Judge gavel, scales of justice and law books in court

Siskinds LLP and Bates Barristers P.C. have filed a proposed class action against Toronto-based TD Asset Management Inc. (TDAM) regarding trailing commissions paid to discount brokers on TD mutual funds, the two law firms announced on Monday.

The suit, which names retail investor Gary Stenzler as the proposed representative plaintiff, alleges breach of trust, breach of fiduciary duty and unjust enrichment (among other things).

The action claims damages of $200 million and other relief on behalf of all investors that have ever purchased a TD mutual fund through a discount broker.

The claim alleges that TDAM received “excessive, inflated, and/or unearned management fees”, by charging the funds fees that were, in part, used to finance trailers to discount brokers. And, it alleges that the portion of management fees that is charged in order to pay trailers to discount brokers for advice that they cannot provide under securities rules, is “improper, unreasonable, and unjustified”.

The allegations have not been proven, and the class action has not been certified.

In an email, TDAM says that it can’t comment on the lawsuit “because the matter is before the courts.”

Investor advocates have long argued that trailing commissions are ostensibly paid to distributors for the ongoing advice they provide to investors, but that discount brokers are explicitly prohibited from providing advice. Therefore, investors are not getting value when they purchase funds through a discount broker that receives trailers.

“It’s time for investors to challenge this long-standing practice of paying trailing commissions to discount brokers, which is common throughout the mutual fund industry in Canada. This practice continues today despite ongoing regulatory review of embedded commissions having regard to investor protection concerns,” says Paul Bates of Bates Barristers, in a statement announcing the suit.

Securities regulators have expressed concerns about the use of embedded fee structures in the Canadian fund industry generally, including the practice of funds paying trailers to discount brokers. The Canadian Securities Administrators (CSA) are currently contemplating regulatory action in this area, which may include banning trailers.

As well, the Investment Industry Regulatory Organization of Canada (IIROC) has also indicated that it plans to issue guidance later this year on how discount brokers can meet their regulatory obligations regarding conflicts when they sell funds that pay trailers.