Amid investor protection concerns, the British Columbia Securities Commission (BCSC) is proposing to scrap the so-called Northwest exemption.

The BCSC said Thursday that it is proposing to revoke both the Northwest exemption, which allows firms to trade in the exempt market without registering, and its similar registration exemption for trades in mortgage investment entities (MIEs).

The so-called Northwest exemption was introduced by a handful of regulators in that region (including Alberta, Manitoba, Saskatchewan, Northwest Territories, Nunavut, and the Yukon, along with B.C.) in the wake of the registration reform that created the new exempt market dealer (EMD) category. It provides an exemption from the requirement to register as an EMD for those that are only selling private placement securities under the capital raising exemptions.

The exemption has been controversial with investor advocates, such as the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), which has called for its repeal.

On Thursday, the BCSC announced that it intends to do just that. The commission said in a notice that there is “significant non-compliance with the exemptions, thereby putting investors at greater risk.”

It reports that sample compliance reviews found that 74% of those relying on the exemption “failed to provide purchasers of private placement securities with the risk disclosure required under the exemptions.” The lack of compliance was even higher for the MIE filers, where it found 90% non-compliance.

“The risk disclosure obligation is fundamental to investor protection when buying from unregistered dealers,” the BCSC says.

It notes that it adopted these exemptions because, at the time, it “did not have the information to understand what impact the EMD registration requirement would have on private enterprise financing or investors.” It has now concluded that not only is investor protection compromised, but that requiring registration likely won’t harm capital raising very much. It estimates that only about 1% of capital (by dollar value) could be impacted.

“Investors who are considering investing in private placement securities would be better protected if they purchase securities from a registered dealer. In particular, they would have the benefit of advice about whether a purchase is suitable for them before they invest,” it says.

Comments on the proposal are due by February 4.