A recent decision of the Court of Appeal for Ontario, Boal v. International Capital Management Inc., reopens the question of how regulatory standards affect whether financial advisors owe a fiduciary duty to their clients1. The lower court's decision, previously discussed here, was one of the first to consider whether Client-Focused Reforms2 made it easier to establish ad hoc fiduciary duties. In overturning the lower court's decision, the Court of Appeal validated a pleading of fiduciary duty owed by an advisor with respect to non-managed accounts.
What you need to know
- Pleading of fiduciary duty upheld. The Court of Appeal has further pushed the bounds of financial advisor-client relationships by upholding a pleading of fiduciary duty in the absence of a managed or discretionary account.
- Making recommendations and failing to disclose self-interest was sufficient to sustain the pleading. The Court held that in the context of a long-standing advisor-client relationship and a regulatory duty to address conflicts in the best interests of clients, the advisor's decision to select specific clients to recommend a particular investment product to and failing to disclose the advisor's self-interest in that product was sufficient to sustain a pleading of breach of fiduciary duty.
Background
A former client of two MFDA registrant defendants commenced a class action for losses associated with an investment in promissory notes. The defendants did not have unilateral discretionary authority over the accounts of the proposed class members. The proposed representative plaintiff sought to certify a cause of action for breach of fiduciary duty (among others), but the motion judge denied certification on the basis that the claim did not plead the necessary facts to support a finding of fiduciary duty, and that regulatory requirements to act in good faith and address conflicts in the best interests of clients were insufficient in and of themselves for a tenable fiduciary duty claim. A majority of the Divisional Court upheld the decision.
The Court of Appeal for Ontario allowed the proposed representative plaintiff's appeal and determined that the former client's claim disclosed a cause of action for breach of a fiduciary duty on a class-wide basis. The appellate court's decision considered the motion judge's sole focus on regulatory standards to the exclusion of other pleaded facts relevant to assessing the existence of fiduciary duty.
Fiduciary duties owed by financial advisors
It is well-settled law that financial advisors do not categorically owe fiduciary duties to all clients. However, a fiduciary duty can exist if an advisor-client relationship has certain features as identified by the Supreme Court of Canada in Hodgkinson v. Simms3 and later interpreted by the Court of Appeal for Ontario in Hunt v. TD Securities Inc.4 These features include (1) the vulnerability of the client, (2) the client's trust in the advisor, (3) the client's reliance on the advisor, (4) the advisor's power of discretion over the client's accounts, and (5) the professional rules or codes of conduct that apply to the advisor5. The presence and degree of these factors place a client on a spectrum from "total reliance" on an advisor to "total independence". Fiduciary duties exist at the "total reliance" end, and do not at the "total independence" end, with most cases falling somewhere in the middle6. This is a fact-specific analysis, and, as the Court of Appeal confirmed in Boal, the existence of a fiduciary duty may vary by transaction within an advisor-client relationship7.
The case law on this topic often turns on whether the advisor had unilateral discretion to affect the plaintiff's investments—specifically, the discretion to buy and sell financial products without prior approval, as in a managed account. In previous instances, where a court found there was no such discretion, it often concluded a fiduciary duty did not exist8.
The fifth Hodgkinson factor—professional rules or codes of conduct—took on new importance following Client-Focused Reforms that came into effect in 2021, including the requirement in some instances that registrants place a client's interest first. The Divisional Court's decision in Boal was one of the first to apply Hodgkinson and Hunt to these reforms. The majority of the Divisional Court found the plaintiff's pleading of fiduciary duty relied solely on regulatory standards, which could not, in the absence of other factors, determine whether a fiduciary duty exists for all class members.
The Court of Appeal's decision
Despite the fact that the registrant defendants did not have unilateral power to trade for the class members, the Court of Appeal still found the claim had effectively pleaded an exercise of discretion based on the fact that the defendants had "unilaterally exercised their discretion" in deciding which individuals would receive a recommendation to invest in the promissory notes". The defendants' act of choosing which clients to recommend the promissory notes to, alongside the MFDA rules and by-laws and further findings of trust, vulnerability, and reliance, led the Court to conclude that the facts could support the existence of fiduciary duties and could disclose a cause of action for breach of fiduciary duty.
What's next?
The Court of Appeal's decision stands for the proposition that regulatory standards like the Client-Focused Reforms are a factor to consider when assessing the existence of a fiduciary relationship between a broker and a client.
The decision also highlights the fact-specific exercise that goes into determining the existence of a fiduciary relationship, and therefore brokers cannot simply rely on non-managed/discretionary accounts as a shield to a finding of a fiduciary duty.
Finally, by remitting the case, with a valid breach of fiduciary duty claim, back to the motions judge, it remains to be seen whether such a claim can satisfy the other criteria required for it to be certified as a class action. In particular, it is an open question as to whether a breach of fiduciary duty (which typically involves a highly individualized analysis) is appropriate for the commonality requirements of a class proceeding9.
Footnotes
1. 2023 ONCA 840.
2. The Client-Focused Reforms are a comprehensive set of rules developed by the Canadian Securities Administrators focused on enhancing and clarifying the duties securities registrants owe to clients. Among other things, the reforms require advisors to resolve conflicts of interest in their clients' best interests as well as requiring enhanced disclosure to clients on the products advisors recommend.
3. [1994] 3 SCR 377.
4. (2004), 66 OR (3d) 481 (CA), leave to appeal refused.
5. Ibid, para 40.
6. Hodgkinson v Simms, [1994] 3 SCR 377, p 419, citing Varcoe v Sterling (1992), 7 OR (3d) 204 (Gen Div), pp 234-36; Hunt v. TD Securities Inc. (2004), 66 OR (3d) 481 (CA), leave to appeal refused, para. 42, citing Kent v. May (2001), 298 AR 71 (Alta KB), paras 51-53.
7. 2023 ONCA 840, para 50.
8. See, for example, Zraik v Levesque Securities Inc., [2001] OJ No 5083 (CA); Transpacific Sales Ltd. v Sprott Securities Ltd.(2003), 67 OR (3d) 368 (CA); Parent v Leach, [2008] OJ No 2155 (Sup Ct J).
9. In a 2022 certification decision, the Court of Appeal of Alberta found that while professional rules and codes of conduct were helpful to determining the existence of a fiduciary duty, they were insufficient to make that determination at a common issues trial given the variability in other facts for each class member. See Fisher v Richardson GMP Limited, 2022 ABCA 123, para 49.
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