The Investment Dealers Association of Canada has released sales and financial compliance reports for 2003, highlighting the problems these divisions encountered during the year.

On the financial side, it reports that, to the end of November 2003, there were 100 instances of firms in early warning (down from 127 in 2002) caused by 24 members (down from 35); and 19 capital deficiencies (down from 33) caused by 13 members (down from 20).

The primary reasons for the capital deficiencies were: failure to perform monthly reconciliations; insufficient level of capitalization; and, inaccurate accounting estimates. Of the firms that became capital deficient, one was suspended and one was terminated. There was no loss to the public. All other deficiencies were rectified immediately, the IDA reports.

In the cases where actual results differed from the estimates and a capital deficiency occurred, the deficiency was immediately rectified with additional capital. And, reconciliation-related deficiencies were corrected immediately.

On the sales compliance side, the IDA says that many members had to draft or revise policies and procedures to comply with regulatory initiatives or changes passed in 2003. The most important of these were the by-law on principal/agent relationships and the policy dealing with research analyst standards.

Frequent findings in sales compliance reviews included: inadequate documentation of internal compliance activity and findings; tracking of clients who are insiders or in control positions; and, verification of identity under the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations. It notes that some members do not have adequate procedures to ensure that the identity of all new clients is verified within six months of account opening, as required under the regulations.

Also, in 2003, the sales compliance division developed a special review program for debt market trading and used it to review the debt market practices of five firms. The reviews followed up on a 2002 survey of debt market participants commissioned by the CSA and IDA, which noted a number of concerns about debt market integrity. A summary report of the review findings will be published early in 2004.

The basic findings and recommendations were: a tendency by compliance departments to pay less attention to debt market activity because the market is largely institutional and self-policing; that the code of conduct for domestic debt trading provides insufficient operational guidance; and, although there was no evidence of retail investors being overcharged, the report recommended continuing promotion of efforts to increase market transparency.

Additionally, the IDA and Mutual Fund Dealers Association undertook a joint review of referral and operational relationships between IDA members and their MFDA affiliates. The review identified several models and the risks inherent in each, including: the temptation for mutual fund dealers to overstep the bounds of their registration by advising on trades in securities; the risk of the development of introducing/carrying arrangements contrary to IDA regulations; and the risk of client confusion re dealer responsibility and insurance coverage.

A report of the results has been forwarded to the Canadian Securities Administrators to serve as the basis for ongoing policy discussions.