New guidance for order execution only (OEO) services ( a.k.a. discount brokerages) calls on these firms to rebate the commissions they receive from certain mutual funds for advice. Discount brokerages are not permitted to offer advice under existing securities rules.
Published on Monday, the Investment Industry Regulatory Organization of Canada’s (IIROC) final Guidance on Order Execution Only Services and Activities aims to set out the sorts of products and services that discount brokers can provide to clients under the existing rules.
In the guidance, IIROC underlines that “funds that pay a trailing commission as compensation for ongoing investment advice … pose a conflict of interest for OEO firms since they are not permitted to offer advice.”
The self-regulatory organization expects discount brokerages to address this conflict by “making available funds that do not pay a commission for ongoing advice,” IIROC says.
In cases where certain funds are only available in versions that pay trailers for advice, IIROC expects firms to “mitigate the conflict by, for example, rebating the portion of the trailing commission that is related to advice.”
Law firms Siskinds LLP and Bates Barristers P.C. have filed a proposed class action against Toronto-based TD Asset Management Inc. (TDAM) regarding trailing commissions paid to discount brokers on TD mutual funds for advice.
The claims in that suit have yet to be tested in court, and the allegations have not been proven.
IIROC’s final guidance also aims to detail the self-regultory organization’s (SRO) expectations and regulatory requirements for discount brokerages general, given that these sorts of firms are not permitted to provide investment advice.
The question of what constitutes advice has become increasingly blurred as the type of information and tools that firms can offer to clients grows more sophisticated.
The guidance reviews the sorts of tools that IIROC considers “consistent with the OEO regulatory framework,” vs those that could constitute actually making recommendations.
“The resulting guidance enables OEO firms to offer value-added services and choices for investors, without compromising investor protection,” IIROC says.
Also Monday, the SRO announced it is launching an industry study, along with consulting firm Accenture, to examine possible regulatory barriers to innovation in the advice business, and to consider how regulation may have to evolve to accommodate future innovation.
In the meantime, IIROC aims to speed up regulatory approvals for firms that are shifting their business models.
The SRO is “enhancing its process for reviewing and approving changes in dealers’ business models, allowing for a faster, more-efficient process and ensuring existing rules are applied as flexibly as possible, while adhering to the underlying principles,” IIROC says in a news release.
“IIROC is committed to interpreting its current rules as flexibly as possible, or changing them if necessary, to accommodate new service offerings where appropriate, without compromising investor protection or choice,” says Wendy Rudd, senior vice president, member regulation and strategic initiatives, at IIROC, in a statement. “Our goal is to facilitate innovation and accommodate changes in business models to meet investor needs.”