B.C. court dismisses closet indexing class action against TDAM

The Supreme Court of British Columbia has dismissed a proposed class action against TD Asset Management Inc. (TDAM) that alleged the firm overcharged investors by engaging in closet indexing in certain mutual funds.

In the case, which was certified as a class action in July 2020, the plaintiff alleged that as trustee and manager for certain actively managed funds — including the TD Canadian Equity Fund — TDAM overcharged investors when those funds promised active management but actually just tracked their respective indexes.

“The damage to [investors] resulting from this strategy and [TDAM’s] unjustified fees for purportedly active management has been substantial,” the plaintiff in the case alleged.

However, following a hearing, the court sided with the firm, ruling that TDAM did not use a closet indexing strategy in managing the TD Canadian Equity Fund.

The court concluded that the fund’s portfolio manager actively managed the fund with the goal of outperforming its benchmark.

“He did not intend to closely track or replicate the benchmark,” it said, noting that the portfolio manager’s remuneration was structured to incentivize outperforming the benchmark, and that the funds’ investment guidelines were not set to prevent it from beating its benchmark.

“In sum, TDAM, as a large institution, did not act, or have policies or procedures in place that would cause the [Canadian Equity Fund] to closely track or replicate the benchmark,” the court found.

Since the court concluded that the fund didn’t use a closet indexing strategy, it also found that it didn’t overcharge investors and didn’t breach its duties to investors, or mislead them in its disclosure.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.