Notwithstanding the certification of class actions against mutual fund managers for losses allegedly suffered by investors arising from the payment of trailing commissions to "discount" brokers (including Stenzler v. TD Asset Management Inc., 2020 ONSC 111, leave to appeal refused 2020 ONSC 5987 (Div. Ct.); Gilani v. BMO Investments Inc., 2021 ONSC 3589, leave to appeal refused 2021 ONSC 5906 (Div. Ct.)), in January 2023 the late Justice Belobaba refused to certify a putative class action against a group of discount brokers alleging their improper receipt of such compensation.
In Frayce, the Plaintiff investors alleged that the receipt of such commissions by the Defendants was illegal and prohibited under Canadian securities law even prior to the amendment to National Instrument 81-105 – Mutual Fund Sales Practices effective June 2022 which prohibited the payment of trailing commissions to "order execution only" brokers. The voluminous certification record filed by the Plaintiffs reflecting extensive discussion and debate about the practice of paying trailing commissions was found to fall short of amounting to "some evidence" that the Defendants' receipt of trailing commissions prior to 2022 was illegal.
In a unanimous decision released by the Divisional Court on January 24, 2024, the Plaintiffs' appeal from the denial of certification was dismissed. The Court rejected the Plaintiffs' submissions that the motion judge had made the following errors:
- Short-circuiting the motion by improperly focusing on what
His Honour found to be the core proposed common issue and in
deciding that if that issue could not be certified, the entire
action could not be certified.
The Divisional Court found that while not every case may be suited to such an approach, it was not an error for the motion judge to have zeroed in on the core issue in the case. The Court noted that the motion judge had taken a similar approach in deciding another motion for certification and that that decision had been upheld by the Divisional Court.
- Ignoring the statutory test for certification by requiring
"some evidence" that the receipt of trailing commissions
contravened applicable Canadian securities law, a legal question
which the motion judge incorrectly attempted to answer at the
certification stage. In so doing the motion judge was said to have
improperly strayed into an assessment of the merits.
The Divisional Court disagreed, finding that the motion judge, an experienced class action judge, correctly applied the accepted two step test for determining whether the proposed common issue that was central to the Plaintiffs' case (whether, by receiving trailing commissions, the defendants had contravened applicable Canadian securities law) should be certified. Sometimes evaluating a proposed common issue posing a question of law will require an examination of the evidence. This was such a case. In order to determine whether there was an "air of reality" to the proposition that the receipt by online brokers of trailing commissions was contrary to applicable Canadian securities law prior to the express prohibition added to NI 81-105, His Honour was required to examine the extensive evidentiary record that the Plaintiffs had chosen to file. (No evidence was filed by the Defendants). His Honour's weighing of the Plaintiffs' evidence was entitled to significant deference and was not challenged by the Plaintiffs on appeal.
- Finding that all of the causes of action pleaded by the
Plaintiffs failed because there was no evidence of illegality. The
Plaintiffs asserted that three of those causes of action –
negligence, knowing assistance, knowing receipt – did not
rely on the allegation that the impugned conduct contravened
Canadian securities law prior to the explicit prohibition of the
practice in 2022.
The Divisional Court also rejected this contention, finding that illegality was rooted in all of those causes of action as pleaded.
- Deciding the case based on a concession by the Plaintiffs
(that whether the Defendants' conduct was illegal would dispose
of the entire action) that had not been made. The motion judge was
alleged to have erred in taking one line from a factum out of
context and treating it as a binding concession.
The Divisional Court found that the record, including the contents of two factums filed by the Plaintiffs, demonstrated that the concession had indeed been made. The concession was a "strategic choice" made by the Plaintiffs after the certification motion was initially adjourned to permit them to rethink their approach to certification.
The decision in Frayce highlights the importance of strategic decisions made by class counsel including as it relates to the framing of the allegations in the pleading, the contents of their certification record and the characterization of their case for certification in their submissions on the certification motion. In particular, the Divisional Court took a dim view of the Plaintiffs' attempt to reverse on appeal positions that had been taken by them for perceived advantage at argument of the certification motion. As a matter of fairness, "[h]aving made a strategic decision that did not work at the court below, it is not appropriate for the Plaintiffs to reverse that decision and try again before an appellate court".
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