By: Craig Skauge and Cora Pettipas
Criticism is common. Anyone can do it. It does not take a strong intellect to criticize an industry, a system, or people in general. In contrast, what is truly brilliant, and incredibly important, is providing useful solutions, particularly when advocating for investors.
FAIR Canada’s disingenuous criticisms of the Exempt Market, and financial services as a whole, have become ubiquitous in our world. Blanket attacks on industry may seem harmless enough, but FAIR’s continuous linkage of the exempt market with the word fraud is akin to yelling shark on a crowded beach today because they were known to be in the area in the past - completely irresponsible.
As summarized in your recent editorial, in their latest research report A Canadian Strategy to Combat Investment Fraud, FAIR states that “the exempt market has increasingly become a gateway to fraud by providing easy opportunity for fraudsters.” Yet, as the IIROC sponsored organization stated in the very same report there is no substantive evidence that the exempt market has a higher percentage of fraud than the public markets. To put it in perspective, the recently high profile ‘Exempt Market’ fraud committed by David Michaels of Victoria, BC involved investor losses totalling 65 million dollars. This is a tragic case, and completely unfortunate. BreX was as well, in which investors lost 6 billion dollars or about 91 times more.
FAIR’s report indicates that the majority of fraud cases in the exempt market result from registration exemptions, yet oddly enough their current efforts are more focused on slowing the adoption of new be most often utilized by registrants subject to direct oversight by the OSC. FAIR’s continued focus on the exempt market is difficult to rationalize given a complete regulatory overhaul conducted in 2010 via implementation of National Instrument 31-103. Statements like “the exempt market is loosely regulated” and “has a high level of fraud” are not only inaccurate of current reality but lead to unnecessary panic amongst the very investors FAIR holds themselves out as representing.
No one wants bad apples in their industry; however, until someone discovers a magic bullet to eradicate it, investment fraud will continue to occur in all areas of the capital markets. NEMA suggests that instead of having a highly cantankerous approach, FAIR should work collaboratively with industry, as opposed to criticising it from afar. In the research report, they stated they had spoken with stakeholders, but they only used regulator interviews, data, and reports. ‘Stakeholders’ must include industry and investors - not just regulators. As a corrections officer may after some time lose their faith in humanity, so too may regulators whom only see the very worst behavior in the capital markets.
he exempt market is a new and growing area of the capital markets. It is an exciting space and holds well documented potential for fostering economic prosperity. However, it is far from mainstream and accepted, and will never be so if it continues to be slandered publically by the uninformed groups who should know better.