Fund Management Risk and Class Actions in Canada

July 4, 2016 | smeditor

This recent decision by the Court of Appeal For Ontario will (or should) have fund managers and other regulated professionals on the edge of their seats. On January 27, 2012, in Fischer v. IG Investment Management Ltd., 2012 ONCA 47, here, Justices Winkler C.J.O., Epstein J.A. and Pardu J., determined that both lower courts erred in their consideration of the underlying regulatory (Ontario Securities Commission (“OSC”)) alternative dispute resolution, but ultimately agreed with Divisional Court that a class proceeding is the preferable procedure for resolving the investors’ claims.

The underlying matter relates to the dreaded “Market Timing” cases that hammered the mutual fund industry and their insurers, on both sides of the border, in 2003. In short, allegations were made against many industry leaders that they permitted certain traders to benefit from the short term fluctuations in fund values at the expense of the majority of their fund investors. If you are interested in how such allegations are worded, think “breach of fiduciary duty”, “breach of duty of care”, “declaratory and restitutionary relief” and “general and special damages”, amounting to over $800 million.

For an overview of the case and the issue of “preferable procedure”, see the article “When There’s A Choice Of Procedure, Which Is “Preferable”?” by Adrienne Boudreau of McMillan’s Litigation and Dispute Resolution Group, here.

Risk Management Spin: This case highlights two very important risk management and loss control issues. First, some fund managers lulled themselves into a false sense of security because their actions were “not illegal.” Turns out that being “not illegal” does not protect you from loss measuring in the hundreds of millions of dollars. Second, encouraging a “quick fix”, in this case a closed-door (in camera) OSC investigation, and a cents-on-the-dollar (dimes in some cases), “without prejudice”, “agreement of facts”, settlement, will not actually put the issue is behind you.

Insurance Spin: There is “long tail liability” risk in professional liability lawsuits. This case shows that nine years after the “wrongful act”, the biggest portion of litigation might just be starting. Directors’ and Officers’ Liability policies (D&O), and Professional Liability Policies (E&O), are written on a “Claims-Made and Reported” basis, and there is only one limit of liability (limit) that will respond to each and every claim related to a “wrongful act” or series of wrongful acts. The limit is shared by each and every entity and individual insurer, and depending on the policy wording this list might be much larger than you ever realized. Defence and/or investigation costs may be included within this limit. Therefore, such parties and costs will erode or even exhaust the limit prior to final disposition of the claim(s). These insurance contracts are not regulated by any government or SRO. The policies can be dozens of pages long (don’t forget the endorsements and the fact that applications and certain submission material form part of the wording) and can differ significantly from contract to contract and carrier to carrier. And, in almost all cases, the policies renew annually, so asserting your rights under the policies are dependent on satisfying the “notice” opportunities/obligations under the first available contract.

As for coverage specifics: some, but not all, D&O and E&O policies contain a “late trading, market timing” and/or “professional services” exclusion, but exceptions to these exclusions or full removal may be negotiated, perhaps with some details on the loss control actions being taken by the company.

Don’t make any assumptions about the coverage under a D&O or E&O policy based on its title; you have to endeavor to understand the coverage and question all aspects of it. There are many competing interests in D&O and E&O policies, and a “broad” policy is not always in the best interest of all parties. Determining the risk priorities of the underlying parties, ie. personal liability vs entity coverage, should be determined before a policy is purchased.

Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at,  416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to

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