New regulations reshape the industry
The security commissions recognized that there needed to be significant changes to
the exempt market world.
It wasn’t that there weren’t rules in the past, it was just that the rules were virtually
impossible to enforce properly. There were hundreds of investments being offered by
over a thousand advisers. Each of these investment companies and the people who sold
the investments were reporting directly to their provincial security commissions. The
commissions simply didn’t have the manpower or capacity to govern everyone properly.
In order to protect investors, something needed to change.
In 2009, the security commissions announced a solution to their dilemma and
in the fall of 2010 the new rules took effect. As of September 28th, 2010, all exempt
market products were to be sold through a registered exempt market dealer. The security
commissions made it very onerous, expensive and challenging to become an exempt
market dealer as the dealers were going to assist the security commissions in cleaning
up the exempt market world. Under the new regulations, the exempt market dealer
would choose which investments would be sold under their umbrella and would govern
the people who sold those products under their dealership. In other words, the exempt
market dealer is now in charge of governing their investment advisers and the products
they sell. The security commission governs the exempt market dealer.
These new regulations have had a dramatic effect on the industry. The first change
comes with the registration of the people who sell these products. These people are now
called dealing representatives. In order to become a registered dealing representative,
they must meet certain education requirements and become registered under their
provincial securities commission. The security commission will no longer approve
part-time sales people and wanted to set a higher standard for the people selling exempt
Under the old rules, investment advisers were not allowed to give suitability or
financial advice to their clients. Their job was to educate their clients on the investments
they offered and it was up to the client to determine how to allocate their investment
into their financial portfolio. Now the dealing representative must determine whether an
investment is suitable for their client and place an appropriate amount of the investment
in a client’s portfolio. They went from being sales people to investment advisers.
The investments offered are now being held to a higher standard as well. The exempt
market dealers have a responsibility to perform an extensive amount of due diligence on
every product they offer. If they offer an investment that goes sideways, the dealer will
have to prove that they did their due diligence on the product or face the possibility of
liability for some of the losses incurred by the investor. Most quality dealers are unlikely
to risk their reputation or capital on an investment that is likely to fail. Because of this,
subpar investments are less likely to find a home with a reputable dealer and raising
capital will likely be a challenge.