New rules governing analyst conflicts in Canada “have teeth,” the head of the Investment Dealers Association of Canada said today.

In a speech to the Toronto Society of Financial Analysts, Joe Oliver, president and CEO of the IDA, said firms that have the capability to comply with proposed new rules, known as Policy 11, will do so first by including the guidelines in their internal policies.

“If they do not, our compliance reviews will require that they do. Then if they do not comply with their own requirements, they will be in violation of our rules and be subject to investigation and disciplinary review. As a practical matter, most firms are already complying with these guidelines.”

He noted the IDA’s new rules apply to both equity and debt securities, whereas U.S. rules only affect equities.

The IDA’s new rules are a mixture of disclosure and prohibitions. “We believe that mandatory disclosure is the most effective way to help investors assess the independence and objectivity of investment research. However, where a conflict cannot be appropriately managed, we have established clear prohibitions.”

In addition to the disclosure and prohibitions, Oliver noted that it does not intend to create yet another category of registration specifically for analysts, but it is creating a voluntary proficiency standard by stating that analysts should obtain the Chartered Financial Analyst designation or other appropriate qualifications. And, it will require firms’ senior management to certify compliance by all analysts with AIMR’s Code of Ethics annually.

Oliver compared Policy 11 with new rules being brought about in the U.S. following the US$1.4-billion settlement with some of Wall Street’s biggest firms over analyst conflicts. “Our approach also acknowledges the cross-border realities of securities regulation. Regulating in isolation from the U.S. market would be like having one set of rules at first base and another set at third.”

However, he stressed that the IDA response has been in the works for four years, whereas the U.S. rules come following a series of scandals. “When examining the U.S. approach, it is important to understand the different circumstances from which it arose: the collapse of the tech bubble, the now infamous e-mails from star research analysts that exposed appalling cynicism, greed and lack of concern for investors whom they were allegedly advising, the highly charged political environment that underpinned policy development and the settlements created under threat of indictment. In other words, the circumstances were unique, as was the combination of legislative, regulatory and prosecutorial input.”

Oliver also called on the regulators to look at the conduct of issuers. He stressed that the IDA’s rules cover the conduct of firms and analysts, but they can’t prevent issuers from pressuring analysts for favourable treatment. “This problem is the responsibility of the company board and falls under the jurisdiction of the securities commissions. Now that we are firming up our rules, it is surely time to look into those relationships also.”

He also said the IDA has decided to follow the National Association of Securities Dealers in requiring disclosure when a firm and their affiliates, but not their employees, beneficially own 1% or more of any class of the issuer’s common equity securities. The current proposed requirement is that firms must report “Pro Group” holdings of over 5%. This requirement derived from the Hagg Committee.

“We have concluded that this wide net may not be practical or indeed really necessary,” he said. “Adopting the NASD approach will promote harmonization between U.S. and Canadian rules. It will thereby permit US research to be available in Canada and Canadian research relating to Canadian firms to be distributed in the US, a result that will be positive for both Canadian investors and Canadian corporations.”