Trailing commissions paid to brokers who sell mutual funds are under fire in a proposed class action against TD Asset Management (TDAM). Siskinds LLP in London, Ont. and Bates Barristers P.C. in Toronto have filed the class action, a release said on Monday.

The action alleges that TDAM, as trustee and manager of TD mutual funds, pays substantial sums of money out of TD mutual funds as trailing commissions to discount brokers, and that these commissions reduce investors’ returns.

Read: Stock market volatility could put focus on fees

In the release, Siskinds says TDAM describes the purpose of the trailing commissions as compensation for “services and advice” provided to investors. However, discount brokers are prohibited from providing investment advice to investors, so investors who hold these funds in discount brokerages allegedly receive no value for the trailing commissions paid.

When asked for comment, a TDAM spokesperson said in an email that the company is unable to comment since the matter is before the courts.

Read: Examining IIROC’s guidance on order execution discount brokers

The release says the action “seeks to advance claims on behalf of all persons, wherever they may reside or be domiciled, who hold or held, at any time prior to the conclusion of the trial of the common issues in the proposed class action, units of a TD mutual fund through a discount broker.”

Gary Stenzler, the proposed representative plaintiff in the action, says in the release that he invested in mutual funds to save for retirement and his children’s education. “I was troubled to learn that the trustee of the mutual funds I owned was taking a portion of my life’s savings to pay my discount broker for advice and services which I did not receive,” he says in the release.

Paul Bates of Bates Barristers says in the release that it’s time for investors to challenge the practice of paying trailing commissions to discount brokers, which he says 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,” he says.

The proposed class action comes as the industry awaits policy on embedded commissions. Last fall, John Mountain, OSC’s director of investment funds and structured products, said a proposal could be expected in early 2018.

Recent industry commentary on mutual fund fees

For registrants who offer advice, the MFDA released a compliance bulletin in January of this year reminding firms of their obligation to inform clients about cheaper series of mutual funds.

Read: MFDA to advisors: We’re watching your recommendations

“There have been several settlement agreements between provincial securities regulators and registrants relating to firms not having sufficient controls to advise clients when they become eligible for a lower MER series of the same mutual fund,” says the MFDA in the bulletin. “We expect members and approved persons to understand the products they recommend, including understanding circumstances where clients may be eligible for a lower MER series of the same fund.”

The SRO explicitly states that that expectation applies to both proprietary and third-party funds, and will be part of exams.

“In our examinations, we will be assessing whether members have implemented appropriate policies and controls in respect of lower MER series funds,” says the MFDA.

Today, IIROC released its final guidance on order-execution-only (OEO) firms to clarify the products, tools and information these firms can provide investors. Specifically, the guidance clarifies what tools are considered advice, and therefore not to be used by OEO firms.

In an accompanying notice, IIROC says that funds with trailing commissions for ongoing investment advice pose a conflict of interest for OEO firms, since they’re not permitted to offer advice. Under IIROC rules (section 42.3 of Rule 42), dealer members must address conflicts of interest considering the best interests of the client.

In the notice, IIROC says that it expects OEO firms “will make available, whenever possible, funds that do not pay a trailing commission for ongoing advice”—often Series D.

When Series D isn’t available (because a fund family doesn’t offer that series) and an OEO firm makes available another series that pays a trailing commission, “we also expect the firm to address the conflict by rebating to the client the portion of the trailing commission for ongoing advice, or taking other similar steps,” says the notice.

IIROC further comments that “management of the conflicts of interest relating to trailing commissions by OEO firms allows investors continued access to the widest possible range of investments.”

Also read:

Pro bono legal clinic backs wronged investors

MFDA finds lack of clarity on trailing commissions