A proposed $70.25-million settlement in a class action against TD Asset Management Inc. (TDAM) over the payment of trailer fees to discount brokers has been approved by an Ontario court.
The Superior Court of Justice approved a proposed settlement that will resolve a class action against the fund manager, alleging that investors who purchased TD mutual funds through discount brokers were harmed when those funds paid trailer fees to the discount brokers, in part for ongoing advice to investors that the brokers didn’t provide. (Discount brokers can’t provide advice under the terms of their registrations.)
“The claim alleges that the defendant improperly paid trailing commissions to discount brokers for services and advice that were never provided, and thereby improperly dissipated TD mutual fund assets, which diminished the value of the TD mutual fund units held by the class members,” the court said in its decision.
The plaintiff also alleged that the firm made misrepresentations in its Fund Facts disclosure documents.
TDAM denied all allegations, and the allegations have not been proven in court.
The case was certified as a class action in 2020.
Now, the court has approved a proposed settlement that would pay investors $70.25 million, without any admission of liability by TDAM.
According to the court’s decision, the funds paid $622 million in trailer fees to discount brokers between 2002 and 2022 (the period covered by the class action), including $522 million to an affiliated broker, before the Canadian Securities Administrators banned the payment of trailers to discount brokers.
“However, there were risks that recoverable trailing commissions would be significantly lower than this figure,” the court said, including the potential application of a limitation period on investor claims and arguments that the discount brokers provided some services of value over the years.
“The defendant’s expert opined that recoverable trailing commissions could be as low as $13 million,” the court noted.
Given these factors and other considerations, the court concluded that the proposed settlement “is within the zone of reasonableness” and approved it.
Additionally, the court endorsed the proposed plan for notifying affected investors and distributing the settlement funds.
“The stated objective of the distribution protocol is to equitably distribute the net settlement amount among class members who submit a valid claim while avoiding double compensation,” it noted.
If any money remains after the distributions to investors are made, those funds would be paid to the Osgoode Hall Law School Investor Protection Clinic, which provides free legal advice to retail investors who cannot afford a lawyer.
The court approved the resolution, along with proposed legal fees and costs of $20.6 million, which would be paid out of the settlement funds.
The legal fees include $17.9 million for the class action lawyers plus $2.3 million in taxes on those fees and almost $339,000 in disbursements.
“The result achieved for the class is excellent,” the court said in approving the legal expenses. “For such complex litigation, it has come relatively early in the process, as discoveries are not yet complete. The settlement is a cash settlement.”
The court also approved the payment of $3.25 million from the settlement funds to the firm that financed the litigation, along with the return of the $400,000 that it posted as security for potential adverse costs.
Finally, it approved an honorarium of $10,000 for the investor who served as lead plaintiff in the case.
The court didn’t deal with the proposed settlement of a parallel class action on behalf of investors who held their units through a full-service broker. That case has been settled for $8.5 million, it noted.