Court pauses rival series of trailer-fee lawsuits

By James Langton | August 3, 2023 | Last updated on August 3, 2023
2 min read
Judge makes ruling
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An Ontario court is pressing pause on a series of proposed class actions that were filed last year against several bank-owned fund managers over the payment of trailer fees to discount brokers.

The decision effectively allows an earlier series of legal actions on the same issue to move ahead first.

Back in 2018, a series of proposed class actions was filed, alleging that mutual fund investors who bought their funds through discount brokers were harmed when those funds paid trailer fees to the brokers, at least in part, for advice that the investors did not receive.

Last year, a second series of proposed class actions was launched, arguing that the allegedly improper payment of trailer fees to discount brokers harmed all of the funds’ investors — not just the discount brokerage clients — since those fees came out of the funds’ assets, reducing the value of all investors’ funds.

Now, the Ontario Superior Court of Justice has granted a motion from the 2018 plaintiffs seeking a temporary stay of the 2022 cases on the basis that pausing those cases until a key issue that’s common to both sets of cases — whether the payment of trailers to discount brokers was improper — is resolved, which the court found will prevent needless duplication of litigation.

According to the court, the plaintiffs in the 2018 cases argued that the 2022 cases would cause delays in their own actions and that a stay would be “efficient and in the interests of justice.”

The plaintiffs in the 2022 cases disagreed, and argued that, despite the significant overlap between the two sets of cases, they intend to make other arguments, beyond the issue of whether the payments were improper.

The fund companies that are defendants in all of these cases took no position on the motion.

In its ruling, the court noted that both sets of plaintiffs are arguing that the payment of trailer fees to discount brokers was improper, and that the two sets of proposed class actions wouldn’t increase the alleged damages caused by the improper payment of trailers — the competing claims would only impact the distribution of those damages, it suggested.

In other words, the damages caused by improper trailer fees would either be shared among discount brokerage clients, or all fund investors.

The key issue is whether the payment of trailers was improper or not, in the first place, the court suggested. And, it concluded that allowing the plaintiffs in the 2018 actions to argue their issues first will not prejudice the 2022 cases.

If the 2018 plaintiffs succeed in establishing that the payments to discount brokers were improper, the fund companies would have a hard time challenging that finding in the 2022 cases, the court noted — adding, “the plaintiffs in the 2022 actions will be more than happy to accept that conclusion as binding in their litigation.”

And, if the 2018 plaintiffs fail on that issue, then the 2022 plaintiffs can still argue their alternative theory, but they won’t have to also litigate the issue of whether payments to discount brokers was improper, the court noted.

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James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.