First Portus cheques in the mail

Without so much as a press release, the investment industry has started the unprecedented step of returning referral fees to clients who bought into Portus Alternative Asset Management. But at least one firm has missed the deadline.

As part of a deal struck earlier this year between the Ontario Securities Commission, the Investment Dealers Association and the Mutual Fund Dealers Association, 57 firms had until May 31 to return $12 million in Portus referral fees in exchange for exclusion from further investigation and possible disciplinary action. These firms now have until the end of June to get the cheques out to clients.

One IDA firm is just starting the process of matching client records to its own files, says according to Alex Popovic, vice-president of enforcement at the IDA, because it was waiting for a related tax ruling from the Canada Revenue Agency. As part of the terms and conditions of the agreement, the fees must be returned in the most tax efficient means possible.

Although Popovic is unwilling to identify the firm, he did say that its referral fees total $979,212 in fees, which represents the lion’s share of the approximately $1 million due to be returned by the five IDA brokerages that sold Portus.

The wait might make clients of that firm uneasy since to the best of Popovic’s knowledge, it has not been communicated to them. Still, the firm is not expected to suffer any penalties as a result. “They were simply waiting for the CRA waiting to confirm the information that they needed,” he says. “They were acting in good faith to try to ensure they get the money to the client in the most tax efficient way.”

The CRA was asked for an opinion on whether money returned to a registered plan would be considered a contribution. As Popovic explains, the concern was that if it was treated as a contribution there was a chance that it could result in an overpayment that could result in penalties to the plan holder. “You don’t want to have the client paying penalties for over contributions,” he says. “It’s just lawyers and accountants being careful.”

All of the 52 MFDA firms, meanwhile, have sent or are in the process of sending out payments to clients, which amounts to about $11 million.

Several IDA and MFDA firms owe only small amounts of money. In one case, a firm will pay back just $479.68. When the dust settles there will no doubt be complaints about the amount of work some companies had to do to return such a small sum of money, particularly since many believed their fees shouldn’t have to be returned.

But that’s all part of the agreement, says the MFDA’s vice-president of enforcement, Shaun Devlin. “One hundred per cent of the money has to be returned to the client,” he insists. “It is cost neutral to the client; the client does not pay for the efforts to put these payments together.”

While the cheques are in the mail, this is by no means the end to this particular hedge fund fiasco. The firms might be off the hook, but individual charges can still be laid. “We are continuing with the files where we believe an investigation is appropriate,” says Devlin.

The IDA doesn’t expect to levy any additional sanctions. “From our standpoint, this will probably be the end of it,” says Popovic. Still, given the complex nature of Portus he’s not about to rule anything out. “That’s not to say that the next phone call doesn’t give us information that may change our mind.”

Portus clients will now turn their attention to recouping the rest of their investment. The first meeting of creditors and investors is set to take place at Ricoh Coliseum in Toronto on June 21.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(06/02/06)