Amendments by Investment Dealers Association by to its by-law governing introducing and carrying broker arrangements became effective September 1.

These amendments set limits for Type 1 and Type 2 introducing broker/carrying broker arrangements in order to provide adequate protection of clients of introducing brokers. They also encourage the use of efficient business relationships for Type 3 and Type 4 introducing broker/carrying broker arrangements.

Type 1 arrangements require just $75,000 in capital and $200,000 in insurance coverage from the introducers and rely most heavily on the carrying broker. the various other arrangements allow the introducing broker progressively more responsibility, while requiring $250,000 in capital and $500,000 in insurance.

The IDA says these amendments establish more appropriate boundaries and requirements for introducing broker/carrying broker arrangements and are part of the continuous response process to the changing needs of members of the IDA and other SROs.

The by-law establishes a category of SRO membership that allows small securities firms to operate effectively with decreased capital and insurance requirements. Because of these decreased requirements, introducing brokers are restricted in their activities and their arrangements with carrying brokers are subject to SRO approval and control. The principal issue dealt with in the recent amendments was multiple introducing/carrying arrangements.

The by-law previously allowed an introducing broker involved in Types 1, 2, 3 or 4 arrangements to fully service any part of its securities-related business. With the amendments, an introducing broker involved in a Type 1 or Type 2 arrangement may no longer fully service any part of its securities-related business.

In addition to this restriction, an introducing broker involved in a Type 1 arrangement may no longer conduct trade settlement and custody of securities activities, related to this arrangement, in-house. It must conduct these activities through the facilities of its carrying broker.

Also, an introducing broker involved in a Type 3 or Type 4 arrangement may now enter into more than one introducing broker/carrying broker arrangement, provided a business case can be made for having the additional arrangement.

The IDA also clarifies that Mutual Fund Dealers Association member firms are not permitted to enter into introducing broker/carrying broker arrangements with members of other SROs.

The IDA requires that both firms in such an arrangement be members of a SRO that is a participating institution in the Canadian Investor Protection Fund. Currently, the only SROs that are participating institutions in the CIPF are the IDA, the Toronto Stock Exchange, the Bourse de Montréal Inc. and the Canadian Venture Exchange.