The Investment Dealers Association of Canada has left brokers confused and uninformed in the way it has handled two important recent industry policies.

The IDA’s Policy 8 has been highly publicized, but has not yet been approved by the Ontario Securities Commission. Policy 8 will require IDA members to report all complaints, settlements, arbitrations, internal discipline and the outcome of all these proceedings to the IDA. The industry, while shaking in its 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.

The IDA’s vice president, enforcement, recently spoke at a conference that included Policy 8 as a “recent change to the [IDA] bylaws 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 the OSC.

By contrast, Policy 9, which has been passed by the IDA and was approved by the OSC Sept. 6, 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 it has been drafted to extend to non-discount brokers who apply and receive approval from the IDA (Regulation 1300.1(e) and Policy 9B – minimum requirements for members offering both an advisory and an order execution-only service).

In the past, some IAs have had the presence of mind to indicate on the client’s monthly statement those orders that were “unsolicited.” Brokers should pay close attention – 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 1300.1(c) on suitability. If the broker remembers to go to the trouble of indicating that a trade is “non-recommended” then that trade may be exempt from suitability requirements. I emphasize the word “may” because labelling 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 client dispute, the onus is likely to 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), is completed indicating the trade as being “non-recommended.”

The implications of Policy 9 for branch managers are significant. While the IDA attempts to relieve the firms from 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:

• 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;

• examine patterns of trade designation for possible inaccuracies.

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 so designate and supervise properly, particularly as 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 non-discount firms apply to the IDA for the approval necessary to allow them the relief from suitability. I understand there is no lineup at the moment.

Ellen Bessner is a lawyer in Toronto with Gowlings Lafleur Henderson LLP practising in the area of broker liability.