So, you’re thinking of setting up your own Exempt Market Dealer “EMD”. Starting your own firm, along with the additional compliance responsibilities, can be daunting, but being your own boss can be rewarding.
Since NI 31-103 was enacted in 2009, regulators have imposed more obligations on EMD registrants: audit, insurance, proficiency, and now Chief Compliance Officer experience requirements. It’s important to vet the details before you file the application, since incompleteness can result in delays and, possibly, extra fees.
First, you need to incorporate an entity, open a bank account, and fund it with at least $55,000 to cover the minimum capital requirements and the insurance deductible. Then get in touch with an auditor, since regulators also require audited statements attesting to your financial health.
Next up: obtain necessary insurance coverage. This is a basic requirement that protects against fraud, theft and other losses. Errors and omissions insurance may be obtained separately, but is not specifically required. While waiting for word from the insurers, an application form to join the National Registration Database (NRD) can be submitted and provincial commission applications can be prepared. Once these two steps are complete, you can file the application with your principal regulator.
Registering to be an EMD used to be simpler, but now regulators are asking more questions to ensure principals are suitable.
Over the last couple of years, regulators have found recurring problems with EMDs selling products to non-accredited investors, inadequate suitability assessments coupled with incomplete client documentation, and a lack of due diligence on the products being promoted by representatives. As a result, regulators are trying to weed out unsuitable applicants before granting registration. Applicants who have little prior securities experience, no understanding about the role of compliance, and vague notions about the proposed activities of the registrant will set off alarm bells.
THE APPLICATION PROCESS
There are two main parts to the application process: the firm application and the registration of key people at the firm.
Regulators will want to know what the firm’s future activities will be, what type of products will be offered, and that the firm has proper policies and procedures in place.
The regulators usually take about a month to review the application and follow up with questions. And they always have questions, because no application is complete in their eyes. These aren’t necessarily as a result of problems that the regulators have found, but usually are them wanting to understand more about the firm and its individuals.
The most common issues raised by the regulators involve incomplete information. They’ll focus on who the key personnel behind the firm are, and will want to know the shareholders, directors, officers and dealing representatives. Each of these people must file their personal information online with the NRD, where commission staff will review it.
Further, the reviewer will look closely at what’s disclosed under the Current Employment section. You must include not only your employment with your sponsoring dealer, but also any outside business activities. Commission staff Google people, and if an activity is not disclosed, it can lead
to questions.
If you have a holding company, are on the board of a charity or even act as a coach in a youth organization, you’re considered to be conducting an outside business activity. The regulators’ view is that you can influence potential clients. So it’s better to over-disclose, rather than have them ask you to justify why you did not include an activity they feel should have been mentioned.
And, if you’ve had a bankruptcy or credit arrangement in the past, this must also be disclosed. Having had these problems does not mean they won’t register you; it is simply one factor they use to determine your suitability.
BUSINESS PLANS
The British Columbia, Alberta and Manitoba Securities Commissions require you to provide a business plan up front; the other commissions do not. You will need to have a clear idea about what you need the registration for, so have a good understanding of the products you want to distribute, as the commissions will ask about your proposed activities. This includes who your target market is, what exemptions you’ll be relying on and what types of due diligence you will perform.
To keep the application process moving along, respond to regulators’ follow-up questions within 48 hours so there’s no reason to delay your registration. If you meet the general requirements, there is no reason for commissions to deny your registration.
For more information on becoming an EMD
Jonathan Heymann
Director Compliance & Registration
KoreConX