Exempt Education | A Canadian Non-Profit Organization

Exempt Market Dealers (EMDs)

EMDs are exempt market dealers registered with the provincial securities regulators to sell Exempt Market products. To be registered as an Exempt Market Dealer, a firm must meet minimum solvency, integrity and proficiency requirements. In other words, they have to have enough money to operate the firm, they have to have a clean conduct record and they have to have the right education, experience, and compliance structure to meet their regulatory duties. EMDs select exempt market investments to sell to clients through Dealing Representatives (DRs). The products are selected through a due diligence process that is specific to the EMD. The sales of the investment product to clients by DRs are called subscriptions. Each subscription is approved by a Chief Compliance Officer (CCO) at the dealership for suitability.

Dealing Representatives (DRs)

The Exempt Market version of a Financial Advisor is called a Dealing Representative (DR). The name comes directly from the securities regulatory registration category. The DR will be registered with an EMD. It is important to check the registration of the EMD and DR before investing in any financial product to ensure they are legitimate. (Ontario Residents have to check in a separate database). DRs have similar requirements as Financial Advisors registered in other categories with regards to being knowledgeable on the investment products they sell and ensuring the product is a good fit for your specific financial situation.

The terms for this are:

1) Know your Product (KYP)

2) Know your Client (KYC) and suitability principles

Tips Selecting a DR to Work With

Hiring an advisor is a very personal process, and not all clients work well with all advisors. There is a ‘like attracts like’ rule with clients and advisors. Because it is a relationship of high disclosure and mutual trust, it is best to find an advisor whom shares similar values and attitude towards investments. What your advisor does for you is largely driven by your needs and preferences.

Information interview questions for your perspective advisor:

1. How long have you been an advisor?

2. Why did you choose to work with your EMD?

3. Other than exempt market products, what other investments are you registered to sell?

4. What is your investment process for your clients?

5. How does your EMD choose its investment product offering?

6. How do you keep up to date with all the investments you offer?

7. How many clients do you have? What does their typical investment portfolio look like?

8. Can you offer two references?

9. Do you have any conflicts of interest?

10. Do you refer clients to anyone or accept client referrals from anyone?

The KYC Process

All dealers and their representatives have a duty to know their clients. Your DR will ask you questions about your financial situation and attitude towards investing. To invest in mid to higher risk investments, as are commonly found in the Exempt Market, you have to have a willingness and ability to provide such information. Financial ability is measured by things like net worth, income and other personal details like upcoming life changes (divorce, a baby). Your financial willingness to invest is more subjective and is often referred to as Risk Tolerance. This is a culmination of personal attributes such as experience with investing, knowledge of finance, and how accepting you are of potential losses. Your financial goals and intentions are incorporated into your risk tolerance and investment suitability. For example, if you have a high risk tolerance and a very short term timeline, or a low risk with a very long timeline, Exempt Market investments will be deemed unsuitable for you.

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