ASC details issues in exempt markets
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?