Do regulations and ethical rules requiring investment advisors to act in clients' "best interest" create a fiduciary relationship between them? Not by themselves, according to a recent 2 to 1 decision of the Ontario Divisional Court, which upheld a decision by the Superior Court of Justice not to certify the putative class action.
Background
The plaintiff, a client of defendants registered with the Mutual Fund Dealers Association ("MFDA"), commenced a putative class action for investment losses. The plaintiff sought to certify breach of fiduciary duty, knowing assistance, and knowing receipt as common issues against the defendants. The motions judge denied certification, holding that the pleaded allegations did not support a fiduciary duty claim:
A fiduciary relationship imposes obligations that are stricter than the morals of the marketplace and of the workaday world and a higher standard of behaviour, and when there is a breach of a fiduciary duty, courts mete out more powerful remedies.. The law, therefore, is very careful in determining whether a particular relationship qualifies as a fiduciary relationship .
In the immediate case, it is undisputed, and it is undisputable, that the [defendants] had a professional relationship and a duty of care relationship with all the Class Members, and, in the immediate case, there is undoubtedly some basis in fact for the allegations that the [defendants] breached the professional standards of the MFDA and of the FP Standards Council and that they misrepresented information and were negligent in the performance of their professional obligations.
However, it does not follow . that there was a common fiduciary relationship with all or even any of the putative Class Members. ...
... in each individual case, it is contestable whether the relationship with the investor was a fiduciary relationship, and in each individual case the breach of any fiduciary duty is idiosyncratic and not common. On a class wide basis, the elements of the cause of action for breach of fiduciary duty are not made out in common.1
The plaintiff appealed to the Divisional Court.
The Divisional Court
The Divisional Court in Boal v. International Capital Management, 2022 ONSC 1280 held that regulatory "best interest" standards - such as those found in the Rules of the MFDA - do not automatically create a fiduciary relationship between advisor and client. Instead, whether an advisor owes a fiduciary duty to a particular client must be determined on a case-by-case basis with reference to the factors set out by the Court of Appeal in Hunt v. TD Securities.2 Those factors go to the nature of the client relationship and include the degree of vulnerability of the client, the client's reliance on and trust in the advisor, the extent to which the advisor has power or discretion over the client's account, and the content of any applicable rules or codes of conduct.
The Divisional Court found that the plaintiff's pleading in Boal focused solely on the MFDA rules, without reference to the other factors in Hunt and, in particular, failed to plead any facts that could support a conclusion that the defendants had "discretionary authority" over the plaintiff's account. To the contrary, the Superior Court judge who denied certification found that the defendants had no discretion to make investment decisions without the plaintiff's approval.
Significantly, the Court said that the analysis of whether an advisor owes a fiduciary duty to a client must be conducted on a "case-by-case" and "client-by-client" basis. In light of this holding, it will be difficult for proposed representative plaintiffs to obtain certification of common issues grounded in breaches of fiduciary duties owed by advisors to clients.
Addressing the broader implications of the plaintiff's claim, the Divisional Court said that imposing fiduciary duties on all those who are subject to regulatory "best interest" standards would be inconsistent with the expectations and practices of investors and advisors, and could have significant adverse effects on the industry:
[67] . I am of the view that the regulatory best interests standard is not an unqualified common law fiduciary standard. Whether or not a fiduciary duty exists in a financial advisory relationship depends on the facts of each case, including the other factors in the test. Imposing a common-law fiduciary standard based on the MFDA rules and by-laws or the FP Code of Ethics could have a significant impact on elements of the capital markets including those with restricted advice business models (like many mutual fund dealers), and could have significant negative effects on both investors and capital markets.
Finally, the Divisional Court held that the absence of a fiduciary relationship does not affect or reduce other duties that advisors may owe clients under statue or common law -- good faith, care, confidentiality and disclosure -- depending on the circumstances.
Dissent and Potential Further Appeal?
The Divisional Court holding was not unanimous, which could make a leave to appeal motion by the plaintiff to the Court of Appeal more likely. Sachs J. wrote a lengthy dissent and placed significant reliance on the "best interest" standard in the MFDA Rule. In so doing, Her Honour relied upon the Supreme Court's dicta in Hodgkinson v. Simms that "the rules set by the relevant professional body are of guiding importance in determining the nature of the duties flowing from a particular professional relationship" and "[i]t would be surprising indeed if the courts held the professional advisor to a lower standard of responsibility than that deemed necessary by the self-regulating body of the profession itself." Her Honour was persuaded that in addition to the professional standard, the plaintiff sufficiently alleged that the defendants had considerable discretion and power over their investment strategy such that a fiduciary duty claim was viable.
Footnotes
1. Boal v. International Capital Management Inc., 2021 ONSC 651 at paras. 87, 98, 99, 102.
2. (2003), 66 O.R. (3d) 481, 229 D.L.R. (4th) 609 (C.A.) at para. 40
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