Discount brokers can’t be sued over pre-ban trailers, court rules30 January, 2023 4:41 PM
Ontario court rules that discount brokers’ receipt of trailing commissions was not considered illegal before the June 2022 ban.
The practice of mutual funds paying trailer commissions to discount brokers for advice they were prohibited from providing was finally outlawed last year. But investors cannot sue to recover fees they paid before the ban took effect, an Ontario court has ruled.
The Ontario Superior Court of Justice dismissed a proposed class action suit on behalf of investors against many of the major discount brokerages: BMO Investor Line Inc., CIBC Investor Services Inc., Desjardins Securities Inc., HSBC Securities (Canada) Inc., QTrade Securities Inc., Scotia Capital Inc. and TD Waterhouse Canada Inc. The suit alleged that, while the practice of paying trailing commissions to discount brokers wasn’t banned until 2022, it represented a violation of securities law long before that.
According to the court, the plaintiffs in the proposed suit argued that “the receipt of trailing commissions by discount brokers was illegal and exposed the discount brokers to damage claims long before the formal prohibition.”
The defendant brokerage firms argued that, while a debate over the fairness of trailers may have dragged on for more than 20 years, “there is no evidence that the receipt of trailing commissions by discount brokers was illegal or unlawful” before the prohibition adopted by the Canadian Securities Administrators (CSA) in 2022.