Executive Summary: Key Legal and Evidentiary Issues

• Allegations focus on RBC charging active management fees for a fund that closely tracked an index, raising questions about disclosure and investor expectations.

• The adequacy of disclosure in the fund’s prospectuses, particularly regarding the closet indexing strategy and associated risks, is central to the dispute.

• Plaintiffs seek to amend pleadings to clarify their claims, expressly disclaiming fraud and removing knowing receipt and knowing assistance.

• Certified causes of action include breach of trust, breach of contract, breach of fiduciary duty, prospectus misrepresentation, and unjust enrichment.

• The court considered whether the proposed amendments would fundamentally alter the certified class action or introduce new causes of action.

• Leave to amend was granted, allowing the case to proceed on clarified claims without a finding of new causes of action.

Facts of the case

Annabelle McCorquodale and Robert Cummings, acting as representative plaintiffs, brought a class action against RBC Global Asset Management Inc. and The Royal Trust Company on behalf of investors in the Canadian Equity Fund. The plaintiffs alleged that RBC employed a “closet indexing” strategy, meaning the fund closely tracked a benchmark index while charging fees as if it were actively managed. Investors, they claimed, were led to believe they were paying for active management designed to outperform the market, but in reality, the fund’s performance mirrored the index, and the higher fees were not justified.

The action was certified as a class proceeding under the Class Proceedings Act, with the court recognizing causes of action in breach of trust, breach of contract, breach of fiduciary duty, prospectus misrepresentation, and unjust enrichment. Initially, there was some confusion over whether fraud was pleaded, but the plaintiffs later clarified that they did not intend to allege fraud and sought to amend their pleadings to expressly disclaim it. They also moved to remove claims of knowing receipt and knowing assistance.

Discussion of policy terms and clauses at issue

The heart of the dispute lies in the adequacy of disclosure in the fund’s prospectuses. The plaintiffs argued that RBC failed to disclose both the closet indexing strategy and the risk that the fund would not outperform its benchmark after fees. These omissions, they contended, constituted material facts, rendering RBC’s statements about the fund’s investment strategies misleading. The relevant legal provisions included section 131 of the Securities Act, which addresses prospectus misrepresentation, as well as common law duties of trust and fiduciary responsibility.

Procedural history and analysis

This case is one of several similar class actions against major financial institutions, all managed by the same class counsel. The procedural history includes related cases such as Turpin v. TD Asset Management Inc., Gibbs v. HSBC Global Asset Management, and Pope v. Canadian Imperial Bank of Commerce. The plaintiffs in this case sought to amend their pleadings to align with recent appellate authority, particularly the Court of Appeal’s decision in Gibbs, which clarified that fraud need not be pleaded for claims of breach of trust, breach of fiduciary duty, or prospectus misrepresentation.

The defendants opposed the amendments, arguing that they would fundamentally change the nature of the certified class action and introduce new causes of action. The court rejected this argument, finding that the amendments merely clarified the plaintiffs’ theory of liability and did not alter the substance of the issues. The court also emphasized the need for flexibility in pleadings in complex commercial litigation and found that the amendments would help define the real issues between the parties.

Outcome and ruling

Justice Elwood granted the plaintiffs leave to file a further amended notice of civil claim and to amend the common issues, provided that evidentiary charts were excluded from the pleadings. The court found that the amendments clarified the certified claims and allowed the case to proceed on a clearer basis. The plaintiffs were the successful party in this application. No costs or damages were awarded at this stage, as the decision was procedural and did not address the merits of the claims or any monetary relief. If an amount is to be determined, it will be addressed in future proceedings.