It is very necessary to protect client interest in exempt markets and as such regulatory bodies have clearly defined the kind of disclosures exempt market dealers need to make. We aim to delve into some of the main disclosures EMDs need to make to meet compliance requirements.
Conflict Of Interest Disclosure
Exempt market dealers need to make proper disclosure in case there is indirect or direct relationship present between selling security holder and issuer as well as the underwriter.
The offering document should have a statement right on front page which clearly explains the grounds based upon which issuer is connected or related issuer to the exempt market dealer.
The offering document should also have cross reference to a segment within the document body where more details about the relationship are provided.
As per regulations, in case any dealer in exempt markets recommends or trades in securities of any connected or related issuer then such EMD will have to provide clear disclosure about such issuer.
Following details have been provided by OSC in this context:
- Disclosure should be clear, prominent, specific and meaningful regarding material conflicts and the disclosure needs to describe how such conflict of interests may affect the service that is offered.
- Things to avoid would include offering partial or generic disclosure which might mislead clients or hide conflict of interests with complex or overly detailed disclosure.
- EMDs also need to disclose any type of conflict of interest to all clients at the time of or before any transaction is recommended to them. They are also advised to maintain proper evidence of such disclosure.
- It is also necessary to update clients about changes in the disclosure as earlier disclosure might not be relevant any more.
In exempt markets the EMDs are required to provide sufficient risk disclosure details to clients before starting work for them. Such risk disclosure consists of description of involved risks if borrowed funds are utilized for financing purchase of securities.
Another description which should be present in risk disclosure would be regarding type of risks clients will have to take into consideration at the time of taking any investment decision.
Exempt market dealers are also required to:
- Provide risk disclosure details in meaningful and clear manner.
- EMDs should also have procedures as well as policies in place which necessitates registered individuals working for the EMDs to show that obligations have been met with regards to explanation of risk disclosure details to clients.
- They should also maintain adequate evidence of client disclosure compliance during opening of account, before trades and other times. Such evidence can be in the form of signed acknowledgement from client and by use of detailed notes.
- EMDs need to review all the necessary documents such as term sheets, KYC forms as well as offering memoranda at regular intervals to make sure that all these documents have necessary risk disclosure details.
- Facilitate client participation by assisting clients fully comprehend the investment risks and encourage them to check the sales literature. Such participation can be further improved by consulting industry professionals such as accountants and lawyers as and when necessary.
To recap we will say that these are quite important disclosures and EMDs need to follow them if they earnestly want to safeguard interest of their clients.