As the exempt market continues to come
under regulatory scrutiny, dealers are being urged to ensure their suitability,
marketing and other compliance practices are up to standard.
At the Strategy Institute's Registrant
Regulation Compliance Strategies Summit in Toronto on Wednesday, regulators
said they're heavily focused on ensuring exempt market players are familiar
with, and complying with, the applicable regulations.
"We're trying to understand our
exempt market. We're also trying to bring into registration those who should be
registered," said Mark French, manager of regulation and compliance in the
capital markets regulation division of the British Columbia Securities
Commission. "We're going to be doing a lot of compliance outreach work,
visiting these firms, doing what we call inspections – limited scope examinations."
Added French: "where we see risk,
we'll take action."
Prema Thiele, partner at Borden Ladner
Gervais, LLP, said exempt market dealers which haven't yet been audited will
likely be contacted by regulators in the months ahead. "There's a
lot of emphasis on the compliance side," she said.
Exempt market dealers have been struggling
to keep up with the ongoing regulatory changes that have been taking place
since National Instrument 31-103 came into effect in 2009, according to David
Gilkes, director of the Exempt Market Dealers Association and president of
North Star Compliance & Regulatory Solutions Inc. He said there have been
10 regulatory staff notices, amendments and proposed rules affecting exempt
market dealers since 2009.
"It is hard for people to keep in
touch," said Gilkes. "I'm hoping that the regulators will appreciate
how much is being pushed onto dealers at this time."
It's been particularly challenging for new
registrants in the exempt market, which had to register for the first time in
2009 under NI 31-103, said Geoffrey Ritchie, executive director of the EMDA.
"They're struggling to understand their compliance obligations," he
said.
Regulators have identified plenty of
compliance deficiencies at the exempt market dealers they've reviewed.
Suitability has been a particularly problematic area, since many exempt market
products are illiquid and considered to be risky. The onus is on the dealing
rep to prove that the product is suitable for a particular client, given their risk
tolerance and time horizon.
"You've got to think about liquidity
as part of your suitability requirement," said Gilkes.
Regulators find that many dealing reps
fail to appropriately document conversations about suitability.
"A lot of times we don't see the
documentation of these discussions anywhere," said Janice Leung, lead
securities examiner at the BCSC. "We're looking for stronger and clearer
evidence that that's being carried out."
Marketing is another area where regulators
commonly identify deficiencies in the exempt market. "It's a top of mind
issue," said Ian Pember, chief operating officer and senior vice president
of administration and compliance at Hillsdale Investment Management.
Specifically, Pember said regulators often
find exempt market players using exaggerated or unsubstantiated claims on their
websites, pamphlets and other marketing materials.
"Unless you can point to some third
party source to back it up, you just can't use it," he said.
Since many of these compliance
requirements represent new territory for many exempt market dealers, much
education will be necessary to bring the industry up to speed, Ritchie said.
He's encouraged that regulators seem to be focused on helping to educate
dealers on their obligations.
"We're really into a big education
phase," he said.