Analysis Performed by EMDs in Exempt Markets

An Insight into Value of Appropriate Suitability 

Analysis Performed by EMDs in Exempt Markets

exempt marketsThe main responsibility of exempt market dealers is to make sure that the investment decisions their clients take are right and appropriate based upon their financial condition. In this context there are specific guidelines that are to be followed for assessing suitability of investors with respect to sale or purchase of specific securities. 

Our aim here will be to look at these details in greater detail in the next few sections.

Assessing Suitability of Sale or Purchase of Securities for Investors

It is necessary for exempt market dealers to provide a statement to their investors which clearly states that the EMD is obligated to assess suitability of any particular sale or purchase of securities for the client. Such suitability analysis is to be performed before any transaction is done on behalf of the client. 

However, CSA during its review of exempt markets has found that these guidelines were not being followed by some of the exempt market dealers. In the following sections let us go through some of the problems which were noticed.

Problems in Suitability Analysis

CSA has found that disclosure information provided by exempt market dealers did not contain a statement about such suitability analysis. Few of the EMDs considered that it was enough to:

  • Have required policies as well as procedures to assess suitability for their clients.
  • Properly manage account for clients according to investment objectives client has and KYC information. But considered that it was not necessary to provide a statement.
  • The language of the statement was not as required or in some instances no statement was provided.

Necessary Guidelines for EMDs

To rectify the situation CSA has made it mandatory for exempt market dealers to include necessary statement according to specific guidelines.

Collection of Information about Clients

As per regulations exempt market dealers are required to disclose details of the information they need to collect about investors as part of their KYC obligations. EMDs need to collect and document information which is required for establishing identity of investors, to check whether investor is an insider and also to assess if any specific investment is suitable for the client.

Issues and Discrepancies

Few of the problems which were found in terms of collection of information included:

  • EMDs were collecting needed KYC information as well as providing copies of such KYC forms to their clients. But they were lacking in explaining all the terms of their KYC form within the RDI. It was also noticed that firms were not mentioning that the KYC details will be used for assessing suitability.
  • Some of the firms were collecting KYC data as required by regulations.

How to fix these problems?

The good thing is that CSA has provided clear instructions on how this situation can be rectified.

Accordingly, now EMDs are required to provide investors a statement which lists as well as describes details they are required to collect. 

Such statement should also consist of description of the way such information will be utilized by the EMD for performing suitability analysis on behalf of the client with respect to any specific investment.

Conclusion

As we can see there are clear guidelines on how EMDs need to perform suitability analysis for their clients. By following these guidelines EMDs can ensure that they are suggesting only the right investment opportunities to their clients.