Proposed trailer fee class action denied again

A proposed class action against several major discount brokers over the payment of mutual fund trailer fees has suffered another blow. An Ontario court again declined to certify the case as a class action, finding that there was nothing wrong with the firms collecting the fees before regulators outlawed the practice.

The Canadian Securities Administrators (CSA) banned the payment of trailer fees to discount brokers in June 2022 on the basis that the fees are paid, at least partly, for ongoing advice that discount firms can’t provide under the limitations of their registration.

A proposed class action against seven of those brokers — BMO Investorline Inc., CIBC Investor Services Inc., Credential Qtrade Securities Inc., Desjardins Securities Inc., HSBC Securities (Canada) Inc., Scotia Capital Inc. and TD Waterhouse Canada Inc. — alleged that they harmed investors when they collected trailer fees for advice they didn’t provide in the years prior to the CSA’s ban.

In January 2023, an Ontario judge dismissed a motion seeking to certify the case as a class action, finding that the plaintiffs couldn’t establish evidence that the firms violated securities laws by receiving the trailers before the CSA changed the rules and banned the practice.

On appeal, the proposed plaintiffs argued that the motion made several errors of law, including that the judge improperly demanded evidence of wrongdoing at the certification stage, and that the allegations against the firms don’t rely on whether the conduct was legal or not.

However, the Ontario Superior Court of Justice rejected those arguments and sided with the firms, dismissing the appeal.

In its decision on appeal, the court said “the motion judge was correct that, in order to perform his necessary screening function at the certification stage, it was necessary for him to examine the evidentiary record with a view to determining whether there was some basis in fact for the proposition that the receipt of trailing commissions by online brokers was contrary to applicable Canadian securities law.”

It found that the motion judge’s “weighing of the evidence on this issue is entitled to considerable deference from this court and is not being challenged by the plaintiffs.”

Similarly, the court found that the motion judge’s decision on whether it was illegal for the discount brokers to accept trailer fees was relevant to the plaintiffs’ other claims alleging that the brokers were negligent and knowingly took improper fees.

“The motion judge considered the evidence of the standards of conduct in securities industry rules and legislation that could possibly underpin a negligence action and found no basis in fact for their existence, as he was entitled to do,” the court said.

The appeal was dismissed and the court ordered costs of $50,000 to the defendants in the case.