Court rules class-action lawsuit can proceed against CIBC and Mackenzie over mutual-fund commissions

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An Ontario judge has given the go-ahead for two separate class-action lawsuits to proceed against CIBC and Mackenzie Financial Corp., alleging that fund managers improperly overcharged investors millions of dollars in fees for a service they did not receive.

Last week, Ontario Superior Court Justice Jasmine Akbarali certified two lawsuits against Canadian Imperial Bank of Commerce CM-T and CIBC Trust Corp., as well as Mackenzie Financial Corp. and Mackenzie Financial Capital Corp. The two cases involve trailing commissions that were paid to discount brokerages out of the assets of CIBC and Mackenzie mutual funds.

Trailing commissions are embedded fees found in mutual funds that are typically used to compensate an individual for advice and services provided to an investor. But do-it-yourself investors – who purchase and sell investments on their own through a trading platform known as a discount brokerage – do not typically work with advisers and, therefore, do not receive advice.

The latest rulings are the fifth and sixth class-action lawsuits to be certified out of a series of seven cases that have been filed on behalf of investors. Since 2020, four other proposed class-action lawsuits have been green-lit by Ontario courts to proceed, involving TD Asset Management Inc., BMO Investments Inc., National Bank Investments (including Natcan Trust Company) and Bank of Nova Scotia’s 1832 Asset Management LP.

Legal experts have calculated that the fees paid by do-it-yourself investors totalled about $5-billion in overcharged commissions since 1993.

A class-action certification is not a determination of the merits of a case. Rather, it examines whether – among other things – the claim raises common issues, and whether there is a plaintiff that represents a larger group of individuals. In addition, it examines if a class proceeding is the best course of action to take. Once certified, the case then moves ahead to a trial.

Spokespeople for CIBC and Mackenzie both declined to comment, saying the matter is before the courts.

According to court filings, Stephen Pozgaj, the representative plaintiff in both cases, alleges that the trailing commissions are “improper, unreasonable and unjustified,” and were paid by CIBC and Mackenzie “in breach of their duties” to the investors who held their mutual funds.

In original certification filings for all seven cases, which were launched by Toronto-based Siskinds LLP, investors allege that these commissions were “improperly used as incentives” to encourage discount brokerages to sell the bank and Mackenzie mutual funds, “violating” the asset managers’ trust obligations to investors.

In the CIBC and Mackenzie rulings, Justice Akbarali said the decisions took into account an analysis already undertaken by two other Ontario Superior Court justices who oversaw contested certification motions by both TD and BMO.

In the BMO ruling, Ontario Superior Court Justice Benjamin Glustein said BMO Investments entered into a management agreement with itself as a manager and, therefore, was responsible for day-to-day administration of the BMO Mutual Funds, including supervisory, administrative and investment advisory services.

Justice Glustein wrote that BMO Investments paid a portion of the management fees it received to discount brokers, known as trailing commissions, for “shelf space” to list the BMO mutual funds on their trading platforms. He concluded in his certification ruling that such a payment was “not permitted by the applicable trust instruments or management agreements” and, therefore, resulted in significant losses to investors.

There is only one outstanding proposed class-action lawsuit – against the investment arm of Royal Bank of Canada RY-T – in which the courts have yet to make a certification ruling.

In 2020, the practice of paying advice fees to discount brokerages was banned by regulators after years of industry consultation. The ban had a two-year implementation period and came into effect in 2022.

In the past few years, a series of class-action lawsuits were filed by groups of do-it-yourself investors. In addition to the seven cases filed against investment-fund managers, a separate proposed class-action case was filed in 2018 against several discount brokerages, alleging that the trading platforms had improperly collected about $5-billion in trailer fees.

However, in January, 2023, an Ontario judge declined to certify that case, stating that the trading platforms had not contravened any applicable securities law prior to the 2022 regulatory ban.

Last week, an appeal filed by investors was dismissed by the Ontario Superior Court of Justice, which also ruled that the discount brokerages were entitled to be paid $50,000 for costs of the appeal.