This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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In Ontario, securities regulation is strict, and a high degree of regulatory oversight applies to businesses involved in the buying, selling, or advising of securities. An Exempt Market Dealer (EMD) is one type of securities dealer that operates in the exempt market, where certain securities may be sold without the requirement to file a prospectus. The exempt market is attractive to entrepreneurs and businesses as it enables them to access capital more flexibly than through traditional public offerings. However, setting up an EMD in Ontario is a regulated process with specific legal, financial, and operational requirements.
This article will walk you through the primary steps required to establish an Exempt Market Dealer in Ontario, including registration requirements, capital and insurance mandates, compliance obligations, and ongoing operational standards.
What Is an Exempt Market Dealer?
An Exempt Market Dealer (EMD) is a registered entity authorized to trade securities that are exempt from prospectus requirements under Ontario’s securities laws. Exempt securities often include private placements, accredited investor sales, and other offerings that do not need to be made available to the general public. EMDs play a vital role in providing issuers with alternative access to capital markets and giving certain investors access to private investment opportunities.
Step 1: Understand the Regulatory Framework
In Ontario, the Ontario Securities Commission (OSC) governs EMD activities. The OSC’s rules regarding EMD registration are laid out in National Instrument (NI) 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations and National Instrument 45-106 – Prospectus Exemptions.
Familiarity with these regulations is essential for anyone seeking to operate as an EMD, as compliance with these rules is crucial to avoid penalties and protect both the dealer and its clients.
Step 2: Determine Eligibility
The following criteria must be met to register as an EMD:
Principal and Ultimate Designated Person (UDP): Every EMD must appoint an Ultimate Designated Person (UDP) and a Chief Compliance Officer (CCO) who are responsible for ensuring the dealer complies with regulatory requirements and industry standards. Both roles require specific qualifications and industry experience.
Capital Requirements: EMDs are required to maintain adequate financial resources to meet operational needs and protect investors. For EMDs, the minimum capital requirement is $50,000 under NI 31-103. This is subject to change, and maintaining excess capital is advised as a best practice.
Insurance Coverage: EMDs must obtain a minimum level of insurance coverage, including fidelity insurance, errors and omissions insurance, and general liability insurance. These insurance policies protect the firm and its clients against certain risks associated with operating a financial services business.
Education and Experience: The OSC requires that all representatives of an EMD meet specific education and experience requirements. This typically involves passing industry-recognized exams such as the Canadian Securities Course (CSC), Conduct and Practices Handbook (CPH), and/or the Exempt Market Products Exam offered by the Canadian Securities Institute (CSI).
Step 3: Submit a Registration Application
The registration process involves submitting a detailed application to the OSC, which can be done through the National Registration Database (NRD). The application requires you to provide information about the EMD’s business structure, key personnel, compliance policies, and capital structure. Below are the main components required:
Business Plan: A detailed description of the EMD’s business model, including the types of securities it will trade, the target investor base, and any operational risks and compliance procedures.
Compliance Manual: A written compliance manual outlining how the EMD will adhere to NI 31-103 requirements, manage conflicts of interest, and prevent money laundering and fraud. The compliance manual should address issues such as recordkeeping, suitability assessments, know-your-client (KYC) requirements, and complaint handling.
Financial Statements: Initial financial statements may be required as part of the registration process, demonstrating the firm’s financial viability.
Background Checks and Personal Disclosures: The OSC will require extensive background information on the firm’s principals, UDP, and CCO, including employment history, educational qualifications, and personal disclosures of any past regulatory or legal issues.
The OSC reviews all applications in detail, often requiring follow-up information or clarifications. The application process can take months, depending on the completeness of the submission and the OSC’s questions and response time.
Step 4: Establish Ongoing Compliance Systems
After registration, an EMD must implement robust compliance systems to meet ongoing regulatory requirements. Failure to comply with ongoing obligations can lead to sanctions or even revocation of registration. Some key ongoing compliance requirements include:
Know-Your-Client (KYC) and Suitability Obligations: EMDs must conduct thorough KYC procedures for each client, collecting information such as their financial situation, investment experience, and risk tolerance. Additionally, the EMD must ensure that any securities recommended or sold are suitable for the client, based on their KYC information.
Annual Financial Filings: All EMDs are required to submit annual audited financial statements to the OSC. The statements must reflect compliance with the minimum capital requirement and provide transparency into the EMD’s financial health.
Compliance Training EMDs must provide ongoing compliance training to their representatives and ensure that they remain up-to-date with regulatory changes. This includes training on anti-money laundering (AML), conflict of interest policies, and investor protection measures.
Client Complaint Handling and Recordkeeping: EMDs must establish a complaint handling process to address client grievances fairly and efficiently. Comprehensive recordkeeping is also required to document all client interactions, KYC information, and transactions. This documentation must be retained for a minimum period, as specified by the OSC.
Regular Compliance Reviews: The OSC may conduct periodic audits or reviews of an EMD’s operations. To prepare for these reviews, EMDs should conduct regular internal audits of their compliance systems, addressing any identified weaknesses or deficiencies.
Step 5: Consider Joining a Self-Regulatory Organization (SRO)
While not required, joining an SRO, such as the Private Capital Markets Association of Canada (PCMA), can provide valuable support and resources. Membership in an SRO may offer guidance on industry best practices, compliance tools, and networking opportunities within the exempt market industry.
Conclusion
Setting up an Exempt Market Dealer in Ontario involves navigating a complex regulatory landscape to ensure compliance with OSC requirements and to protect investors. By carefully planning each step—from meeting eligibility requirements and submitting a comprehensive application to establishing ongoing compliance processes—firms can successfully enter Ontario’s exempt market with a strong foundation.
Understanding and adhering to the requirements for EMD registration can mitigate risks and help ensure a sustainable and compliant operation. Seeking guidance from legal and regulatory professionals experienced in Ontario’s securities laws can further enhance compliance and improve the likelihood of a successful registration and long-term growth in the exempt market industry.