Discount brokers’ trailers harm all investors, lawsuit alleges

Several major fund managers are facing a new class action threat, with a proposed lawsuit alleging that fund investors were harmed when their mutual funds paid trailing commissions to discount brokers that those brokers weren’t entitled to collect.

The fund divisions of the Big Six banks, along with Mackenzie Financial Corp., are all facing a proposed class action, first filed last August in the Ontario Superior Court of Justice by law firm Kalloghlian Myers LLP on behalf of investors who purchased funds through channels other than a discount broker.

None of the allegations have been proven, and the class action hasn’t been certified.

Previous lawsuits have alleged that investors who bought mutual funds through discount brokers were harmed when those funds paid trailers, in part for advice that the investors never received, given that discounters are prohibited from providing advice to their clients.

This new claim seeks to allege that other investors were also harmed by the payment of trailers to discounters, as these payments reduced the funds’ assets and the value of investors’ holdings.

“The defendants’ payment of management fees for trailing commissions to discount brokerages from the mutual fund assets improperly dissipated the mutual fund assets,” the lawsuit alleged, adding that, while the purported rationale for trailing commissions is to compensate dealers for service and advice, “The truth is that trailing commissions are a sales commission.”

“Trailing commissions incentivize dealers, including discount brokers, to offer for sale, or provide ‘shelf space’, for the mutual funds,” it said, adding this “is to the detriment of [investors], because the payment of trailing commissions from the mutual fund assets reduces the value of the mutual fund units and the [investors’] investment returns.”

The lawsuit alleged breach of trust, breach of fiduciary duty, unjust enrichment, and breach of contract.

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.