar ,590,000 Held To Maturity Ah 1,682,121 1,685,082 Ontario Provincial, 4.50%, Mat. Mar ,565,000 Held To Maturity AAl 1,674,012 1,678,744 B.C. Provincial, 4.70%, Mat. Dec ,550,000 Held To Maturity AAh 1,666,564 1,671,954 Ontario Provincial, 4.40%, Mat. Jun ,580,000 Held To Maturity AAl 1,637,744 1,646,455 Canada Government, 4.25%, Mat. Jun ,500,000 Held To Maturity AAA 1,596,629 1,643,700 Canada Housing Trust, 3.75%, Mat. Mar ,650,000 Held To Maturity AAA 1,635,830 1,676,945 Sub-Total Bonds 15,845,000 16,412,866 16,799,806 Cash on hand for bond investment N/A N/A N/A 292, ,767 Treasury Bills and Notes Canada Government, 0.219%, Mat. Jul ,775,000 Held for Trading AAA 3,772,056 3,772,056 Canada Government, 0.265%, Mat. Jul ,775,000 Held for Trading AAA 3,771,979 3,771,979 Canada Government, 0.399%, Mat. Aug ,000 Held for Trading AAA 299, ,709 Canada Government, 0.406%, Mat. Aug ,350,000 Held for Trading AAA 1,348,577 1,348,577 Canada Government, 0.428%, Mat. Sep ,250,000 Held for Trading AAA 1,248,525 1,248,525 Canada Government, 0.552%, Mat. Sep ,000 Held for Trading AAA 299, ,613 Sub-Total Treasury Bills and Notes 10,750,000 10,740,459 10,740,459 Cash on hand for T-Bills investment N/A N/A N/A 16,471 16,471 Total Investments 27,462,563 27,849,503 6 MFDA Investor Protection Corporation

9 3. Investments (continued) The following table lists the investment holdings and their carrying and fair values as at June 30, Par value ($)/ Credit Carrying Investment number of units Designation rating value Fair value $ $ Money Market CIBC Imperial Money Market Pooled Fund 188,030 Available For Sale N/A 1,879,711 1,879,711 Bonds Canada Housing Trust, 3.75%, Mat. Mar ,670,000 Held To Maturity AAA 1,658,862 1,707,826 Canada Housing Trust, 4.60%, Mat. Sep ,640,000 Held To Maturity AAA 1,636,688 1,746,862 Financement Quebec, 4.75%, Mat. Dec ,640,000 Held To Maturity Ah 1,639,766 1,668,798 New Brunswick Provincial, 5.875%, Mat. Dec ,600,000 Held To Maturity Ah 1,677,707 1,775,824 Financement Quebec, 4.50%, Mat. Dec ,600,000 Held To Maturity Ah 1,590,601 1,668,368 Sub-Total Bonds 8,150,000 8,203,624 8,567,678 Cash on hand for bond investment N/A N/A N/A 219, ,397 Treasury Bills and Notes Canada Government, 0.398%, Mat. Jul ,000 Held To Maturity AAA 99,891 99,891 Canada Government, 0.169%, Mat. Sep ,550,000 Held To Maturity AAA 5,547,005 5,547,005 Canada Government, 0.231%, Mat. Sep ,025,000 Held To Maturity AAA 3,023,125 3,023,125 Canada Government, 0.239%, Mat. Oct ,675,000 Held To Maturity AAA 3,672,536 3,672,536 Sub-Total Treasury Bills and Notes 12,350,000 12,342,557 12,342,557 Cash on hand for T-Bills investment N/A N/A N/A 13,440 13,440 Total Investments 22,658,729 23,022, 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 $58,109 ( $15,100) represents outstanding amounts from MFDA Members on billings due at June 30, 2010 and All monies collected by the MFDA had been transferred to the MFDA IPC at year end. MFDA Investor Protection Corporation 7

10 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 period was $63,000 (2009-$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 $15,878 ( $13,614) in respect of support costs as at June 30, Credit facilities The MFDA IPC has been granted a credit facility limited to a maximum of $30 million ( $30 million) by the Canadian Imperial Bank of Commerce (the Bank ). 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 Bank. To date, no amount has been drawn on the line of credit. At June 30, 2010 the interest rate is prime per annum (2009 prime plus 25 basis points per annum). In the absence of a drawdown, the Bank charges a standby fee on the credit line. This charge is included in Bank charges in the Statement of Revenues and Expenses as $133,356 ( $54,000). 7. Investment Income Investment income is comprised of the following: $ $ Distributions from money market fund 3,145 69,205 Income from bonds Coupon interest 521, ,138 Accretion of the bond discount/premium (52,580) (2,750) Bank interest on cash held for bond investment - 34, , ,535 Income from treasury bills and notes Coupon interest 27,797 88,426 Bank interest on cash held for investment - 1,334 27,797 89,760 Bank interest Total investment income 500, ,104 Bank interest earned on bond, treasury bills and notes is subject to a minimum cash balance. 8 MFDA Investor Protection Corporation

11 8. 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. The narrow field of investments in 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, 2010 and 2009, the MFDA IPC s investments in fixed income securities are held with a Tier 1 banking institution. 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. 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. MFDA Investor Protection Corporation 9

12 9. Claims Paid from Investor Protection Fund There were no claims paid from the IPC Investor Protection Fund during the year ( $63,300). In May 2009, the MFDA IPC made a payment of $63,300 to the receiver in settlement of claims with respect to the ASL Direct Inc. bankruptcy matter. 10. 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 approximately $5 million annually to ensure operations are funded and to allocate the balance toward the accumulation of the investor protection fund. As at June 30, 2010, the value of the operating fund unrestricted net assets was $27,789,407 ( $22,854,454). There are no external restrictions on the MFDA IPC s capital. 10 MFDA Investor Protection Corporation

MFDA Investor Protection Corporation Corporation de protection des investisseurs de l ACFM. Image (cc) Bruce-flickr FINANCIAL STATEMENTS

MFDA Investor Protection Corporation Corporation de protection des investisseurs de l ACFM 2015 Image (cc) Bruce-flickr FINANCIAL STATEMENTS INDEPENDENT AUDITOR S REPORT To the Members of the Board of