A new class-action lawsuit filed against Canada’s biggest banks alleges that mutual fund investors were harmed by improper payouts of trailing commissions to discount brokerages.Adrien Veczan/The Canadian Press
A group of investors who purchased mutual funds through advisers has launched a series of lawsuits against Canada’s Big Six banks, claiming advice fees the banks improperly paid to discount brokerages reduced the overall assets held in the investments.
Ontario-based law firm Kalloghlian Myers LLP has filed seven proposed class-action lawsuits against the asset-management divisions of Royal Bank of Canada RY-T, Bank of Montreal BMO-T, TD Canada Trust TD-T, Bank of Nova Scotia BNS-T, National Bank of Canada NA-T, Canadian Imperial Bank of Canada CM-T as well as independent fund company Mackenzie Financial Corp.
The proposed class actions claim the trailing commissions – also known as advice fees – should not have been paid out to the online trading platforms.
Investors also claim that these commissions were instead “improperly used as incentives” to encourage discount brokerages to sell the bank and Mackenzie mutual funds, “violating” the asset managers’ trust obligations to investors.
The lawsuit follows a series of class actions filed in 2018 by do-it-yourself investors who claim they paid millions in advice fees for advice they did not receive. Discount brokers are not legally allowed to give advice.
“Prior lawsuits have only sought damages on behalf of mutual fund unit holders who invested through discount brokerages,” said Garth Myers, a partner at Kalloghlian Myers. “By contrast, these class actions are on behalf of everyone else, including those who bought mutual funds through investment advisers.”
Trailing commissions are payments a mutual fund company gives annually to an investment dealer for selling its investment products. Trailing commissions are embedded in a fund’s management expense ratio and paid from assets under management within each mutual fund trust. They are intended to compensate financial advisers for providing continuing advice to investors.
“We allege that the improper payment of trailing commissions reduced the value of those assets, and a reduction in the mutual fund assets equally impacted the value of all mutual fund units, not just those bought through discount brokerages,” Mr. Myers said in an e-mail to The Globe.
Mr. Myers alleges the conduct over “many years” has hurt the retirement savings of “thousands of Canadians.”
On June 1, 2022, the Canadian Securities Administrators, an umbrella group for all provincial securities commissions, implemented a ban on all trailing commissions being paid out for DIY investing services.
The online brokerages were not required to pay back any commissions received.
However, Eric Kirzner, a finance professor at the Rotman School of Management in Toronto and a 45-year financial industry veteran, said in an affidavit that any improper payment of trailing commissions to discount brokers would have “an economic effect on the value of all units in the fund or particular series of the fund at issue.”
“The effect would not be limited to units held by investors that purchased through a discount channel,” he said in court documents. The only exception, said Mr. Kirzner, would be in relation to fee-based mutual funds.
The 2022 ban sparked several class-action lawsuits by do-it-yourself investors. Some class actions targeted Canada’s largest discount brokerages while others pointed the finger at the mutual fund arms of all six Canadian banks and independent asset manager Mackenzie Financial.
Earlier this year, Ontario Superior Court Justice Edward Belobaba dismissed an application to certify a class-action lawsuit that was filed against several online trading divisions. It is currently being appealed.
In his decision, Mr. Belobaba wrote that the evidence showed that while the practice of paying trailing commissions to discount brokers was controversial and needing reform, it was not illegal or unlawful until the law was changed effective June 1, 2022.