The Investment Dealers Association is publishing a revised policy establishing minimum standards for institutional account opening, operation and supervision, for comment.

In 1996, the IDA proposed minimum standards for institutional accounts, and it was published for comment in the Ontario Securities Commission Bulletin. No public comments were received, although the OSC did have some minor drafting comments at the time.

In the interim, the IDA reports, discount brokers began seeking relief from general suitability obligations. The IDA determined that until the issue of suitability was resolved in the retail business, further development of the policy should be delayed and then reconsidered in the context of changes to the suitability regime in Canada.

In 2003 the OSC published for comment a proposed policy that set out the standards for institutional accounts. One comment letter was received on the proposals in addition to comments from staff of the Canadian Securities Administrators.

In November 2004, at the request of the OSC, the IDA withdrew the proposed policy and informed the OSC that it intended to resubmit a revised version, which would address the comments received on the version published in 2003. This revised version now also reflects discussion with OSC staff on the issue of suitability for institutional accounts.

The IDA says the approach contained in the policy is flexible and will depend upon the nature of the firm, its procedures and its customers. The policy defines institutional account and enumerates factors, which will be considered in determining whether a firm’s suitability obligation owed to an institutional customer has been fulfilled.

The IDA explains, “The trade will be suitable if the member concludes that the customer is capable of making an independent investment decision and independently evaluating the investment risk for a particular transaction. If no reasonable grounds exist for making these conclusions then the member must take steps to ensure that the institutional customer fully understands the investment product, including the potential risks. The policy provides a list of factors to consider when deciding whether the customer is capable of independently evaluating investment risk and is exercising independent judgment.”

The revised policy also exempts trades from the suitability requirement when they are executed on the instructions of another IDA member, a portfolio manager, investment counsel, limited market dealer, bank, trust company or insurer.

This exemption parallels those found in various securities legislation, which do not require a suitability determination to be made by a dealer who executes a trade on the instructions of another dealer, investment counsel, portfolio manager or financial institution.