The recent decision of the
The decision does not certify the proposed class action or make any determination of its merits but allows the action to proceed to a further certification hearing. In making its decision, the
BACKGROUND
The proposed class plaintiff commenced an action against Horizons, a manager of exchange traded funds (ETFs), in respect of losses sustained on
HVI was structured as a commodity pool for purposes of Canadian securities laws and, accordingly, granted greater freedom in its use of specified derivatives and leverage strategies than conventional mutual funds. HVI was not designed to be an active investment product. The prospectus disclosed a number of detailed risk factors associated with an investment in HVI, including that it was a speculative investment tracking a highly volatile index that could incur substantial one-day losses, including the loss of an investor's entire investment.
The plaintiff's primary claim was that Horizons was negligent for developing, promoting and selling an improvident investment fund that was unsuitable for retail investors and for failing to actively manage HVI in a rapidly declining market, despite being a passive investment product.
ACTION DISMISSED
The Honourable Justice Perell of the
COURT OF APPEAL DECISION
On
Like
The Court of Appeal then held that, even if it is not negligent performance of a service, the conditions exist for creating a novel duty of care for investment fund managers. Taking a relationship of proximity between the plaintiff and Horizons as given, the
POTENTIAL IMPLICATIONS
The potential implications of the decision for the Canadian investment fund industry are far-reaching. The decision raises such questions as:
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Do investment fund managers have a duty to make suitability determinations for investors with whom they have no direct relationship or contact?
- Do investment fund managers of passive index-tracking investment funds have a positive duty to take action in response to declining or volatile markets?
- Can investment fund managers be held liable for investor losses, even if they comply entirely with all securities laws and offer securities under receipted final prospectuses that provide full, true and plain disclosure, including fulsome disclosure of the risks of investing?
- What regulatory body should make the final determination as to whether an investment product that complies with securities regulation and disclosure requirements is nevertheless considered unsuitable for certain investors, and should therefore not be publicly offered?
- Will the scope of the registration regime currently governing investment fund managers need to be expanded to include the suitability or assessment requirements previously imposed only upon advisors that met minimum proficiency requirements?
The answers to these questions could significantly alter the asset management landscape, including the willingness or unwillingness of certain asset managers to assume the risks associated with launching retail product in
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