To create a fair marketplace for investors and dealers in the exempt market, regulators need to evolve their policies and the industry must renew its commitment to investor protection, according to Howard Wetston, chairman and CEO of the Ontario Securities Commission (OSC).
Traditionally, regulators have not focused very heavily on the exempt market as part of the broader capital markets, said Wetston, speaking at the Exempt Market Dealers Association’s annual conference in Toronto on Thursday.
However, he said that attitude needs to change. “The exempt market is too important, too integral, too important a part of the capital markets,” he said. “We cannot view it as an exception, we need to look at it as a part of the entire framework.”
In reviewing the exempt market regulatory regime, regulators must find ways to get rid of some of the perceived barriers and inefficiencies, he said. Wetston added that any new rules must, of course, be balanced, allow for efficient capital raising, increase access to investment opportunities for investors and provide appropriate investor protections.
One possible change the OSC is currently exploring is crowdfunding. In deciding on whether to allow crowdfunding in the Canadian marketplace or not, Wetston said regulators must consider the following three questions: Would crowdfunding be an effective capital-raising tool? Are investors interested in these types of investment opportunities? Can ways be found to protect investors from the potentially high risk and illiquid nature of these investments?
Also in need of change, according to Wetston, are the differences in the exempt market regulatory regime from province to province. He said these discrepancies cause inefficiencies and higher costs. As such, one of the objectives of the OSC is to harmonize the exempt market regulatory regime with the Canadian Securities Administrators (CSA).
However, for any change to take hold in the exempt market, the OSC requires appropriate action from industry participants.
“We cannot do this alone,” said Wetston. “We feel investor protection is a shared responsibility, we need you to commit, it’s not just a regulatory responsibility.”
Regulatory review reveals compliance failures
Wetston said industry players must also do a better job of complying with their registration requirements.
He called out exempt market dealers for compliance failures turned up by a recent regulatory review. In a sweep of portfolio managers and exempt market dealers, he said the OSC “found substantive and procedural issues at certain exempt market dealers with respect to know your client and suitability obligations, as well as the sale of securities inappropriately to non-accredited investors.”
Wetston also called on the industry to do a better job meeting its regulatory obligations generally. “In our view, more work needs to be done by industry to, at a minimum, consistently meet existing requirements,” he said.
Wetston noted that the commission plans to publish a report of key findings and ‘best practice’ guidance later this year to help firms comply with their obligations.
“We do not want to stand in the way of capital formation, but we have a responsibility to ensure that capital formation occurs in a manner that reflects the important investor protections provided under securities law,” he added.
With files from James Langton