Proposed fund dealer class action fails again

A proposed class action against Royal Mutual Funds Inc. (RMFI) for alleged sales practices violations has once again failed in a British Columbia court.

The Court of Appeal for B.C. dismissed an appeal of the Supreme Court of B.C.’s refusal to certify a proposed class action against the firm stemming from its practice of paying its reps an extra 10 basis points for selling certain proprietary funds.

Last November, the B.C. Supreme Court dismissed an application for certification as a class action against the fund dealer, finding that most of the plaintiffs’ claims were bound to fail and that a class action would not be the “preferable procedure” for the claims that could have a chance in court.

That ruling was appealed, and the appeal court has upheld the initial decision.

“The appellants have not demonstrated any basis on which to interfere with the judge’s conclusions,” the written reasons stated.

On appeal, the plaintiffs argued the fund dealer owed an “ad hoc fiduciary duty” to its clients, and that it breached its “fair dealing” obligation to clients.

The appeal court dismissed those arguments once again.

On the question of whether the firm owed an “ad hoc” fiduciary duty to clients, the appeal court said, “The appellants seek to establish a duty that is based on RMFI’s alleged breach or capacity to commit such a breach, thus creating a conflict of interest, rather than on the basis of some vulnerability on the part of the appellants or the existence of a discretionary power over them.”

The court upheld the previous decision, denying that argument. It also dismissed the plaintiffs’ efforts to argue a novel claim for breaching a fair dealing obligation, noting that the claim rests on the argument that a regulatory violation on its own may be enough to justify a civil remedy — an argument that was previously rejected in the courts.

RMFI was sanctioned by the Ontario Securities Commission after self-reporting the compensation arrangement, which did violate sales practices rules. In a 2018 settlement, RMFI agreed to a $1.1-million penalty, $20,000 in costs and a reprimand.

However, the court found that this doesn’t necessarily create a civil cause of action.

“I again agree with each aspect of the judge’s analysis in concluding that the appellants’ novel claim for breach of an equitable obligation of fair dealing is bound to fail,” the appeal court said.

The court also dismissed appeals of the judge’s conclusions on damages, and whether the case was suitable for a class action.

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.