From the Regulators

The SRO points out that the advice these firms are providing is helping to fill the “advice gap” some clients may be experiencing

By James Langton |

The Investment Industry Regulatory Organization of Canada (IIROC) proposed new guidance on Thursday that aims to enable certain firms billed as dealers that are restricted to offer order-execution only (OEO) services to provide services that stray into a limited form of advice.

Traditionally, these so-called discount brokers that provide OEO services have been exempt from the requirement to ensure suitability on the basis that they simply execute client orders and don't provide any form of advice.

However, in a notice outlining the proposals, IIROC indicates that these services have evolved dramatically in recent years, thanks to increasingly sophisticated technology. As a result, these firms may be straying into the business of providing recommendations to clients.

For example, IIROC is concerned that the tools discount brokers offer these days — such as asset-allocation tools and automated model portfolios — may be effectively serving as recommendations.

Indeed, the proposed guidance would establish that IIROC believes model portfolios "constitute a recommendation and therefore should not be made available by [OEO] firms."

That said, IIROC also proposes granting standardized exemptive relief to allow firms to "make available certain limited model portfolios," as defined in the guidance.

This relief would represent a change in traditional regulatory policy, IIROC indicates in its notice seeking comments on the idea. However, it suggests that these services are helping to fill the "advice gap" that some clients may be experiencing as traditional full-service firms raise their investment minimums.

In addition to the proposed relief, the new guidance aims to modernize IIROC's expectations for these firms, generally, and sets out the self-regulatory organization's views on the products, tools and account types that should be permitted.
"In response to rapid changes in technology and shifting investor needs, OEO firms are quickly evolving the range of tools, services and products they offer their clients," says Wendy Rudd, IIROC's senior vice president, member regulation and strategic initiatives, in a statement. "It is crucial that the rules and guidance are clear and appropriate to ensure that firms carry on only the activities they are registered to conduct."

IIROC's proposed new guidance was developed following extensive consultation, including the creation of an industry working group, a survey of OEO firms and independent research on investors who use these services.

"Given the continuing fast pace of change in the environment, we want to get input from a broad range of industry and investor stakeholders before finalizing this guidance," Rudd said.

Comments on the proposals are due Dec. 19.

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