IDA Leaves Brokers Confused, Uninformed
by Ellen Bessner
Originally published in the November 2001 issue of Investment Executive.
The IDA has left brokers confused and uninformed in the way they have handled two
important industry policies.
The IDA's Policy 8 has been highly publicized but has not yet been approved by the
OSC. Policy 8 will require IDA Members to report all complaints, settlements,
arbitrations, internal discipline and the outcome of all these proceedings to the IDA.
Industry, while shaking in their loafers, has received little guidance and no guidelines
from the IDA concerning how this policy will be applied. There is virtually nothing on the
IDA web site to assist. The most recent version of the draft is not yet even on the web
site but the IDA intends to roll this out by May 1, 2002.
The IDA's Vice President, Enforcement, recently spoke at a conference which included
Policy 8 as a "recent change to the [IDA] By-Laws and Policies" but failed to advise the
audience, until I put it to him in a question period, that it had not yet been passed by
OSC. In contrast, Policy 9, which has been passed by the IDA and approved by the
OSC on September 6, 2001, was not even mentioned in the speech.
Policy 9 is a response to industry's outcry for the need to soften the suitability rules for
discount brokers but has been drafted to extend to non-discount brokers which apply
and receive approval from the IDA (Regulation 1300.l(e) and Policy 9B - Minimum
requirements for Members offering both an advisory and an order-execution only
service). In the past, some lAs have had the presence of mind to indicate on the client's
monthly statement those orders that were "unsolicited". PAY CLOSE ATTENTION
BROKERS - FORGET THE TERM "UNSOLICITED" because the IDA has now seen fit
to strike that term from its vocabulary and has replaced it with the terms
"RECOMMENDED" and "NON-RECOMMENDED" (not a word found in the Webster's
dictionary).
If the broker uses the wrong word, the broker will not be in compliance with Policy 9 and
hence will not obtain relief from the requirement in Regulation 1300.l(c), suitability. If the
broker remembers to go to the trouble of indicating that a trade is NONRECOMMENDED then that trade may be exempt from suitability requirements. I
emphasize the word "may" because labeling a trade as Non-Recommended is only the
first step. Whether a trade is recommended or non-recommended will, according to
Policy 9, "depend on an analysis of all the relevant facts and circumstances ." In the
face of a grieving client, the onus will likely be on the broker, the firm and the Branch
Manager to prove that the trade was not recommended, even if the paperwork
necessary, as specified by Policy 9 (trade confirmation and monthly statement) are
completed indicating the trade as being "NON-RECOMMENDED".
-2The implications of Policy 9 to Branch Managers are significant. While the IDA attempts
to relieve the firms from the strict suitability requirements, Branch Managers' obligations
are more onerous than before the institution of Policy 9.
Notwithstanding the passing of Policy 9, Branch Managers must continue to review
trades in accordance with Regulation 1300 and Policy 2, Policy 9 requires Branch
Managers to add the following to their long list of obligations:
1.
look for patterns suggesting inaccurate designation of trade including, but of
course not limited to, trades by more than one customer of a broker in the same
security designated as non-recommended;
2.
Examine patterns of trade designation for possible inaccuracies.
So, what are the implications to non-discount firms?
1.
Firms will be fighting with clients about whether the trade was properly
designated as non-recommended;
2.
If there is no indication on the trade confirmation and the monthly statement that
the trade was "NON-RECOMMENDED" then Policy 9 will not apply thus no relief
from suitability, even if the trade was actually not recommended;
3.
Branch Managers will be responsible for the review of trades by brokers for any
impropriety related to designating trades as Non-Recommended.
What constitutes a "Non-recommended" trade is as clear as mud to senior members of
industry's compliance and legal departments. How can Branch Managers and brokers
be expected to properly so designate and supervise, particularly since Policy 9 has not
even been a topic of discussion by the IDA?
If adding Policy 9 was the IDA'S response to making the playing field more balanced
between discount and non-discount firms, it will be interesting to see how many nondiscount firms apply to the IDA for the approval necessary to allow them the relief from
suitability. I understand there is no line up at the moment.