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OSC finds ‘significant deficiencies’ in exempt market

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The Globe and Mail  |  JANET McFARLAND  |Last updated

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The Ontario Securities Commission has found rule breaches and poor procedures in a review of securities firms operating in the “exempt” market, where products are sold to qualifying investors with little regulatory oversight.

The OSC said Friday it has completed a “sweep” launched last June of exempt market dealers and portfolio managers, calling the review its largest-ever targeted sweep of a sector.

In two cases, the OSC said it found “significant deficiencies” that led to regulatory action against the unidentified firms. Two other firms have discontinued their operations since the review was started, the OSC said.

Beyond those cases, however, the OSC warned it has found a range of deficiencies at other firms, primarily around selling securities to investors who did not qualify as “accredited” or wealthy investors eligible to buy exempt market products, and around sales of securities that were not appropriate for investors’ situations under what are known as know-your-client rules.

“Know-your-client and suitability determinations are fundamental obligations owed by registrants to their clients,” OSC chairman Howard Wetston said in a statement.

“Enhancing compliance among portfolio managers and exempt market dealers is critically important and we are taking appropriate regulatory action where we identified significant compliance issues.”

The exempt market -- where securities can be sold to qualifying investors without the need to issue prospectuses that are reviewed and approved by securities regulators -- has been a particular focus of the OSC’s in the past year. The commission is considering new rules, which it has issued for public comment, that could have the effect of broadening the range of people who can buy shares in the exempt market.

In a speech in early May to the Exempt Market Dealers Association of Canada, Mr. Wetston called on the industry to improve its adherence to existing rules if standards are broadened.

“In our view, more work needs to be done by the industry to consistently meet the existing requirements,” he said at the event.

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