CIRO proposes new guidance for DIY investing

Online discount brokers will be able to push more information to do-it-yourself investors, and provide them with a broader array of tools to facilitate their investing decisions, under new guidance being proposed by the Canadian Investment Regulatory Organization (CIRO). The self-regulatory organization (SRO) seeks to draw a clearer boundary between full-service firms and so-called order execution only dealers (OEO dealers).

The new guidance, which is out for public comment until Nov. 10, aims to address the demand from industry firms that are keen to expand the communications that they can have with investors, without going offside of the long-standing prohibition on discount brokers providing investors with advice. It also addresses the growing concerns that regulators have about investors’ increasing reliance on unregulated sources of investment information, such as finfluencers and social media generally.

“Our objective … is to provide flexibility that allows OEO dealers to better service clients’ needs in this channel without compromising investor protection … while remaining consistent with the [dealer] rules, which prohibit recommendations in OEO accounts,” CIRO said in a notice detailing its proposals.

To that end, the SRO is seeking to tighten its guidance around the prohibition on the provision of advice by discount brokers.

Under the current guidance, discount brokers are prohibited from providing investors with communications that could “reasonably be expected to influence” investors’ specific investing decisions — an approach that has made dealers cautious about providing information to investors that could be construed as driving their investing decisions, and putting firms offside with regulators.

Yet, at the same time, the online availability of investing material has grown exponentially in recent years, exposing investors to a vast, unregulated trove of information — and misinformation — that may well be influencing investors’ decisions.

In response, CIRO is now proposing to tighten its guidance to allow OEO dealers to provide a broader array of communications — including alerts, notifications, tools and sample portfolios — without straying over the line into providing specific advice.

“The new guidance clarifies that OEO dealers are allowed to provide informative resources and decision-making supports to clients as long as they do not endorse a specific investment decision and are provided with adequate safeguards,” the SRO explains in its consultation.

Under the proposed new guidance, discount brokers would be allowed to, “send targeted, proactive communications to clients as long as they are purely educational and do not endorse any specific investment decisions.”

The regulators hope that by expanding the ability of OEO dealers to communicate with investors, this will “help reduce investors’ reliance on social media or other non-regulated sources, fostering more confident and informed investment decisions.”

No free-for-all

At the same time, the regulators aim to maintain the prohibition on discount brokers straying into the provision of advice, which means that it also won’t be a free-for-all in terms of what firms are allowed to send to investors — dealers will still have to be wary of overstepping that line.

For instance, the proposed guidance indicates that the provision of multiple pieces of information that, taken together, amount to pushing a specific investment decision would still be prohibited.

Additionally, under the proposed guidance, firms would not be allowed to select specific investment products for sample portfolios that are provided to clients, again for fear that this could stray into driving an investment decision.

“OEO dealers cannot avoid the revised recommendation prohibition by simply stating that a sample portfolio is not tailored to a specific client if, in every other regard, it meets the test of a recommendation,” the proposals said.

“Ultimately, the proposed guidance seeks to strike an appropriate balance between empowering investors to make informed decisions for themselves, promoting healthy capital markets by addressing the types of decision-making supports that OEO dealers can opt to offer to their clients and maintaining adequate investor protection,” the SRO said.

“Relying on unverified sources of information could put investors at significant risk of financial harm,” said Alexandra Williams, senior vice-president, strategy, innovation and stakeholder protection at CIRO, in a release.

“Giving investors greater access to high-quality, trustworthy and timely information from OEO dealers will not only help them make informed, confident investment decisions, but could also reduce their reliance on unregulated sources that may be providing incomplete, biased or misleading advice,” she added.