Law concept - Law book with a wooden judges gavel on table in a courtroom or law enforcement office

In a split decision, an Ontario court has rejected a proposed class action alleging that investment advisors violated a fiduciary duty to investors. The judges disagreed on the question of whether the industry’s standards can establish a fiduciary relationship.

In January 2021, a judge refused to certify a proposed investor class action against former fund dealer International Capital Management Inc. (ICM) and two of its reps on the basis that the plaintiff failed to establish that the relationship between investors and their advisors was a fiduciary one.

That conclusion was been upheld on appeal — albeit in a split decision.

The proposed class action stemmed from the sale of promissory notes by mutual fund reps John Sanchez and Javier Sanchez through ICM. The plaintiff in the case alleged that the reps didn’t fully disclose their relationship with the notes’ issuer or their sales commissions.

The suit was launched in the wake of disciplinary action brought against the Sanchez brothers by the Mutual Fund Dealers Association of Canada (MFDA), which resulted in a 2018 settlement that saw them fined and banned from the industry after admitting they failed to act in their clients’ best interests.

However, the court initially rejected the proposed class action, finding that the plaintiff failed to establish that the investors and their advisors were in a fiduciary relationship.

On appeal, the proposed class action has again been rejected in a split decision from the Ontario Superior Court of Justice’s Divisional Court.

The majority found that the certification judge was correct in rejecting the existence of an alleged fiduciary duty between the affected investors and the defendants.

However, in dissent, one judge said that the court erred in failing to consider that the defendants were subject to professional standards — including the MFDA’s rules and the FP Canada Standards Council’s code of ethics — that “mirror fiduciary duties.”

“The plaintiff’s claim is not just based on the allegation that John Sanchez gave her investment advice, but that he did so when he was subject to professional rules that required him to act in a way that a fiduciary must act, which in turn led to reasonable expectations on her part,” the dissenting opinion said.

The certification judge erred, the dissenting judge said, by failing to consider the role that professional standards play in determining whether a fiduciary relationship exists.

“In a professional advisory relationship, such as that of a financial advisor, the client may have the reasonable expectation that their advisor will put the client’s interests above their own and will not profit from the relationship except to receive the expected level of remuneration for a financial advisor,” the dissent said.

The dissent concluded that the appeal should be allowed and the original decision set aside.

Yet the majority disagreed, saying that the question of whether a fiduciary duty exists in a financial advisory relationship depends on the facts of each case.

“I do not agree that that the use of the phrase ‘best interests of the client’ in itself creates a fiduciary duty relating to existing or potential material conflicts of interest for all clients of the advisor,” the majority said, adding that adopting this view could have negative implications for the investment business and investors.

“Imposing a common-law fiduciary standard based on the MFDA rules and by-laws or the FP Code of Ethics could have a significant impact on elements of the capital markets including those with restricted advice business models (like many mutual fund dealers), and could have significant negative effects on both investors and capital markets,” the majority said.

As a result, the majority dismissed the appeal and awarded $40,000 in costs to the defendants.