Small firms need living wills: OSC

Small firms, including one-person shops, need a business continuity plan, the Ontario Securities Commission (OSC) says.

In an email to chief compliance officers and/or heads of registered firms, the OSC reminded the industry of the requirement to establish plans for handling significant business disruptions — including the sudden death of the head of the firm.

“For small firms and firms with few registered individuals, it is particularly important for the [business continuity plan (BCP)] to reasonably address the impact to clients and business operations in the event of the death, incapacitation or prolonged absence of key individuals,” the regulator said.

The reminder comes in the wake of the collapse last year of a small hedge fund firm, Toronto-based Traynor Ridge Capital Inc., which was forced into receivership after the firm’s only director and officer, Christopher Callahan, died, leaving no one in charge of the firm.

In that case, the OSC cease-traded the firm’s funds and the courts appointed a receiver to oversee its liquidation, amid allegations from several firms that they suffered large losses — estimated at between $85 million and $95 million — when trades with the funds failed to settle.

According to court filings, the Canadian Investment Regulatory Organization (CIRO) alerted the OSC that three firms had suffered losses on failed trades with the Traynor Capital funds, and when the OSC attempted to contact Traynor, it was advised by the firm’s only other employee that “Callahan had gone ‘AWOL’ and [the employee] was not sure what to do next.”

The next day, Traynor’s counsel informed the OSC that Callahan was dead, but counsel “was unable to provide any information about who was in control of the firm following Callahan’s death, and did not expect any such information would be forthcoming.”

“Callahan’s death has left Traynor without [an ultimate designated person] and CCO, contrary to requirements under securities law, and also left Traynor without a director or officer in charge of the firm,” the regulator said in court filings.

“Traynor is frozen, without anyone who has the ability or authority to make decisions on its behalf and/or act on behalf of Traynor with third parties, including counsel, custodians, banks and regulators,” it said.

In the wake of the incident, the regulator is reminding other small firms about their obligations to establish plans for dealing with major operational disruptions, and that they should consider designating an individual to execute these plans — including assigning responsibility for “notifying the regulators in the event of death, incapacitation or prolonged temporary absence of the sole registered individual.”

These plans should also include a succession or wind-up plan in the event of the death or incapacitation of the key person.

“Small firms with only one registered individual and no other support or administrative staff may have to designate a BCP executor external to the firm (e.g., a spouse, relative, legal counsel or another registrant), provided that such external BCP executor has the knowledge, authority and qualification to carry out this responsibility in compliance with securities legislation,” the regulator said.

These kinds of arrangements should be set out in a written agreement so “the BCP executor understands and acknowledges his or her responsibilities,” it noted.