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Toronto-Dominion Bank has taken unusual steps to discourage some clients from investing in the marijuana sector.

The bank is limiting the ways in which its advisers discuss the industry with clients, banning staff from recommending almost all marijuana firms and exchange-traded funds (ETFs), according to a recent internal e-mail viewed by The Globe and Mail. TD is also prohibiting portfolio managers from proactively adding most cannabis shares to certain client investment accounts – unless clients specifically instruct their adviser to do so.

As a result, the bank’s investment advisory channel – TD Wealth Private Investment Advice (PIA) – has put dozens of pot stocks and the four Canadian-listed cannabis ETFs onto its non-approved list of securities, leaving advisers with only three Canadian marijuana stocks to suggest. As of Friday, TD advisers were approved to recommend the country’s largest publicly traded producer of the drug, Canopy Growth Corp., and two smaller, lesser-known growers called Emerald Health Therapeutics Inc. and Emblem Corp.

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Investors who use the bank’s online discount brokerage – TD Direct Investing – can buy and sell pot stocks without issue, as those trades are self-directed.

The restrictions put on advisers who work at PIA appear to be driven out of concern of the legal risks the bank could face in the United States, where cannabis is legal in some states but illegal under federal law.

“This is an evolving issue with legal ramifications in the U.S. Therefore, we are restricting our advisers from counselling clients to acquire shares in certain cannabis-organizations with operations in the U.S.,” TD spokeswoman Emily Vear said in an e-mail.

“The cannabis industry is complex and evolving rapidly,” TD spokesman Paolo Pasquini added in a separate e-mail. “As a result, TD has policies in place to manage the advice we provide to clients about investing in companies in this sector. We expect our views will evolve and develop with the industry.”

The TD policy includes stocks of companies with no U.S. operations; it isn’t clear why those companies are included. TD expects its list of approved pot stocks to increase.

As with with any emerging sector, investments in legal marijuana businesses are risky. Most of the companies are startups and have booked little to no revenue. Yet, many investors are upbeat about their prospects, pouring millions into the sector despite the many unknowns – all in the hopes of cashing in on the green rush as countries around the world legalize and regulate cannabis.

Still, no other big Canadian bank or major independent wealth manager has slapped restrictions on how their financial advisers handle weed stocks, eight firms told The Globe last week.

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As TD takes a hard stance with its advisers, other parts of the bank are pushing into the cannabis space.

TD is providing chequing and savings accounts to marijuana companies, including at least one whose stock is on TD’s non-approved list. The bank is also one of the most-active stock brokers in the cannabis sector, earning fees on each client order it executes. This winter, heavy trading in pot stocks was even blamed for multiday outages at TD’s online discount brokerage. And its investment banking arm is in the process of plotting its entrance into the sector, courting at least one grower also on TD’s non-approved list.

In the internal e-mail sent to TD advisers at the end of March, TD warned that cannabis companies “with U.S. touchpoints could create significant legal risks to PIA due to the application of U.S. federal laws.” Last week, it wouldn’t explain what those risks are.

TMX Group Ltd., the largest operator of stock markets in Canada, also wrestled with the U.S. legal issue last year. In October, it clarified its policy to restrict any cannabis company violating U.S. federal law from listing on the Toronto Stock Exchange and TSX Venture Exchange. The markets conducted a review of their issuers, forcing those breaching the policy to offload their U.S. assets to keep their listing.

TMX has more than two dozen pot stocks listed on the TSX and TSXV, including Aurora Cannabis Inc. and MedReleaf Corp.

Provincial securities regulators also require all marijuana-related issuers to disclose more about where they do business, noting whether they have exposure to the United States In filings, 10 TMX issuers on TD’s non-approved list that were reviewed by The Globe said they have no ties in the U.S. cannabis market today and have no intention to do so in the future as long as the drug remains federally illegal.

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On Friday, a handful of cannabis executives weren’t aware that their stocks were placed on a non-approved list at TD. As with Canopy, Emblem and Emerald, their companies don’t conduct business in the United States, they told The Globe.

The number of TD advisers actively investing in the marijuana sector for clients isn’t known. But TD Securities Inc. is a large broker in the space. For example, since the Horizons Marijuana Life Sciences Index ETF launched last year, TD has been the most-active broker in the ETF, according to trading data compiled by Bloomberg.

“I really hope that TD wakes up and smells the coffee and changes their mind,” said Steve Hawkins, president and co-CEO of Horizons ETFs Management (Canada) Inc.

“TD, for whatever reason, from my perspective, has taken some very bad advice and [is] moving forward in a direction that is wrong for the Canadian adviser industry. It really blows my mind.”

TD Wealth PIA has more than 740 investment advisers, of which 200 are discretionary portfolio managers, meaning their clients defer individual investment decisions to them.

If a client of PIA tells their adviser to buy shares of a marijuana company or ETF, the adviser is able to do so after notifying the client of the U.S. legal risks that could be involved, including the chance that the business could be shut down if U.S. federal law was enforced, sources say. The TD adviser also internally tags the transaction as being client-initiated.

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But if a client says they’re interested in the marijuana sector as a possible investment, a TD adviser can only recommend that clients buy shares of Canopy, Emerald and Emblem, as of Friday.

On the other hand, Canaccord Genuity Wealth Management hasn’t put any restrictions on its advisors, allowing them to buy and sell stocks of any legal cannabis operator for clients as they see fit. Canaccord is a major investment bank in the space, helping many marijuana firms on both sides of the border go public and raise money.

“To restrict an investment adviser on what they can and cannot do has the potential of limiting someone reaching their short- or long-term investment goals,” said Stuart Raftus, president at Canaccord Genuity Wealth Management in Canada.

“It’s usually left up to the investment adviser, with compliance, to determine the suitability of investments for those particular clients. To wipe out an entire industry, that’s just not something we’ve considered.”

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