The industry and investor advocates are butting heads over possible regulatory reforms to the exempt market, with the industry favouring no changes, and investor advocates calling for a fundamental rethink of the exemptions regime.

In a submission to a Canadian Securities Administrators’ consultation paper proposing changes to a couple of key prospectus exemptions — the accredited investor exemption, and the $150,000 exemption — the Investment Funds Institute of Canada says that the existing exemptions should be maintained.

In the wake of the financial crisis, and ongoing compliance concerns in the exempt market, the regulators are considering whether to revise the qualifying criteria for the exemptions, or even to do away with them entirely, in order to better protect investors.

IFIC published its submission to the consultation Thursday. The comment period closed Wednesday. “We know that there are Canadians who are independently qualified or self-sufficient to acquire and manage their own investments,” said Joanne De Laurentiis, president and CEO of IFIC, in a release. “As a result, we believe that the CSA should maintain the current prospectus exemptions.”

“In an economy such as Canada’s where there are many smaller issuers seeking financing for particular projects or other purposes, the exemptions offer a financing alternative to traditional banking relationships,” IFIC’s submission says. “This divergence of capital raising needs and ready availability of willing investors, suggests to us the need to preserve choice in the markets. As such, our members recommend that the CSA not only maintain the current prospectus exemptions, but expand the availability across Canada of the exemptions that are currently in place only in individual jurisdictions.”

Indeed, IFIC also calls on the CSA to work toward harmonizing the exemptions, so that they are consistent throughout the country. “Canadian investors who are qualified to purchase securities under these exemptions should be equally so qualified anywhere in Canada; their status should not depend on their province of residence,” she said.

Conversely, in a submission that is soon to be released, the Canadian Foundation for Advancement of Investor Rights (FAIR Canada) says that it believes that the premises underlying the existing exemptions are flawed. “For example, that an individual is ‘wealthy’ and potentially better able to weather a loss or able to pay for advice are not reliable proxies for investor sophistication and, therefore, do not provide an acceptable level of investor protection,” it says.

It recommends scrapping the $150,000 exemption altogether, and says that the qualification criteria for the accredited investor exemption (income and asset thresholds) are poor proxies for sophistication, and should be amended. It proposes a revised exemption that would vary according to the type of issuer issuing the securities, the type of seller involved, and the complexity of the security.

FAIR Canada also recommends that a best interest of the client/fiduciary standard should be imposed on any investment recommendation, including recommendations about securities sold under prospectus exemptions, in order to ensure investors are better protected. “FAIR Canada believes that all registrants who provide investment advice to retail investors should be subject to a best interest/fiduciary standard, and the need is particularly pressing in the exempt market,” it says.

It also calls on regulators to provide more hard data on the exempt market, and says that compliance with exempt market requirements must be improved. “The exempt market needs effective oversight in order for investors to be appropriately protected. This is essential to any reform of the exempt market,” it says.

FAIR also recommends that the so-called Northwestern Exemption orders — which allow trading in connection with a prospectus-exempt distribution without requiring registration in several northwestern jurisdictions (BC, Alberta, Saskatchewan, Manitoba, the Northwest Territories, the Yukon Territory, and Nunavut) — should be revoked.