Caplink Financial Corporation (CFC) has been in operation since 1997. Its primary business activity has been, and continues to be, originating, vetting, funding and administering residential and commercial mortgages.
Currently, 721259 Alberta Ltd., a company owned by Brian Menges and his wife Elizabeth, is the sole owner of CFC, and Brian Menges operates the firm as President and CEO.
CFC maintains several licenses and securities registrations. CFC is registered as an Exempt Market Dealer (EMD) in Alberta, British Columbia, Saskatchewan and Manitoba. CFC is also registered as an Investment Fund Manager (IFM) and Restricted Portfolio Manager (RPM) in Alberta and British Columbia.
In addition to its securities registrations, CFC is also licensed as both a Mortgage Broker (MB) and a Real Estate Broker (REB) in Alberta, and as a MB in British Columbia and Ontario. In Saskatchewan, CFC is licensed as a Financing Corporation under that province’s Trust and Loan Corporations Act, 1997.
Though responsible to the securities commissions in the four western provinces, CFC’s primary securities regulator is the Alberta Securities Commission (ASC). For its Alberta based REB and MB licenses, CFC’s regulator is the Real Estate Counsel of Alberta (RECA). For its British Columbia based MB license, CFC’s regulator is British Columbia’s Financial Services Authority (BCFSA). For its Saskatchewan based Financing Corporation license, CFC’s regulator is Saskatchewan’s Financial and Consumer Affairs Authority of Saskatchewan (FCAA).
CFC offers propriety mortgage investment products, which include Mortgage Investment Corporation (MIC) Shares and direct investment in mortgages. CFC’s Dealer Representatives (DRs) are registered to sell these products.
Introduction and Scope
Inherent in CFC’s business model are several existing and potential material conflicts of interest.
CFC is the Fund Manager, Restricted Portfolio Manager, and Exempt Market Dealer for three mortgage investment corporations (MIC), which are proprietary products (Caplink Mortgage Investors Corporation “CMIC”, Cedar II Mortgage Corporation “Cedar II” and Crossroads DMD Mortgage Investment Corporation “Crossroads”). As such, CFC has a management agreement with each of these MICs to provide Investment Fund Manager, Restricted Portfolio Manager and Exempt Market Dealer services as well as loan origination and the administration of mortgages funded. The management fee is generally calculated as a percentage of the number of investment shares outstanding multiplied by their subscription price.
CFC also offers direct mortgage investments to a single investor or syndicated group of investors. In its Mortgage Purchase Agreements with direct mortgage investors, CFC is engaged to provide loan administration services for a fee generally calculated as a percentage of the value of the loan.
As the Loan Originator for mortgage investment products for each of these funds, CFC earns a lender fee on every loan it sells to its clients (CMIC, CII, and Crossroads, direct mortgage investors). This fee is generally a percentage of the value of the loan advanced, but can be a spread between the interest rate the borrower pays and the rate that the investor earns on the loan.
As the Administrator for all loans funded by CFC clients, CFC in some instances earns certain fees charged to borrowers. These fees could include late fees, NSF fees, insurance placement fees, foreclosure fees, discharge fees, and prepayment penalties. In general, mortgage agreements allow for these fees to be paid out of funds collected from borrowers before outstanding principal and interest is paid to the investor.
Where a particular service has been identified as having a material conflict of interest, it has been highlighted in this Conflict of Interest Disclosure.
Identifying and Addressing Conflicts
A conflict of interest may exist or arise when CFC’s interests are different or inconsistent with the investors’ interests or when there is an imbalance of information and an investor may perceive CFC to be influenced to put its interests ahead of investors’ interests. CFC and its registered individuals address existing or reasonably foreseeable material conflicts of interest in its client’s best interest. If a conflict cannot be addressed in this manner, it is avoided. CFC has a Code of Conduct and has regulatory requirements embedded in its procedures, which CFC and its registered individuals are expected to follow to ensure that client relationships with CFC are managed fairly, honestly and in good faith.
In general, we manage conflicts through avoidance when a conflict is prohibited by law or cannot be resolved in the best interest of our clients. Conflicts that can be resolved in the best interest of our clients or cannot be avoided, but can be controlled and managed through effective policies, internal controls, and procedures are disclosed to you in our Relationship Disclosure Information (RDI) document. Existing or foreseeable material conflicts, those that we have assessed a likelihood of impacting your investment decisions with CFC are outlined in this Disclosure Statement. CFC has an obligation is to resolve conflicts in the best interest of its Clients. In accordance with National Instrument 31-103 13.4(3), we will advise you of these conflicts at the time a future trade is contemplated, and explain to you how a conflict may affect your decision to invest or to redeem your investment.
Conflicts of interest exist in every relationship. CFC has reviewed its operations for existing and potential conflicts of interest and based on our industry experience and our understanding of investor objectives, we have identified the following material conflicts of interest. For each conflict we have explained how it may affect your investment decision, and how it is currently addressed or avoided. As CFC continues to innovate its business, new conflicts may arise. All material conflicts that cannot be avoided in CFC’s business activities are required to be disclosed to you in terms of how they may impact your investment decisions and how CFC is managing them through procedures and internal controls to ensure your interests are considered ahead of CFC’s. This document and any updates will be posted on CFC’s website at www.caplink.ca
Existing or Reasonably Foreseeable Material Conflicts
CFC’s Management fee is based on outstanding investment shares in the MICs it manages and may be motivated to sell you an unsuitable investment with an aim to increase the number of shares outstanding. An unsuitable investment may be the investment itself, or too large of an investment in a particular product based on the investment information you provide and your risk profile. CFC complies with regulatory requirements, which prohibit CFC from recommending investments that are not suitable for you. Securities regulations require that, unless you are a permitted client and waive the requirement, CFC must provide you with an assessment of the suitability of the proposed transaction based on the financial information you provide and your investor risk profile. CFC may even decline to proceed with your trade. CFC’s Dealing Representatives are not paid a commission, nor does CFC earn a specific fee on your transaction.
Dealer Representatives compensated with commission based on sales volumes could be motivated to sell you shares to earn fees for their own account. CFC’s Dealing Representatives are not paid a commission, nor does CFC earn a specific fee on your transaction. If that should change in the future, CFC is required to disclose those fees to you on each trade.
CFC manages the investments and reports results and could be motivated to understate losses or over state performance on the MICs. Fair and timely reporting to stakeholders is critical to the management of any investment. CFC is responsible for managing and reporting financial results on investments. Understated credit losses would result in overstated performance. This conflict is mitigated by regular meetings between Management and the Board or a committee of the Board to review financial results prior to any distributions being declared. Annual audits are conducted for each Mortgage Investment Corporation (MIC) and periodic Shareholder Updates are provided to MIC Investors, and investor statements issued at least quarterly on direct mortgage investments.
CFC manages and reports on mortgage investments that are funded directly by private lenders. Although CFC earns an administration fee based on collections, CFC may be motivated to delay or withhold negative information on the status of the investment should the loan default. These relationships are managed by an agreement between the investor and CFC with respect to all aspects of this security. Controls include the collection and release of periodic loan payments to investors (net of a service fee). Periodic payments received are a confirmation to investors regarding the credit standing of the investment. Regular statements of account, and updates on investments that are not performing are provided to the Investor. Included in the management agreement is an option for the Investor to assume the administration of their investment by providing notice to CFC.
CFC is the single source of mortgage investments and may be motivated to favor one client over another. Security regulations require CFC to have a Fair Allocation Policy that ensures that, to the extent possible, investors participate fairly and transparently in opportunities appropriate to their needs and that, no client is given preferential treatment with respect to investment or expense allocation. When allocating investment opportunities, in addition to considering the investment mandate of each MIC, CFC adheres to its Fair Allocation Policy.
Other Business Activities may distract CFC from its responsibilities agreed to in management agreements with MICs and private lenders. CFC has procedures in place to ensure regular reporting to outside stakeholders, and internal reports to CFC executives regarding performance and activities of each business segment. Reporting is an important control in monitoring performance. CFC complies with regulatory requirements to report outside business activities of its registrants. As well, securities regulators require that each registrant firm appoint an Ultimate Designated Person, who must be an owner of the registered firm, and who is ultimately responsible for the activities of the registrant, supervision of its employees and its compliance with securities regulations. In tandem with the internal and regulatory controls, each MIC has a Board of Directors that is independent of CFC that regularly reviews financial results, and meets annually with each MIC’s auditors.
Direct Mortgage Investors are in competition with MICs for investment opportunities. CFC may be motivated to offer better investments to preferred clients. Security regulations require CFC to have a Fair Allocation policy to ensure that all investors are treated fairly and transparently. This policy includes a statement that MICs are given priority to mortgage investments that meet their particular investment criteria. Direct investments in mortgages may be offered when: 1) either MIC does not have sufficient funds available to fund a mortgage transaction (i.e. they are fully invested); 2) a mortgage investment is too large for either MIC to fund on their own and, as such, that mortgage is shared with other investors; 3) in rare cases, CFC has mortgage investment opportunities that do not fit the underwriting guidelines of either MIC and those mortgages may be completely funded through private lenders.
CFC only sells investment products that it originates or manages. CFC might be motivated to sell you their product even if other products in the exempt market that are not sold by CFC may be better suited to your investment needs or risk profile. CFC is not a financial planner, and as such does not purport to provide you with advice regarding your entire investment portfolio. CFC and its DRs are registered as Exempt Market Dealers, and are obligated under security regulations and its policies and procedures to know their product (KYP), which includes an understanding of comparable products not sold by CFC which could be considered to have similar features. This KYP assessment plays a role in performing suitability assessments to determine whether an investment in CFC’s product is suitable for you. An assessment of suitability is based on financial information you disclose on the Know Your Client information form.
Separation of Management and Board duties is an important control function. Mr. Menges is the Mortgage Broker of Record for CFC with RECA and BCFSA. Brian Menges also is the CEO and proprietor of CFC. CFC is the Investment Fund Manager, Restricted Portfolio Manager, and Advising Representative to each of CMIC, CII, and Crossroads, and reviews and approves investments funded by each MIC in accordance with each MIC’s investment criteria and CFC’s Fair Allocation Policy. Mr. Menges is also a Director and President of CMIC and CII. Having an independent Board of Directors is an important control in protecting investor interests and monitoring management of each MIC’s investment activities and performance.
Loan Origination Fees are earned by CFC on every loan that is funded and CFC may be motivated to sell loans to generate a fee. CFC earns a lender fee on every loan that it sells to an investor. Security and real estate regulations require investor disclosure documents describing the investment to be provided to investors. Full disclosure of the features of the investment provide balanced information to the prospective investor. MICs have established investment criteria that must be adhered to in the allocation of investments, which mitigates inappropriate investments. CFC has established loan origination guidelines to which it adheres to in assessing borrower and security quality. CFC has procedures in place to ensure suitability is met with each investment sold.
CFC is a Real Estate Broker and could be motivated to list and sell all foreclosure properties to earn a fee. To avoid this conflict, CFC does not list the foreclosed properties it manages. Instead those properties are sold by arms-length third party Realtors. CFC is a licenced Real Estate Broker, and may receive a referral fee paid by the listing Real Estate Broker when the property is sold.
CFC could earn a referral fee for introducing you to other professionals. CFC is committed to disclosing to all investors any referral fees that it may receive for making such a referral. Currently CFC does not engage in this type of referral relationship respecting investors, but would be required to disclose to you any fee it might receive when referring you in the future.