Divisional Court holds that regulatory best interest standard does not establish common law fiduciary duty

In the post-Client Focused Reforms world, the Ontario Divisional Court’s recent decision in Boal v. International Capital Management Inc. is an important re-affirmation that regulatory standards are not the sole determinant of whether an investment advisor owes fiduciary duties to their client¹. The decision confirms that despite advisors’ obligations under the CFRs to act in their clients’ best interest and avoid conflicts of interest, fiduciary duties will only be imposed where the relationship between the advisor and client meets the traditional hallmarks of a fiduciary relationship.

What you need to know

• The majority held that while regulatory requirements (including a “best interest” standard) will continue to be relevant to a court’s assessment of the standard of care owed by an investment advisor, these requirements are not in themselves determinative of the existence of a common law fiduciary duty.
• The decision of the dissenting judge highlights the concern that a regulatory best interest standard may confuse the long-settled Canadian common law as to when an investment advisor may owe fiduciary duties. In our view, the majority decision is the correct one.

Key facts

A former client of MFDA registrant defendants commenced a class action for losses associated with an investment in promissory notes. The defendants did not have discretionary authority over the accounts of the proposed class members. The proposed representative plaintiff sought to have the causes of action of breach of fiduciary duty, knowing assistance, and knowing receipt certified as against the defendants. Justice Perell, who heard the certification motion, denied certification on the basis that the statement of claim did not disclose a cause of action for breach of fiduciary duty since there were insufficient facts to support a finding of a fiduciary relationship and because the issue of whether a fiduciary duty existed would have to be determined on an individual basis, which was not suited to a class proceeding. The representative plaintiff appealed Justice Perell’s decision to the Divisional Court.

Key issue

The key issue on appeal was whether the professional rules and regulations the defendants were subject to—which included a “best interest” obligation—could be relied upon to establish a common law fiduciary duty on a class-wide basis.

The decision

The dissenting Divisional Court judge held that regulatory standards requiring regulated persons to act in a fiduciary capacity can form the basis of a reasonable client expectation of a fiduciary standard. However, the two judges who formed the majority disagreed, and dismissed the appeal.

The majority held that a class-wide ad hoc fiduciary duty of an investment advisor cannot be established based solely on regulatory (MFDA) rules and by-laws and on professional (FP Canada) standards. The majority’s decision affirmed and applied the generally accepted Supreme Court of Canada test in Hodgkinson v. Simms², as stated in Hunt v. TD Securities³, which requires the court to assess whether a fiduciary duty exists by applying five factors: the vulnerability of the plaintiff; the degree of trust placed on the defendant; the nature and history of reliance on the defendant; the extent to which the defendant exercised discretion; and any professional rules or codes of conduct. The court observed that the plaintiff’s fiduciary duty pleading focused only on the professional rules or codes of conduct applicable to the defendants, but that a fiduciary duty assessment cannot be determined on that one factor alone. Rather, all elements of the test must be applied on a “case-by-case, client-by-client basis”.

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