The Investment Dealers Association of Canada is revising insurance requirements for its members in certain circumstances.

The IDA’s board has approved an amendment dropping mandatory mail insurance coverage, effective April 1. The current rules require every member to keep in force mail insurance against loss arising out of the use of mail in the transmittal of money or securities on the basis of 100% coverage.

However, it notes that it has received a number of comments from members who questioned the wisdom of the mail coverage requirement. Many said they either do not handle securities at all or never use the mail to transmit securities.

The IDA says the amendment will enable the IDA to grant members an exemption from the mail insurance requirement if the firm delivers a written undertaking to the vice president of financial compliance that it will not use the mail “for out-going shipments of money or securities, negotiable or non-negotiable, by first-class mail, registered mail, registered air mail, express or air express.”

The IDA’s board has also approved an amendment to the calculation of insurance requirements, also effective April 1. The objective of the amendment is to change the basis of coverage from a flat requirement to a calculation based on 0.5% of client net equity for Types 1 and 2 introducing brokers.

When the new rules for introducing and carrying brokers were introduced in 1997, a flat rate insurance requirement was established for Types 1 and 2 introducing brokers. This requirement was instituted partly on the assumption that Types 1 and 2 introducing brokers would have relatively small client net equity. Since then, the client net equity of a number of introducing brokers has grown to a relatively large size where it was felt that the flat financial institution bond requirement was inadequate. While the risk of loss inherent in an introducing broker’s operation is lower than that for other brokers, the risk of fraud remains. Such loss would not be covered by the FIB of the carrying broker if caused by the introducer or its employees.

It was agreed that while the flat current requirement may be appropriate as a minimum, such a requirement should be supplanted with some percentage of client net equity. Since the risk associated with Types 1 and 2 introducing brokers was considered to be relatively lower, the amended insurance requirements are based on a calculation of 0.5% of client net equity versus 1% for other members.