Discount brokers no longer need to check suitability of trades
KEITH McARTHUR
The Globe and Mail
Tuesday, April 11, 2000
Canada's securities regulators said yesterday that discount brokerages meeting minimum requirements will no longer have to verify that each trade matches a client's needs and objectives.
Eliminating the "suitability" rule could soon mean cheaper, faster trades for investors, but some observers warn that it could also leave them without protection.
"Speeding up the process will be a good thing for the sophisticated investor. My concern is that the unsophisticated investor will lose any semblance of security that he might have today," said Stan Buell, president of the Small Investors Protection Agency.
Brokerages began lobbying for changes to the suitability rule as early as 1983, when provincial regulators first eliminated fixed commissions for trades, paving the way for today's discount brokerages.
But the rise of Internet investing, coupled with one of the greatest bull markets in history, has led to a flood of do-it-yourself investors who don't want to pay extra for a brokerage's research and advice.
Discount brokerages have been largely unable to keep up with the increased demand, and have blamed the suitability rule for their failure to execute trades in a timely manner.
Canada's 13 provincial and territorial securities commissions yesterday announced they will exempt brokerages from the rule as long as they only provide trade execution services.
"As the retail buy side [started] to gain importance, it became clearer to us that not only did [investors] not need the protection of the suitability rule, they didn't want the protection of the suitability rule," said David Brown, chairman of the Ontario Securities Commission.
Brokerages can immediately apply to regulators to be exempt from the regulation. They will need to show that they do not provide clients with research or investment advice and do not compensate dealers based on the value of trades.
In situations where a parent company owns both a discount brokerage and a full-service brokerage, the exempt company must be a separate legal entity or business unit with separate letterhead, accounts and representatives.
Discount brokerages roundly applauded the announcement yesterday, saying it will mean faster, and maybe even cheaper, trades.
"This is a terrific thing not only for the industry but also for self-directed investors," said John See, president of discount brokerage TD Waterhouse.
Mr. Brown said that while the rule change is regulatory in nature, it could also have legal implications.
"The courts have said that a broker who has a suitability obligation may also have a fiduciary obligation to the customer to be able to demonstrate, in cases of controversy, that the broker has indeed put the customer's interest first. Absent the suitability rule, it may well be that that fiduciary responsibility will fall away as well."
He noted that before dealers are exempt from the requirement, they will need to get signed forms from clients acknowledging that the brokerage will no longer evaluate the suitability of an investment.
But investor rights advocate Glorianne Stromberg worries that some clients may not understand that their broker no longer has fiduciary responsibility over their portfolios.
"While we've got to deal with the problems that occur because of [an unanticipated increase in trade volumes], you still have to not lose sight of the fundamentals of making sure the dealers' capital is not at risk and making sure that the investments are consistent with the risk profile of the client," said Ms. Stromberg, a former commissioner at the Ontario Securities Commission.
The suitability rule will still apply at brokerages that advise clients on their investments. The rule requires a dealer to review each trade to ensure that it fits the customer's needs and objectives. |
