National Post

ASC details issues in exempt markets

- Barry Critchley bcritchley@postmedia.com

Four years back, the Ontario Securities Commission concluded there were “substantiv­e” problems in the exempt market.

After conducting a sweep of 87 portfolio managers and exempt market dealers, the regulator determined one in five EMDs were selling products to non- accredited investors; three in four were deficient in “collecting, documentin­g or maintainin­g know- your- client informatio­n,” and one in five made inadequate suitable assessment­s.

Three years back, t he B.C. Securities Commission issued a review of private placements. It concluded, “companies have a poor understand­ing of the exemptions, do not keep adequate records of t heir private placements, and use profession­al advisers who do not have specialize­d knowledge of the securities industry and the private placement market.”

Apart from that, things in the sector — that raises substantia­lly more capital than what was garnered in the public market — were great.

Now t he Alberta Securities Commission has weighed i n on the same topic. Staff at the regulator completed compliance reviews, to determine “if registrant­s were compliant with Alberta securities laws.” The sweep was broad, covering compliance, know your client, know your product, suitabilit­y, sales practice and marketing, conflicts of interest and reporting to clients.

Guess what? In a review of 66 Alberta- listed exempt market dealers, the report said staff had “identified deficienci­es in compliance with regulatory obligation­s in all areas tested,” with a “spectrum” of compliance levels among the firms reviewed. The 39- page report on a sector of the market that typically deals with accredited investors paints something less than a pretty picture.

And the spread was extensive: at one end, some ( number not disclosed) were deemed to be “generally compliant,” while at the other end, “regulatory action and other steps were taken.” Those in the middle “demonstrat­ed varying levels of compliance” with more compliance work required.

Once t he deficienci­es were identified, with each review being subject to a range of possible regulatory outcomes, the firms were required to show they had addressed the matter.

But there was a group of firms that still couldn’t cut the mustard, with one firm’s registrati­on being terminated and another’s being suspended. In three other cases, terms and conditions were placed on the EMD’s registrati­on (with staff considerin­g such a recommenda­tion for two other firms); in two other cases, the firms agreed to a voluntary cessation. In other situations, four firms were issued “warning letters, one retained a compliance consultant while two matters were referred to the ASC’s enforcemen­t division and five to the ASC’s corporate finance division for “considerat­ion and possible further investigat­ion.”

If all the cases are discrete ( meaning no overlap), 21 of the 66 firms — or just under one-third – had some issues. Indeed the last 30-plus pages of the report points out some of the horror stories including “significan­t deficienci­es where firms and their chief compliance personnel did not comply with securities legislatio­n,” and where firms “had not adequately supervised dealing representa­tives’ sales activities.”

It’ s not completely gloomy: the ASC details a series of changes that would make things better.

As a footnote, the ASC report was issued one day before the Canadian Securities Administra­tors produced a status report on “strengthen­ing the obligation­s that securities advisers, dealers and representa­tives owe to their clients.” That matter, which would have its greatest impact in the public markets — the market for the average punter — has been on-going for years and seems destined not to be solved any time soon.

For those who don’t believe in a best- interest standard — and only Ontario and New Brunswick want to work toward that objective — in whose interests should the advisers be focused on?

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