Oakville, Ont.-based Pro-Financial Asset Management Inc. (PFAM) breached securities laws and failed to deal fairly and honestly with clients, an Ontario Securities Commission (OSC) hearing ruled on Friday.

The panel also found that Stuart McKinnon, PFAM’s president and CEO, breached his oversight obligations at the firm, and that McKinnon and PFAM acted contrary to the public interest.

The panel’s findings stem from allegations filed in 2014 that record-keeping and administrative failures led to a $1.2 million shortfall in principal protected notes distributed by PFAM, incorrectly reported management expense ratios (MERs) for several of its mutual funds, and a working capital deficiency at the firm.

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According to the panel’s decision, the PPN deficieny was largely caused by accounting and administrative issues. In particular, “PFAM knowingly made redemption requests that were unsupported by noteholder requests and mishandled redemption payments by applying different trade prices and that this conduct was improper,” the panel’s decision states.

The panel also found that the firm mishandled its trust account and “failed to maintain appropriate records which contributed to the shortfall of approximately $1.2 million and harm to the noteholders who were not paid on the maturity of their respective PPNs.”

In addition, the panel ruled that PFAM’s failure to investigate the operational and accounting issues that allowed the PPN-related problems to continue amounted to a failure to “deal fairly, honestly and in good faith with its clients.”

As for the MERs, which had to be restated for several funds, the panel ruled that there “is no evidence that the errors in the calculation of the MERs were intentional … The evidence does, however, support a finding of a lack of care, diligence and/or skill.”

The panel also found that the firm failed to maintain its required working capital, failed to report its working capital deficiency and failed to maintain appropriate records.

A sanctions hearing will be held at a future date to determine any penalties in the case.

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