The Investment Dealers Association is reminding member firms of the requirement to have written custody agreements for all external custody arrangements with third parties.

In particular, the reminder notice explains the application of the custody rules as they relate to certificated or non-certificated securities commonly referred to as GICs, term deposits and other forms of deposit investment contracts issued by financial institutions that are not negotiable and/or transferable.

IDA regulations specifically require custody agreements for securities held by third parties on behalf of member firms. This includes physical and book-based equity, mutual funds and debt instruments such as treasury bills, banker acceptances, government and corporate bonds, etc. The notice is intended to specifically clarify the application of the custody rules as they relate to these sorts of investment contracts.

Notably, the SROs have taken the position that “evidence of deposits” referred to as GICs, term deposits and other forms of deposit investment contracts with financial institutions with maturities greater than one day must be treated as a security for which the rules of segregation and custody apply. Reviews conducted by the IDA of member firms reporting customer positions in such investments show that there is no standard description or form of documentation for these securities, and much of the relevant legislation does not prescribe any specific requirements.