Court asks for evidence of closet indexing

The Supreme Court of British Columbia is asking plaintiffs in a proposed investor class action against CIBC for alleged closet indexing in certain mutual funds to provide evidence that the funds actually pursued a closet indexing strategy before ruling on whether the case can proceed.

The court denied a motion to certify a proposed lawsuit against CIBC, CIBC Trust Corp. and CIBC Asset Management Inc. as a class action, citing the need for more information from the plaintiffs in the case.

The proposed class action is one of several cases against bank-owned fund managers alleging that mutual fund investors were overcharged when they bought funds that promised active management but actually closely tracked the S&P/TSX Composite index.

“The plaintiff says that the investment strategy harmed him and other investors in various ways, including through the payment of excess management fees,” the court noted in its ruling.

The same judge (Justice Gordon Funt) already certified proposed class actions alleging closet indexing against RBC Global Asset Management Inc. and TD Asset Management Inc. The allegations have not been proven in those cases (in July, the court dismissed the case against TDAM).

In August, the judge deferred a decision on certification in a proposed class action against HSBC Global Asset Management (Canada) Ltd., asking the plaintiff for more information to establish whether there was actually a basis for the lawsuit.

Now, it has taken the same stance in the proposed case against CIBC, saying that “the court will require further information before it will make a final determination as to whether this action should be certified as a class proceeding.”

Specifically, it seeks some evidence to establish that the funds in question did in fact use a closet indexing strategy.

“Such evidence need not be conclusive or satisfy the civil standard of a balance of probabilities, and the particular level of evidence that will be sufficient is highly fact‑specific,” the court said in its decision.

The court ruled that the proposed plaintiffs in the case can submit further evidence “to show some basis in fact that a common issue actually exists with respect to closet indexing.”

Once that evidence is provided, it will make a decision on whether to certify the case as a class action or not.

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.