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Mar 02 2012

Retail Investors Need Greater Protection in Exempt Market

FAIR Canada submitted comments to the CSA in response to a request for comments regarding the minimum amount (MA) and accredited investor (AI) exemptions that allow the sale of investments to retail investors without a prospectus. FAIR Canada pointed out a number of concerns regarding these exemptions, including:

    • The lack of data available regarding the exempt market in Canada. Regulators should provide data to show where losses are suffered by consumers due to fraud or other misconduct in order to focus regulation on high-risk areas.
    • The limited protections afforded to investors by current “suitability” obligations;
    • A lack of compliance by market participants with “suitability” requirements and qualifications for the AI exemption.
    • The need for effective oversight of exempt market firms in order for investors to be adequately protected.
    • The absence of any compensation fund coverage (such as CIPF or IPC) for clients of Exempt Market Dealers.
    • A lack of disclosure of large commissions made on the sale of exempt products and conflicts of interest that are rife in this market.
    • Flawed presumptions underlying the current MA and AI exemptions. The fact that a consumer may have a certain income or level of financial assets does not mean that the person is financially sophisticated and not in need of protections provided by securities law.

We understand that the exempt market is a significant source of fraud and investor losses and that there is widespread non-compliance with existing requirements. We recommend the repeal of the MA exemption and reform of the AI exemption. Our proposed reform of the AI exemption takes a practical approach, and is based on our understanding of the different risks posed to investors which can vary, depending upon:

  1. whether the security is that of a listed issuer or not;
  2. whether the seller is a member of an SRO or not; and
  3. whether the security is straightforward or complex.

The objective of our recommendations is to improve consumer protection in areas where there is the greatest risk of loss due to fraud or other misconduct without impeding the ability of legitimate companies to raise capital in the exempt market.