The Investment Dealers Association and the Mutual Fund Dealers Association are putting an immediate end to joint service and omnibus arrangements between fund dealers and securities dealers.

The two regulators announced the decision in a notice reporting the results of a project they undertook together at the behest of the Ontario Securities Commission. The regulators say that these arrangements raise “significant investor protection concerns”, and they say that dealers should immediately stop entering into new joint service and omnibus arrangements, and should immediately stop accepting new clients under existing arrangements.

The investor protection concerns were expected to be outlined in detail in a report to be released later Friday by the OSC.

Joint service arrangements between IDA and MFDA members allow salespersons of either organization to service and trade in client accounts of the other member. There are several variations of omnibus arrangements, but they generally involve deals in which MFDA firms have entered into arrangements with IDA firms to transact in and hold prohibited securities for the MFDA members’ clients. When a client wants to transact in prohibited securities, the client is referred to the IDA member, who is only responsible for the execution of the trade. However, proceeds from a sale or securities from a purchase are received into an omnibus account at the IDA member in the name of the MFDA member.

The notice says that the regulators expect the industry to abide by these requirements immediately. However, they will give dealers until July 31 to become fully compliant. However, they will not yet require members to unwind existing arrangements. They considered this option, but decided, “that dismantling these arrangements will have an impact on clients and the industry”.

Instead, the OSC will also be publishing and sending an issues paper to IDA and MFDA members inviting them to participate in a consultation process for the purpose of finding the most appropriate course of action. But if they are unable to resolve these concerns through consultation with the industry, the regulators will require them to unwind these arrangements by Dec. 31. In the interim, the SROs must be advised of any change or modification to such arrangements to ensure compliance with this directive.

The SROs will also be assembling a working group of SRO staff and dealers to consider the possibility of allowing MFDA/IDA introducer and carrier arrangements.

They note that this may address some of the regulatory concerns with existing arrangements. This structure is contingent upon the MFDA joining the Canadian Investor Protection Fund and receiving approval of the provincial regulatory authorities. The regulators also point out that members should note that an MFDA/IDA introducer/carrier model “will not address all regulatory concerns with existing arrangements. Further, the introducer/carrier model may not permit the consolidation of accounts of two different dealers that hold both prohibited securities and mutual funds.”