The Ontario Superior Court of Justice has approved an $11-million settlement of a class action against CIBC over the payment of trailer fees to discount brokers — claiming damages for full-service clients that owned mutual funds that paid those trailers.
In approving the settlement, the court noted that the proposed payout is in line with some of the other settlements involving similar allegations — that mutual funds improperly paid trailers to discount brokers, at least in part, to compensate them for services that they didn’t provide, given that discount brokers are prohibited from providing their clients with investment advice.
The claim originated as an overarching class action against seven fund managers (including CIBC) that was filed in 2022. That case was replaced by seven separate proposed class actions on behalf of unitholders that were clients of full-service brokerages — alleging that the value of their investments was reduced by the trailers paid by the mutual funds to discount brokers.
The plaintiffs alleged that the fund managers “breached their fiduciary and trust duties to unitholders in non-discount broker relationships by paying trailing commissions to discount brokers for advice and services that were not provided to those unitholders,” the court noted in its decision.
Separate class actions were also filed in 2018 on behalf of unitholders that are discount brokerage clients, alleging that they were also harmed by the payment of trailers to the discount firms. At least one of those cases has been settled, and one has been denied certification as a class action.
In this case, the court ruled that the proposed settlement was “fair and reasonable” given the risks of costly, prolonged litigation for both sides, including the added complexity of the parallel cases on behalf of discount brokerage clients.
Additionally, the court said the “limitation defence” put forth by the fund manager — that the payment of trailers to discount brokers was disclosed to investors, and so only two years worth of damages could be claimed, given the two-year limitation period for civil claims — also posed a “significant litigation risk” to the plaintiffs in the case.
“Had this position prevailed, this would have significantly reduced the damages available to the class,” the court noted.
Indeed, while the plaintiffs’ counsel calculated that the CIBC funds paid $105.9 million in trailer fees to discount brokers between 2007 and 2022, and that its Renaissance mutual funds paid another $17.8 million in trailers — using the two-year limitation period, the maximum recoverable damages in the case are only $19.3 million, the court said.
And, it noted that the $11-million settlement represents approximately 57% of that total, which is in line with the 55% recovered in a similar case.
For current unitholders (about 41% of the total investor class covered by the litigation), the net proceeds of the settlement will be directly deposited back into the funds, which the court said is the simplest, most cost-efficient way to administer the settlement, instead of carrying out a traditional claims process.
Former unitholders (59% of the investor class) that participate in the claims process will receive payments of up to $32, which represents the estimated damages for the average unitholder.
Additionally, the settlement includes $3.7 million in legal fees and disbursements, and a mandatory 10% levy to the Class Proceedings Fund, which funded the litigation and indemnified the plaintiffs from paying the defendants’ legal costs in the event that the plaintiffs lost their case.
In settling the case, CIBC didn’t admit to any liability and continued to deny the allegations, the court noted.