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A provincial regulator has taken control of PACE Savings & Credit Union Ltd. amid an investigation into governance issues.

Late last week, the Deposit Insurance Corporation of Ontario (DICO) placed PACE “under administration," invoking a rare measure typically reserved for firms that are in serious financial or operational distress. Administration allows the credit union to continue functioning under the regulator’s watch to protect depositors.

In the meantime, PACE’s two most senior executives – chief executive Phillip Smith, and his father, Larry Smith, the former CEO who now serves as president – have been placed on administrative leave. PACE operates primarily in the Greater Toronto Area.

An investigation into PACE was launched as a result of the regular work DICO does to oversee the credit union, as well as “issues raised by a third party,” according to Guy Hubert, the regulator’s CEO. That investigation continues, but Mr. Hubert said it is "business as usual” for PACE’s day-to-day operations. More than 37,000 PACE members can still access their funds and make transactions normally. And the governance problems are “contained within PACE,” according to an update DICO shared with other credit unions that was obtained by The Globe and Mail.

Consulting firm KSV Advisory has been hired to assist DICO, which remains in charge of all operations.

“Following an investigation, we determined it was appropriate for the institution to be placed under administration in the best interest of the credit union and its members with an overall aim of supporting the long-term success of PACE credit union," Mr. Hubert said in an e-mailed statement. “Beyond that, our investigation continues.”

Mr. Hubert also said DICO “fully anticipates that the governance issues will be resolved."

A PACE employee told The Globe the credit union has “no comment,” and neither Phillip Smith nor Larry Smith responded to requests for comment. The credit union’s chief marketing and community relations officer, Dan Coldwell, referred inquiries to DICO.

PACE was created to serve employees of the Peel Region, near Toronto, but has grown by amalgamating with smaller credit unions and now has about $1.1-billion in assets, with branches stretching from London, Ont., to Whitby. For nearly three decades, Larry Smith led the credit union as CEO, but stepped down in March, 2016, and took on the president’s role. Phillip Smith has been PACE’s CEO since then, and the future of both with the credit union is now unclear.

“What role they might play at the Credit Union in the future will be determined in due course during the Administration proceedings,” DICO said in a statement.

An e-mail circulated by Central 1 Credit Union – which provides services to credit unions in Ontario and British Columbia – said PACE is “currently solvent and operating profitably." In 2017, PACE reported a $5.3-million profit, according to its annual report.

The chair of PACE’s board, Ian Goodfellow, did not respond to requests for comment.

The credit union also has oversight from two prominent former politicians. Frank Klees, who was an MPP for the Ontario Progressive Conservative Party from 1995 to 2014, joined the credit union’s board last April. And, in 2014, when PACE created an investment dealer subsidiary, PACE Securities Corp., former Ontario premier Ernie Eves was named its chairman.

Last year, executives at other credit unions raised concerns with DICO about an investment product created and marketed by PACE Securities, according to a source with knowledge of the discussions and correspondence reviewed by The Globe. But Mr. Hubert said the issues that led DICO to take control of PACE “had nothing to do with PACE Securities" or its subsidiaries.

Mr. Klees directed inquiries to a lawyer who could not immediately be reached. Mr. Eves did not respond to requests for comment.

Editor’s note: An earlier version of this story erroneously stated that PACE's total assets were $209-million. In fact, the credit union has about $1.1-billion in total assets.

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