Investor Alert:
CIRO is issuing a warning to Canadian investors regarding Canada Token Trade.
Effective Date: December 31, 2021
This Guidance on order execution only (OEO) account services offered by Dealer Members (OEO Dealers):
OEO Dealers should evaluate their existing and future tools against this Guidance to determine whether they are consistent with the OEO account regulatory framework. Whether or not a particular tool is appropriate under the OEO account regulatory framework depends on the relevant facts and circumstances of the particular case.
As such, this Guidance is not intended to be exhaustive. We encourage OEO Dealers to speak to us about any current or proposed tools if they have any questions.
Appendix A provides, as a reference, a summary of the key matters discussed in this Guidance.
The OEO account business model was designed to provide investors who are comfortable making their own investment decisions with a lower-cost option to the traditional full-service dealer model. OEO Dealers provide their clients with access to an online trading platform that allows them to trade securities, on their own, without the benefit of receiving any recommendations or suitability assessment from the OEO Dealer.
As the OEO account business model has evolved, OEO Dealers have made available a wide variety of new and innovative tools to help educate and inform clients. This Guidance covers:
OEO Dealers should evaluate their existing and future tools against this Guidance to determine whether they are consistent with the OEO account regulatory framework.
IIROC’s regulatory requirements, which set out the basic framework for the OEO account business model, are designed to ensure that an OEO Dealer’s clients make their own investment decisions, without receiving any recommendations or suitability assessment from the OEO Dealer. To this end, IIROC Rules prohibit OEO Dealers from providing any recommendations (Recommendation Prohibition).1 So long as an OEO Dealer does not provide any recommendations to clients, IIROC Rules exempt the OEO Dealer from the suitability requirements2 (OEO Account Suitability Exemption).3
In this Part, we provide our views on certain regulatory requirements applicable to the OEO account business model. Part 3 of this Guidance sets out our views on the meaning of the term “recommendation” for purposes of the Recommendation Prohibition.
The OEO Account Suitability Exemption exempts OEO Dealers from all suitability obligations (order and non-order related).4 OEO Dealers are not responsible for suitability arising from non-order related events such as transfers out or changes in life circumstances of a client.
IIROC expects Dealer Members to determine, prior to opening an account, whether:
Below are our views on the application of Account Appropriateness and Product/Account Type Appropriateness in the context of the OEO account model.
We believe there may be circumstances where it would not be appropriate for an investor to become a client of the OEO Dealer. OEO Dealers should be mindful of certain “red flags” which indicate that it would be inappropriate for the investor to engage in self-directed investing. These include circumstances where it is obvious that:
We are of the view that OEO Dealers need not conduct Product/Account Type Appropriateness for a potential client, as it is inconsistent with a suitability-exempt business model.7 Nevertheless, the scope of products an OEO Dealer chooses to make available on its platform for all clients generally must be in accordance with IIROC requirements and other applicable securities laws. For example, under securities laws, OEO Dealers are prohibited from making available certain products to any of their clients (e.g., binary options8 ) or may only make available certain products to qualifying clients (e.g., through private placements9 ).
OEO Dealers are also required to meet IIROC requirements and other applicable securities laws (including terms and conditions) when offering certain specific products or account types to a client(s). For example, IIROC requirements include specific obligations when offering contracts for difference,10 margin accounts and options, futures contract and futures contract options products.11
OEO Dealers are reminded of their regulatory obligations when they consider which products to make available on their platforms for clients generally. For example:
OEO Dealers must comply with all IIROC requirements other than those for which they are specifically exempted.13 Notwithstanding, we note that there may be circumstances where an OEO Dealer satisfies an IIROC requirement differently than a full-service dealer due to the nature of the OEO account regulatory framework.
For example, the know-your-client (KYC) obligation requires all Dealer Members to use due diligence to learn and remain informed of the essential facts concerning every client and for every order or account they accept.14 We interpret this requirement, in the context of the OEO account business model, to exclude OEO Dealers from having to collect KYC information that is relevant only to assist Dealer Members in meeting their suitability obligation.
In other words, since OEO Dealers are not required to assess suitability with respect to their clients, it is reasonable that OEO Dealers need not collect KYC information that is normally collected by Dealer Members solely for purposes of suitability. However, OEO Dealers are required to collect certain KYC information for purposes other than suitability (e.g., meeting their anti-money laundering obligations).
As discussed in Part 2, the Recommendation Prohibition prohibits an OEO Dealer from providing recommendations. So long as an OEO Dealer does not provide any recommendations, it:
In this Part 3, we provide our views on the meaning of the term “recommendation” for purposes of the Recommendation Prohibition. In addition, we have analyzed the more common tools currently offered by OEO Dealers and provided our views on the circumstances where such tools may constitute a recommendation.
We are of the view that, for purposes of the Recommendation Prohibition, the term “recommendation” means:
any communication or statement of opinion sent or made available to an investor (or class of investor) that could, based on the context or circumstances, reasonably be expected to influence that investor (or class of investor) to make an investment decision regarding a security (including any class of securities and the securities of a class of issuers) (collectively, securities).15
We set out below our interpretation of certain wording used in the meaning of the term “recommendation”:
When assessing whether a particular tool may constitute a recommendation, OEO Dealers should consider the following:
Tailored Information is information that is customized or personalized to an investor using KYC-type information regarding the investor. Examples of tools providing tailored information include:
Generally, we consider a tool that provides tailored information to be more likely to be a recommendation as it is more likely to be relied on by clients as relevant to them. However, there are circumstances where tailored information would not be considered a recommendation and would be appropriate under the OEO account model.17
General Information is information that is not tailored or personalized to an investor.
Tools providing general information to clients are less likely to be a recommendation. However, general information may be a recommendation if it could reasonably be expected to influence an investor to make an investment decision; for example:
Generally, a tool that is merely made available on an OEO Dealer’s website and can be “pulled” by a client is less likely to be a recommendation. In contrast, a tool (or information) that is “pushed”, or sent/directed, to a client is more likely to be considered a recommendation.
We believe that a tool that is pushed or pushes information to clients is more likely to be relied on by clients as relevant to them.
The relative importance of the “push vs. pull” consideration will depend on the tool and the facts and circumstances. In section 3.3 of this Guidance, we apply the “push vs. pull” consideration to various tools currently offered by OEO Dealers.18 As discussed, we consider certain tools to be recommendations regardless of the fact that they are merely available on an OEO Dealer’s website to be “pulled” by clients.19 Conversely, we consider other tools to not be recommendations so long as they are merely available on an OEO Dealer’s website and are not pushed to clients.20
Generally, where a tool merely provides historical or factual information, it would likely not be considered to be a recommendation. This includes information on the past performance of an issuer, security or market segment.
In contrast, providing a prediction on how an issuer, security or market segment, will/may likely perform in the future would generally be considered a recommendation because it would reasonably be expected to influence clients’ investment decisions. Accordingly, other than as discussed in this Guidance,21 OEO Dealers should ensure that their tools do not include any future and/or predictive information regarding an issuer, a security or market segment.
While disclaimers are helpful to remind clients that OEO Dealers do not provide recommendations, OEO Dealers cannot circumvent the Recommendation Prohibition by providing disclosure to clients claiming that a tool, which is otherwise a recommendation, does not constitute a recommendation.
To help OEO Dealers evaluate their existing and future tools, we set out below how we apply the Recommendation Prohibition to the more common tools currently offered by OEO Dealers.
We note that this Guidance could not possibly contemplate all existing and future tools offered by OEO Dealers. Whether a particular tool constitutes a recommendation will depend on an analysis of all the relevant facts and circumstances of the particular case and whether a reasonable person in similar circumstances would believe a recommendation has been made.
OEO Dealers occasionally use (and post on their websites) pricing incentives (e.g., offering “commission free” or “low commission” exchange traded fund (ETF) trades). While such incentives may provide a financial incentive or encouragement for an OEO account client to trade in a particular class of product, generally, and depending on the facts and circumstances, we do not view pricing incentives as being a recommendation.
While we generally do not consider pricing incentives as providing a recommendation, the particular facts and/or circumstances may lead to a different conclusion. For example, the following would more likely be considered to be a recommendation:
We believe each of the above pricing incentives could reasonably be expected to influence persons to make an investment decision and is therefore more likely to be a recommendation.
An OEO Dealer should ensure the fair visibility, availability and accessibility of all products and information it makes available.
It is inappropriate for an OEO Dealer to favour certain products (e.g., proprietary products) over other products (e.g., third-party products) by making it more difficult to execute trades or access information in the less favoured products. Examples of inappropriate practices include:
Not only would we consider such practices as not dealing with clients fairly, honestly and in good faith, but we believe they could reasonably be expected to influence clients to make an investment decision.
Depending on the applicable facts and circumstances, we view hyperlinks and portals offered by an OEO Dealer to a third-party website (collectively, Hyperlinks) as generally acceptable.
However, where the content of the Hyperlink provides a recommendation, OEO account clients may:
These concerns are magnified where the Hyperlink is to the website of an affiliate/related company of the OEO Dealer with a similar business name.
Consistent with GN-3600-20-002 - Review of Advertisements, Sales Literature and Correspondence (GN-3600-20-002),22 whether or not a Hyperlink (or third-party communication) would reasonably be considered to be the OEO Dealer’s communication will depend on the facts and circumstances of each case. As discussed in GN-3600-20-002, OEO Dealers should consider:
to help determine whether or not the third-party post reflects the views of the OEO Dealer.
OEO Dealers should note that using disclaimers will not necessarily relieve them of their responsibility for Hyperlinks or third-party communications. GN-3600-20-002 provides suggested best practices relating to third-party communications, including the development of policies and procedures to address the issues related to Hyperlinks.
OEO Dealers should not engage in social media activities that could be considered recommendations. For example, re-tweeting or sharing of a third-party post or providing a “thumbs-up” or “liking” the post may be considered an endorsement and potentially a recommendation.
Some OEO Dealers make chat rooms available for their clients to discuss investment-related topics. We do not view chat rooms for “clients only” as inappropriate. However, a recommendation may occur if an OEO Dealer representative participates in chat room discussions with the intention (or effect) to influence a person(s) to make an investment decision (e.g., by discussing the merits of a security or class of securities).
Please refer to subsection 3.3.3 on Hyperlinks and GN-3600-20-002 for guidance and suggested best practices on social media issues relating to third-party communications, including the development of applicable policies and procedures.
Some OEO Dealers offer tools that are integrated with third-party tools (Integrated Tools). For example, a third party may offer research reports23 that provide a “trade now” functionality linked to an OEO Dealer’s platform. With a single click of the “trade now” button on the third party’s website, the client is automatically directed to the OEO Dealer for trade execution where the trade details (e.g. security name, etc.) are automatically populated.
Depending on the applicable facts and circumstances, we view Integrated Tools as generally acceptable. However, as discussed in connection with Hyperlinks, OEO account clients may:
These concerns are magnified where the Integrated Tool is linked to the website of an affiliate/related company of the OEO Dealer with a similar business name. OEO Dealers should take steps to mitigate these risks.
Please refer to subsection 3.3.3 on Hyperlinks and GN-3600-20-002 for guidance and suggested best practices relating to third-party communications, including the- development of applicable policies and procedures.
We consider a “Trading Tool” to be a method or plan of trading in investment products that uses a predefined set of rules for making trading decisions. In other words, Trading Tools inform an investor of what trades to make.
The OEO Dealer may create the Trading Tool itself, or they may purchase or license it from a third party. Often, Trading Tools are delivered to, and used by, investors through computer programs (e.g., algorithmic trading programs) which either: (a) automatically trade on the investor’s behalf; or (b) provide the investor with suggested trades that they subsequently execute on their own.
As Trading Tools are intended to influence clients’ investment decisions, we view Trading Tools made available by OEO Dealers to their clients24 as recommendations and therefore a violation of the Recommendation Prohibition. As such, Trading Tools should not be made available by OEO Dealers.
Further, except for Automatic Rebalancing Tools,25 we note that making available a Trading Tool that automatically trades on a client’s behalf may be considered to be providing managed account services requiring registration as a portfolio manager with IIROC or a Canadian securities regulatory authority.
As discussed above, while a “Trading Tool” informs an investor of what trades should be made, we consider a “trade execution assistant tool” to be a method or plan on how or when to most effectively execute a trade(s) (Trade Execution Assistant Tool). For example, assuming a client wanted to make a large purchase of a single security, a Trade Execution Assistant Tool would inform the investor on how or when to effect the purchase(s).
Trade Execution Assistant Tools may be a recommendation depending on how they are offered.26 So long as the Trade Execution Assistant Tool is merely made available on an OEO Dealer’s website to be “pulled” by the client, without prompting or influence by the OEO Dealer, we would not consider it to be a recommendation.
For example, OEO Dealers may offer their clients the option of how to execute trades (e.g., Volume Weighted Average Price, Percentage of Volume or Time). So long as the choice is made by the client, on their own initiative, without any recommendation provided by the OEO Dealer regarding which of these options, if any, a client should choose, we would consider such options acceptable.
Further, OEO Dealers remain subject to best execution obligations and other regulatory requirements in effecting trades on behalf of their clients.27 An OEO Dealer using an automated “smart order router” to meet its best execution obligations for all OEO account client trades can be distinguished from a Trade Execution Assistant Tool in that a Trade Execution Assistant Tool is tailored to a specific client, or class of clients.
A common tool made available by many OEO Dealers permits clients to “pre-enter’ an order (i.e., on the client’s own initiative and without any recommendation from the OEO Dealer). For example, a client may wish to place an order for a security for a later date or when the security reaches a particular price (e.g., a limit order). This type of tool does not, in our view, constitute a recommendation.
Some OEO Dealers offer clients the ability to rebalance their account holdings to pre-determined levels.
For example, a client who holds four different securities in their account may wish to maintain a balanced account such that each security represents 25% of the total account. To facilitate, an OEO Dealer could:
Assuming the OEO Dealer did not influence the client’s determination of their desired pre-determined levels or rebalancing instructions (in other words, the OEO Dealer did not provide any recommendations) then, depending on the applicable facts and circumstances and subject to the discussion below, we do not view Rebalancing Tools as recommendations.
A Rebalancing Alert notifies the OEO account client that his/her account has moved outside their chosen pre- determined levels (without any recommendations from the OEO Dealer). Upon receiving an alert, the OEO account client may or may not choose to rebalance the account.
If an Automatic Rebalancing Tool was merely acting on an OEO account client’s instructions (provided when the client acted alone in selecting its pre-determined levels or rebalancing instructions) to execute rebalancing transactions, we would not consider this activity to influence a client’s investment decisions.
Notwithstanding our view that Rebalancing Tools are generally not recommendations, these tools raise certain risks and concerns that OEO Dealers should consider and address.
Many OEO Dealers allow clients to sort or filter the list of all securities the OEO Dealer has available for purchase and sale (Filtering Tools). These Filtering Tools allow clients to sort all available securities by criteria such as the name of the issuer, industry sector, trading volume or some other factual criteria relating to the security.
We do not consider Filtering Tools to be recommendations, so long as the client initiates (pulls) the sorting/filtering.
An OEO Dealer should not narrow the list of securities available to a client on its own initiative or suggest any product(s) based on client-related information (e.g., asking the client leading questions, data mining of previous purchases and/or sales30 or using any KYC-type information gathered about the client).
For example, consider a scenario where an OEO Dealer offers 20 securities of technology sector issuers on its platform. Where a client searches for all securities of technology sector issuers offered by the OEO Dealer, the firm’s Filtering Tool should list all 20 securities in response to the client’s query. If the OEO Dealer narrows the list to provide the client with less than 20 securities, then it would be providing a recommendation.
In the above example, the client could choose to narrow the list of 20 securities based on some additional factual criteria (e.g., trading volume), but the resulting list produced by the Filtering Tool should be reflective of the entire list of available products meeting the client’s query.
Some OEO Dealers make initial public offerings (New Issues) available to clients. New Issues that are merely made available on an OEO Dealer’s website to be pulled by a client, without prompting or influence by the OEO Dealer, are not generally considered to be recommendations.
However, OEO Dealers should not push any New Issues to clients, for example by providing information about a particular New Issue to a client based on tailored information (e.g., KYC-type information or transaction history). Further, an OEO Dealer should be mindful of not providing any explicit or implicit endorsement of any New Issues made available on its website.
Many OEO Dealers make a variety of tools available to their clients that are designed to inform and/or educate clients (collectively, Informative Tools). Informative Tools are undoubtedly helpful to clients; however, they may, depending on the facts and circumstances, be considered to be recommendations if they could reasonably be expected to influence a person’s investment decision.
In addition to the general considerations set out in section 3.2, below are our views on some of the more common Informative Tools currently made available by OEO Dealers.
However, depending on the context in which they are made available, certain limited Model Portfolio Tools may be acceptable, provided they:
We refer to such limited Model Portfolios as “Permitted Model Portfolios”.
We do not generally consider Permitted Model Portfolios as providing sufficient motivation to influence a client’s investment decision, due in part to investors’ increased familiarity with model portfolios.
We interpret “specific securities” broadly to include any security that may be purchased by an investor, including but not limited to any equity, debt or fixed-income product, mutual fund, ETF and/or PTF. Model Portfolio Tools should not refer to specific securities or issuers, as we consider any model portfolio that names specific securities or issuers to be significantly more likely to influence a client’s investment decision than a model portfolio that is limited to broader asset classes and/or industry sectors.
Additional guidance is provided below regarding each of the four acceptable bases for Permitted Model Portfolios.
OEO Dealers may couple their Permitted Model Portfolios with their Filtering Tools (see subsection 3.3.10) to allow clients to identify those specific securities that are consistent with a Permitted Model Portfolio. For example, where a Permitted Model Portfolio identifies a particular Asset Class or Industry Sector (such as “Manufacturing Sector”), the OEO Dealer may provide a link to its Filtering Tool to identify all Manufacturing Sector securities it offers.
We set out examples of certain Permitted Model Portfolios in Appendix B. We also include examples of model portfolios that we consider inappropriate for OEO Dealers to make available to clients (referred to as Non-Permitted Model Portfolios).
This Guidance is not intended to be exhaustive. OEO Dealers should evaluate their existing and future tools against this Guidance to determine whether they are consistent with the OEO account regulatory framework.
Whether or not a particular tool constitutes a recommendation will depend on an analysis of all the relevant facts and circumstances of the particular case.
We encourage OEO Dealers to speak to us about their current and proposed tools if they have any questions.
IIROC Rules this Guidance Note relates to:
This Guidance Note replaced IIROC Notice 18-0076 – Rules Notice – Guidance Note – Guidance on Order Execution Only Services and Activities (April 9, 2018).
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.
Appendix A – Guidance Summary
Appendix B – Examples of Permitted & Non-Permitted Model Portfolios
Guidance Reference |
Topic |
Summary |
Part 1 |
Background |
Provides background on the OEO account business model. |
Part 2 |
Regulatory Framework |
Describes IIROC’s regulatory requirements applicable to the OEO account business model. |
Part 3 |
Recommendations |
Describes what may or may not constitute a “recommendation” for purposes of the Recommendation Prohibition. |
Section 3.1 |
Meaning of “Recommendation” |
Provides that “recommendation” means: any communication or statement of opinion sent or made available to an investor (or class of investor) that could, based on the context or circumstances, reasonably be expected to influence that investor (or class of investor) to make an investment decision regarding a security (including any class of securities and the securities of a class of issuers). |
Section 3.2 |
General Application of “Recommendation” |
Provides general interpretive guidance for OEO Dealers to consider when assessing whether a particular tool may be a recommendation. |
Section 3.3 |
Specific Application of “Recommendation” |
Sets out our analysis of some of the more common tools currently being offered by OEO Dealers. Whether a particular tool constitutes a recommendation will depend on an analysis of all the relevant facts and circumstances of the particular case and whether a reasonable person in similar circumstances would believe a recommendation has been made. |
Subsection 3.3.1 |
Pricing Incentives |
Pricing incentives are generally acceptable, depending on the facts and circumstances. A pricing incentive would more likely be considered a recommendation where it:
|
Subsection 3.3.2 |
Fair Visibility, Availability and Accessibility |
OEO Dealers should ensure the fair visibility, availability and accessibility of all products and information they make available. |
Subsection 3.3.3 |
Hyperlinks & Portals |
Hyperlinks offered by an OEO Dealer to a third-party website are generally acceptable, depending on the facts and circumstances. Consistent with Notice 11-0349, OEO Dealers should consider:
to help determine whether or not the third-party post reflects the views of the OEO Dealer. |
Subsection 3.3.4 |
Social Media |
OEO Dealers may engage in social media activities, so long as they do not engage in activities that would be considered recommendations. |
Subsection 3.3.5 |
Integrated Tools |
Integrated Tools are generally acceptable, depending on the facts and circumstances. Consistent with Notice 11-0349, OEO Dealers should take steps to mitigate the risks that OEO account clients:
|
Subsection 3.3.6 |
Trading Tools |
Trading Tools constitute recommendations and accordingly violate the Recommendation Prohibition. Trading Tools should not be made available by OEO Dealers. |
Subsection 3.3.7 |
Trade Execution Assistant Tools |
Trade Execution Assistant Tools may be a recommendation depending on how they are offered. So long as the Trade Execution Assistant Tool is merely made available on an OEO Dealer’s website to be “pulled” by the client, without prompting or influence by the OEO Dealer, we would not consider it to be a recommendation. For example, OEO Dealers may offer their clients the option of how to execute trades (e.g., Volume Weighted Average Price, Percentage of Volume or Time). So long as the choice is made by the client, on their own initiative, without any recommendation provided by the OEO Dealer regarding which of these options, if any, a client should choose, we would consider such options acceptable. |
Subsection 3.3.8 |
Pre-entering of Orders |
Pre-entering of orders is acceptable, assuming that the order is pre-entered solely by the client, on their own initiative, without any recommendation being provided by the OEO Dealer. |
Subsection 3.3.9 |
Automatic Rebalancing Alerts & Tools |
Rebalancing Tools are generally acceptable provided that the OEO Dealer did not influence the client’s selection of their desired pre-determined levels / rebalancing instructions. OEO Dealers should be mindful of the risks and concerns raised by Rebalancing Tools. |
Subsection 3.3.10 |
Filtering Tools |
Filtering Tools that merely sort/filter all securities the OEO Dealer has available for purchase and sale are not considered to be recommendations, so long as the client initiates (pulls) the sorting/filtering. |
Subsection 3.3.11 |
New Issues |
New Issues that are merely made available on an OEO Dealer’s website to be pulled by a client, without prompting or influence by the OEO Dealer, are not generally considered to be recommendations. |
Subsection 3.3.12 |
Informative Tools |
Informative Tools are generally acceptable, depending on the facts and circumstances. However, they may be considered recommendations if they could reasonably be expected to influence a person’s investment decision. |
Clause (a) |
Educational Tools |
Educational Tools are generally acceptable, so long as their primary purpose is to educate, and not influence, clients. |
Clause (b) |
Research Reports |
Research Reports that are merely made available on an OEO Dealer’s website to be “pulled” by the client, without prompting or influence by the OEO Dealer, are not considered to be recommendations |
Clause (c) |
Multiple Fund Series |
We do not consider it to be a recommendation when an OEO Dealer provides factual information to a client of the availability of a lower-cost series of a fund the client holds or is in the process of acquiring (e.g., the availability of Series D, or the equivalent PTF, where the client holds or is in the process of acquiring Series A of that fund). |
Clause (d) |
Portfolio Analyzer Tools |
Portfolio Analyzer Tools are generally acceptable so long as they merely provide a breakdown of a client’s existing holdings. |
Clause (e) |
Model Portfolio Tools |
Permitted Model Portfolios that:
are not generally considered to be recommendations. |
In accordance with clause 3.3.12(e) of the Guidance, below are examples of Permitted Model Portfolios and Non- Permitted Model Portfolios.
A. Examples of Permitted Model Portfolios35
Model Portfolio A36 provides a suggested portfolio distribution based on Asset Class; Model Portfolio B provides a portfolio distribution by Industry Sector; and Model Portfolio C provides a combination of Asset Class and Industry Sector.
B. Examples of Non-Permitted Model Portfolios
We do not consider the model portfolios in Examples 1-3 to be acceptable because they each provide a distribution based on specific securities or issuers (i.e., Example 1 - Security A, B & C, Example 2 - Mutual Fund X and ABC ETF and Example 3 - GIC X & ABC Inc.).