Canadian Imperial Bank of Commerce is the latest Big Six lender to receive a proposed class-action suit against its investment-management arm, alleging investors in its funds paid millions of dollars for advice they did not receive.
Ontario-based law firms Siskinds LLP and Bates Barristers PC have filed a $200-million action against CIBC and CIBC Trust Corp. This is the third Canadian bank the two law firms have filed against. Earlier this year, they proposed a similar class action against 1832 Asset Management LP, Bank of Nova Scotia’s investment arm, and TD Asset Management Inc., the trustee and manager of TD Mutual Funds.
Series A, also known as adviser series funds or A-class funds, are typically sold through a financial adviser and include trailing commissions for the advice an adviser provides. Series A funds account for 68 per cent of the total amount of mutual fund assets in Canada, according to the Investment Funds Institute of Canada, and can charge a management-expense ratio (MER) between 1.5 per cent to 2.5 per cent. By comparison, Series D funds – those tailored for do-it-yourself investors that strip out advice fees – can have an MER of less than 1 per cent.
CIBC declined to comment on the allegations, but the statement of claim notes that CIBC “knew, or ought to have known, that the unearned management fees were being paid to discount brokers as trailing commissions, thereby reducing the value of the [client’s investment], in circumstances where those trailing commissions were not earned by the discount brokers because they are not providing services and advice to [investors].”
Of the $30-billion in total assets held in mutual-fund products in discount brokerages, more than $25-billion remain in fund series that bundle an advice fee within the product, according to a paper released in 2017 by the Canadian Securities Administrators.
The practice of paying trailing fees to discount brokers has been controversial for years, but regulators were just on the cusp of banning the practice altogether. The Canadian Securities Administrators (CSA) − an umbrella group for all provincial securities commissions – was in the process of effectively banning all trailing commissions collected by do-it-yourself investing services. But that CSA initiative is now in disarray as Ontario Finance Minister Vic Fedeli released a statement last week opposing the recommendations. In doing so, the province has stalled the planned reforms, raising the possibility that no changes will take place, leaving DIY investors subject to fees they may not be aware they are paying.