The Investment Dealers Association is proposing to limit the application of suitability to trades involving advice.

Currently, all proposed trades, whether recommended or not, must be reviewed for suitability. The IDA submits that the requirement to make a suitability determination is appropriate where recommendations are made by the dealer as to the appropriateness of a particular trade for their client.

Where the dealer provides only order execution services, without any recommendations to the client, the suitability requirement should be waived.

The IDA is proposing rules that make it a dealer’s obligation to make a suitability determination only to securities that have been recommended by the dealer. It says, “The proposed rules will have a significant impact on the nature of competition in the industry, the current market structure and the costs of compliance of many member firms.”

The IDA argues that the relief from suitability will not have a significant negative impact on the market. Rather, it will help the Canadian market and firms by increasing their competitive ability against U.S. dealers. Dealers in the U.S. are not required to complete a suitability review where no recommendations are given. It also levels the field between full-service firms and discount brokers.

The IDA says that the Canadian Securities Administrators requested a final proposal on relief from suitability requirements on a trade-by-trade basis. That final proposal includes the draft regulations now proposed. “The CSA, after their review of these draft rules and supporting material, have generally indicated their support for suitability relief as outlined by the association.”

The proposed rules set out that a suitability review is generally required when a dealer accepts any order from a client and is recommending a particular transaction to a client.

However, when a firm provides no recommendation to a client, it is not required to undertake a suitability determination, provided that the firm has received approval from the IDA.

Approval is based upon the member firm satisfying the policies and procedures outlined in the IDA’s proposed Policy No. 9, which sets assorted operational and disclosure requirements for firms seeking relief.

To ensure that member firms are in compliance with the requirements for relief from suitability, the IDA will implement a sales compliance review program specifically for these firms that have been granted approval. This review will be conducted 12 to 18 months following implementation.

These proposed amendments will be filed for approval in Alberta, British Columbia, Ontario and Saskatchewan and will be filed for information in Nova Scotia.

The IDA is required to publish for comment the regulations and policy so that they may be considered by staff of the Ontario Securities Commission staff. Comments should be made in writing within 30 days.