A lack of regulatory enforcement action against exempt-market dealers (EMDs) and the absence of comprehensive data on the exempt market, highlights the possible need for a self-regulatory organization (SRO) to cover EMDs, suggests a new paper from the University of Calgary’s School of Public Policy.

The paper, which was written by University of Toronto law professor Jeff McIntosh, examines the exempt-market regime in Canada and finds that there’s likely a significant gap in investor protection in the exempt market.

For example, many exempt financings don’t have to be reported to securities regulators and those that do have to be reported often aren’t, the paper notes. Data from Statistics Canada indicate that there were about 156,000 exempt financings across Canada in 2014 but only about 7,125 exempt financing reports filed with securities regulators that year.

This, in turn, suggests that there may be a substantial gap in investor protection, particularly for retail investors transacting in the exempt market, the paper notes.

“If there are indeed something in the vicinity of 156,000 non-prospectus financings per year in Canada, mostly by small, unsophisticated business enterprises selling securities to investors who are not legally advised, it would be surprising if there were not a far greater number of abuses than are reflected in the relatively small number of cases that actually come to the attention of [the Investment Industry Regulatory Organization of Canada (IIROC)], the securities regulators and the courts,” the paper says.

Currently, there are relatively few enforcement cases against EMDs, which are regulated directly by the provincial securities commissions, the paper notes, pointing to the lack of an SRO as one possible reason for a lack of enforcement activity involving EMDs.

The lack of an SRO “almost certainly reduces both the quality of monitoring and the likelihood of discipline should the dealer misbehave,” the paper says.

Thus, the paper proposes that securities regulators should consider requiring EMDs to belong to an SRO.

“The absence of an SRO for EMDs, coupled with the lack of cases disciplining EMDs, suggests that this might constitute a lacuna in the enforcement apparatus,” the paper concludes. “Securities regulators should give serious consideration to requiring the creation of an SRO for EMDs.”