By: Geoffrey Ritchie, EMDA Executive Director
As a national industry organization, the Exempt Market Dealers Association of Canada (the EMDA) brings together exempt market dealers (EMDs), exempt product issuers and exempt market advisers from across Canada. Our focus is on building a strong exempt market and driving change in policy and regulations where they are needed. We are engaged in private placement and dealer regulation matters across various sectors including real estate, natural resources, technology, heathcare and other industries active in the exempt market.
The EMDA is driven by a simple concept: in a capital market congested with well financed and established players from industry, investor groups, governments and regulators - who will be the voice for the exempt market? The answer is increasingly obvious – the EMDA. We are the national voice of the exempt market and our voice and our influence are growing stronger every day.EMDs – the new dealers on the block
To assess where we are going, we need to understand where we came from. The private capital raising and the prospectus exemption regime is not new, however, the creation of a national registration category of regulated EMDs is still new. On September 28, 2009, the EMD category was rolled out across Canada and established a robust dealer registration requirement for the exempt market. In most of Canada this was an entirely new regulatory framework for the exempt market and brought dealer registration into a previously unregulated area of the capital markets. The reasons securities regulators introduced the EMD category included their focus on improving the proficiency and competence of those in the exempt market, and enabling better protection of investors. As with any new regulatory structure, there were differences of opinion about its utility, and effectiveness, and there remain some differing approaches to the regulation across Canada (e.g., the Northwestern Exemption). But after almost three years, by and large the transition to this new way of operating is coming to an end, and now the hard work begins.
As EMDs across the country settle into their new regulatory category, both the EMDs and the regulators are adjusting to their new environment. EMDs are coming to grips with their new compliance obligations and how to implement them throughout their business. Securities commissions are adjusting to direct regulation of a major dealer category without delegation to a self regulatory organization, and realising that it has its challenges. On both sides there is a steep learning curve, and both sides are working hard to manage it. It is understandable, and predictable, that some EMDs are still wrestling with compliance issues. When we hear a regulator or commentator announcing, with apparent alarm, that some EMDs have compliance deficiencies, I wonder if we all have a short collective memory. Does anyone recall the troubles mutual fund dealers had in the early years? Or for that matter the compliance troubles that MFDA and IIROC dealers continue to have all these years later? To keep things in prospective, lets remember a few things: 1) compliance is always a challenge for a new registration category because people need to learn and adjust, 2) suitability, KYC, and KYP are still the top compliance issues in established IIROC and MFDA dealers, they are not just an EMD issue and 3) EMDs are the only category of dealers the securities commissions directly regulate, so EMDs are the only dealers they can talk about. So let’s keep some perspective and recognize how far we have already come, not just how far we still need to go.What’s changing in the exempt market?
The background is relevant to understanding the increasing flood of regulatory proposals relating to the exempt market. Over the last year as securities regulators have recognized that more capital is now raised in the exempt market than the public market, they are doing their best to understand the exempt market and to further consider its structure and purpose. Having recently redesigned the registration framework of the industry, the attention of regulators is now turning to products and investors.
On the heels of a massive global financial crisis, regulators feel a natural pressure to protect investors and be seen as ‘doing something’. The problem comes when regulators and governments try solving problems that don’t exist, or they simply find tempting and easy targets for those regulatory ‘quick wins’. We believe the exempt market should not be that easy target, and we need to remind regulators and commentators that ‘cracking down’ should not lead to strangulation. Having survived Sarbanes-Oxley, and now living through Dodd-Frank, our American friends have a few good observations to offer on this.Speaking up for the exempt market
We believe the EMDA must speak up for the exempt market, support its maturing EMDs, and ensure securities regulators are focused on what actually needs fixing. We need to provide leadership – and here are some examples from the past year where the EMDA has done exactly that:
- securities regulators attempted a product based carve-up of the exempt market through the proposed securitized product prospectus exemption and continuous disclosure regime for private issuers which the EMDA opposed. We strongly encouraged securities regulators to develop a uniform approach involving all private placements that can be considered by all stakeholders in the exempt market – product complexity does not warrant intentional fragmentation of the exempt market;
- attempts to restrict EMDs from conducting brokerage activities which we noted had less to do with the legitimate use of the dealer category and more to do with EMDs being unwelcome competitors for IIROC dealers in serving large exempt market institutional clients;
- the discrimination against EMDs through their unjustified exclusion from the direct market access rules and the preferences granted to IIROC dealers which were unsupported by a policy or regulatory rationale; and
- proposed requirements for EMDs to report on client name securities (which EMDs could almost never do), and the related proposal to require EMDs to report market values for exempt market securities which have no reliable market value – both of which are now off the table in the latest registration rules proposals (aka CRM II).
In each of these examples, the EMDA has identified the interests at stake for EMDs and the exempt market, and marshalled its resources to provide detailed analysis and commentary to securities regulators. Our approach has been helpful and constructive, but when necessary, we have aggressively defended the interests of the exempt market. Often our interjection was against the voices of other industry players not pleased with the competition from the evidently successful EMDs and from industry associations significantly better financed than the EMDA. But an interesting thing is starting to happen, when the EMDA speaks up for the exempt market, it gets noticed.
Our passion, experience and deep understanding of policy, regulation and the exempt market industry are the hallmarks of our national voice.The EMDA push for a comprehensive exempt market review
A consistent message the EMDA has been delivering is the need for a more comprehensive review of the exempt market and its purpose. Through all our recent written submissions to regulators (which we post on the EMDA website) and in every in-person meeting we have with securities regulators across Canada, the EMDA makes the case for an inclusive policy approach founded on research and facts. Nowhere is this more evident than the EMDA’s response to the recent Minimum Amount and Accredited Investor Exemption review by the Canadian Securities Administrators (CSA). The proposal to significantly change or repeal important capital raising exemptions was critical for its potential to change what we do, but also for its notably absent public policy rationale, lack of context and limited understanding of the size and scope of the exempt market. Bad press and the desire to ‘crack down’ are poor motivations for serious policy reforms, and many commentators pointed that out. But what the EMDA did was something much more.The EMDA built the case to expand the prospectus exemption review
Over the course of several months the EMDA set in motion an extensive consultation process to build our case, both against the proposed changes, and in favour of a more inclusive approach to reforming our capital raising tools across Canada. We did this through multiple Town Hall meetings in western Canada, a cross-Canada online survey, vigorous policy discussions with securities regulators in public and private meetings in western, central and eastern Canada. The EMDA consistently demonstrated its commitment to leading the debate. Reacting to change with empty statements of disagreement or attempting to embarrass Ontario for not adopting the Offering Memorandum (OM) exemption are not successful strategies for long-term influence. Mass rhetoric does not change the minds of regulators, and does not provide them with solutions to long intractable policy problems. What provokes change are passionate and reasoned voices that make an impact through thoughtful, well researched positions capable of pushing policy debate in a new direction. The EMDA again demonstrated our ability to come to the table with a better way forward – that is what effective advocacy looks like.How the EMDA got the OM exemption on Ontario’s agenda
Our approach to the CSA’s limited prospectus exemption review contributed to several key changes to their approach and a significant broadening of the review, particularly in Ontario. The most important change was getting the OM exemption now on the agenda in Ontario – finally! This change didn’t come about because of noise and rhetoric pushing for Ontario to ‘get onboard’. That noise has existed for years, and always failed to persuade the cautious Ontario Securities Commission (OSC). The EMDA pushed for change by getting to the root of why Ontario had stayed out of the OM regime for all these years. This element was key because the EMDA also knew what was coming – a serious statement of concern by the regulators in the jurisdictions which adopted the OM exemption about the quality of the OMs they were seeing. In late April securities regulators released their concerns with a notice highlighting 19 significant and common deficiencies of OMs filed in their jurisdictions. No wonder Ontario wasn’t jumping on board.Striking a Balance - the EMDA framework for change
What the EMDA has done is acknowledge the longstanding and legitimate OSC concerns about weaknesses in the two OM exemptions and we showed them a way it could be done better. In effect, striking the right balance between an efficient capital market for issuers and investors, and the need for adequate and even enhanced investor protections. By setting out the framework for a new, national and harmonized ‘Eligible Investor Exemption’ with safeguards for investors, public disclosure, suitability and KYC protections, we demonstrated that the exempt market in Ontario could find a new and better balance between market efficiency and protection of investors. Having made the point in our submission that 98% of investors in Ontario are locked out of the exempt market, and that a reasonable OM regulatory regime was possible, we are not at all surprised by the OSC decision to finally put the OM exemption on the table. We are also pleased to see the OSC strike a new Exempt Market Advisory Committee to guide them through the year ahead - which incidentally the regulators are now calling ‘the year of the exempt market’. That is what I call progress.What lays ahead?
The challenges laying ahead for the exempt market are only rising – but the EMDA is determined to meet those challenges. How our prospectus exemptions and our dealer and adviser registration framework evolve across Canada will significantly impact the exempt market and the economic health of Canada. Making sure we are able to influence how they evolve, matter to all of us: the investors who purchase exempt market securities, the dealers who sell them, the issuers and companies who rely on them to raise capital, and the governments who need strong economic growth. The EMDA’s work in leading change and helping develop the exempt market in Canada is really just beginning.
The EMDA’s submissions to securities regulators on several of the topics discussed here can be found on our website www.emdacanada.com under "Speaking Up For EMDs
For more information contact: Geoffrey Ritchie
For more articles, please download the Exempt Market Update - the national magazine of the EMDA