Regulators patching together some common ground

(December 3, 2003) If you think the fractured regulatory environment makes it hard to follow the patchwork of rules, wait until you see the exemptions.

“It is a little bit of a difficult regime right now,” Lynn McGrade, partner at Borden Ladner Gervais, told the Canadian Institute’s 12th annual mutual funds symposium. “It has a bit of a pattern, but just when you think you get the idea of the pattern, it all falls away and there’s an exception.”

One of these exemptions is the “accredited investor” exemption, which permits the sale of a product without a prospectus to certain high net worth investors who are considered financially savvy enough to accept the risks.

“There has been some considerable advancement in this area with the adoption of an ‘accredited investor’ regime in most of the jurisdictions.”

Multilateral Instrument 45-103 is meant to define the “accredited investor,” but four jurisdictions have yet to sign on. New Brunswick and the Yukon are “onside” with the rule, and are said to be in the process of adopting it, but Ontario and Quebec have so far opted to maintain their own definitions.

Under this instrument, accredited investor status includes a wide range of institutional investors, managed accounts and individuals who meet one of three criteria:

• $1 million in financial assets (securities and cash only)
• net annual income of $200,000 for a single, or $300,000 for a couple, with the reasonable expectation this income level will continue
• net assets of $5 million

The last criterion is not accepted in Ontario, nor does the Ontario Securities Commission accept managed accounts as accredited investors. In Quebec, sophisticated investor status is closed to individuals altogether.

“Quebec still maintains a sophisticated purchaser regime. There’s a prospectus and registration exemption for a set list, but it is not the same by any means as the accredited investor list under the multilateral instrument,” McGrade says. “One noticeable difference is there is no category that an individual can fit into. There’s no way to get exempt product to a Quebec individual investor under the sophisticated purchaser exemption.”

Even the jurisdictions which have signed on to MI 45-103 differ on the application of some rules within the instrument.

Newfoundland and Labrador, for example, requires universal registration of dealers. The same holds true in Ontario, where you would need at least limited market dealer registration to sell pooled funds.

What do you think about this matter? Do you think there should be one universal definition for “accredited investors”? Are there real cultural or social differences that justify the current patchwork? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com