An Alberta Securities Commission (ASC) review of exempt-market dealers (EMDs) in that province has uncovered widespread compliance deficiencies.
The ASC published the results of a compliance sweep of 66 Alberta-based EMDs on Wednesday, which found deficiencies in every area the regulator examined, including suitability failings, inadequate know-your-client (KYC) and know-your-product processes, and failure to identify or deal with conflicts of interest, among various other issues.
The ASC’s report notes that some of the firms examined had high levels of compliance with the regulatory requirements while others prompted regulatory action to address the failings the review uncovered. In fact, the report indicates that some firms simply ceased business in the face of the regulator’s review.
In addition, one firm had its registration terminated; another firm was suspended; three dealers had terms and conditions imposed on their registration as a result of the reviews; and ASC staff are considering registration conditions for two other firms.
The review also prompted several warning letters from the regulator; a couple of firms provided undertakings to the ASC; two cases have been referred to the ASC’s enforcement division, and five others have been passed to its corporate finance division for possible further investigation.
The report details a host of compliance deficiencies uncovered in the reviews, including, “significant deficiencies in the collection and documentation of KYC information in many reviews.”
The report reveals that a “high number of firms” failed to analyze the products on their shelves adequately. As well, “In many reviews, we observed significant deficiencies relating to inadequate identification and response to conflicts of interest.”
In particular, the ASC found that firms failed to identify conflicts of interest associated with compensation arrangements; conflicts involving related, or connected, issuers; and conflicts stemming from reps’ personal ownership stakes in products sold by the firm.
The reviews also “frequently identified” investors with low, or medium, risk tolerances who were invested in high-risk exempt-market securities; clients invested in growth securities despite the fact they were seeking income or capital preservation; and clients with short time horizons that were invested in long-term, illiquid securities.
The ASC also found failures in assessing clients’ use of leverage, the report notes: “This is concerning because EMDs distribute exempt-market products that are typically illiquid and generally high risk. The use of leverage in such circumstances may significantly affect the suitability of the investments.”
In addition, the regulator reports that the reviews also found clients with an overconcentration in exempt-market illiquid securities.
The ASC’s report says that the main objective of the reviews is to improve industry compliance and that many firms have been required to rectify deficiencies identified in the sweep.
The report also aims to help educate firms by spelling out both suggested compliance practices and unacceptable practices. It calls on firms to use this information to ensure that they are meeting their requirements.
“The notice is intended to provide guidance to assist firms in complying with their regulatory obligations and includes both suggested practices and unacceptable practices,” says Lynn Tsutsumi, director of market regulation with the ASC, in a statement. “We strongly encourage registrants to use the notice as a self-assessment tool to enhance their compliance with regulatory obligations.”
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