W E DN E S DAY , J AN U ARY 22, 2020 | T HE G LOB E AND MAIL G R EPORT ON BUSINESS | B3

Discount brokerages hit with BMO to acquire Clearpool

lawsuit over mutual-fund fees
Group of DIY investors
accuse 11 major firms
of charging for advice
that was never given
CLARE O’HARA
WEALTH MANAGEMENT REPORTER
A group of do-it-yourself inves-
tors has filed a lawsuit against
Canada’s discount brokerage
firms, alleging the brokers impro-
perly received millions of dollars
in fees from mutual-fund inves-
tors for advice they never provid-
ed.
Koskie Minsky LLP filed the
class-action lawsuit this week
naming 11 major discount bro-
kerage firms, including the on-
line trading divisions of Canada’s
six biggest banks as well as small-
er discount brokers such as Ques-
trade, Qtrade, Laurentian Bank’s
and HSBC’s.
The suit alleges the brokerage
firms improperly collected trail-
ing commissions on mutual
funds held in client accounts.
Trailing commissions are typ-
ically used to compensate an in-
dividual or firm for advice and
services that has been provided
to an investor. Do-it-yourself in-
vestors using discount brokerag-
es usually do not work with ad-
visers to purchase investment
products. They typically conduct
independent research, make
their own investment decisions
and should be steered into lower-
cost mutual funds when building
an investment portfolio.
The practice of paying trailing
fees to discount brokers has been
controversial for years, and regu-
lators are in the process of ban-
ning the practice. The Canadian
Securities Administrators, an
umbrella group for all provincial
securities commissions, an-
nounced last year it will effective-
ly ban trailing commissions col-
lected by DIY investing services.
Now those investors who have
been paying millions of dollars in
commissions for years are asking
to be reimbursed.
Mutual funds that charge ad-
vice fees – known as Series A
funds – account for 68 per cent of
the total value of mutual funds
assets in Canada, according to the
Investment Funds Institute of
Canada. They typically charge a
management expense ratio
(MER) between 1.5 per cent and
2.5 per cent. By comparison, Se-
ries D funds – those tailored for
do-it-yourself investors that strip
out advice fees – can have an
MER of less than 1 per cent.
The practice of paying
trailing fees to discount
brokers has been
controversial for years,
and regulators are in the
process of banning the
practice.
Although discount brokerages
are not allowed to provide advice
to do-it-yourself investors, about
83 per cent of mutual funds sold
through discount brokerages in
Canada are series that include
trailing commissions.
Of the total $30-billion in as-
sets held in mutual fund prod-
ucts in discount brokerages,
more than $25-billion were in
fund series that bundled an ad-
vice fee within the product, ac-
cording to a paper released in
2017 by the CSA.
Already, there have been sev-
eral class actions filed against the
mutual-fund arms for all six of
the major banks, as well as Mack-
enzie Financial Corp. Those law-
suits did not point the finger at
the discount brokerage firms, but
rather at the investment fund
managers that created the funds
and paid out the fees to the dis-
count brokerages.
Trailing commissions are paid
for $100-million
ANDREW WILLIS
JAMES BRADSHAW
to discount brokerages by com-
panies that manage and operate
mutual funds, and are paid out of The technology race between Canada’s big banks is heating
the value of an investor’s invest- up, with Bank of Montreal in talks to acquire U.S. trading
ments. software company Clearpool Group Inc. for approximately
“Improper investment com- $100-million, according to multiple sources familiar with the
missions whittle away the retire- transaction.
ment savings of ordinary Cana- Clearpool builds algorithm-based trading programs for
dians,” Kirk Baert, a partner at banks and investment dealers, and the capital markets arm
Koskie Minsky, said in a state- at BMO struck a partnership with the privately owned New
ment. “The practice of collecting York-based company in 2018.
trailing commissions for no rea- According to sources familiar with the talks, BMO is now
son must stop.” planning to acquire Clearpool in a transaction that will see
The claim states that in almost the company’s three founders paid out over a period of sever-
all cases, the group of investors al years, to keep them tied to the Canadian bank. The Globe
were not aware they were paying and Mail is not identifying the sources because they are not
these fees to brokers. authorized to speak publicly about the deal.
“Discount brokers cannot and Clearpool was founded in 2014 and has approximately 120
do not provide advice or services institutional clients. The company claims that its software
to investors,” Mr. Baert adds. “It is supports approximately 2 per cent of daily U.S. stock trading,
alleged that these commissions and the company also operates in
are inappropriate and unlawful Canada and Europe. On Tuesday,
and that these funds should be spokespersons for BMO and BMO has been
returned to investors.” Clearpool declined to comment
The class action has been filed on a possible transaction. expanding its U.S.
on behalf of all investors who If the acquisition does happen, capital market
purchased mutual funds through it will be the latest in a string of business under
a Canadian discount brokerage. technology-focused ventures by chief executive
The lawsuit does not seek a spe- Canadian banks. Two years ago,
cific amount of restitution, but Toronto-Dominion Bank turned Darryl White.
requests “substantial punitive heads by acquiring Toronto-
damages.” based artificial intelligence startup Layer 6 for approximately
“Most providers have engaged $100-million. Last July, Royal Bank of Canada acquired Way-
in behaviour that does more to Pay, a cloud-based payments fintech company based in Bur-
fatten their bottom line than im- lington, Ont. Canada’s largest banks each spend more than
prove investor experience and re- $3-billion annually on technology.
turns,” says Salman Ahmed, a BMO has been expanding its U.S. capital market business
portfolio manager with Stead- under chief executive Darryl White. Last May, the bank ac-
yhand Investment Funds Inc., a quired KGS-Alpha Capital Markets, a New York-based fixed-
low-cost investment company income dealer specializing in U.S. mortgage-backed and as-
who has been a long-time advo- set-backed securities.
cate for fee transparency for in- When BMO announced its partnership with Clearpool in
vestors. April, 2018, Aine O’Flynn, BMO’s head of global equity prod-
“This had been going on for far ucts, said in a news release: “Electronic trading is a key strate-
too long – almost a decade – be- gic priority for us and this partnership reinforces BMO’s com-
fore it finally hit the radar of the mitment to the space.” In the same release, Clearpool foun-
industry. Discount brokerages der and CEO Joe Wald said: “Expanding into Canada and Eu-
are the ones who decide which rope is part of our global commitment to develop electronic
funds make it onto their plat- trading solutions that bring forth transparency to promote
form. Whether it’s explicitly or fair and equitable markets.”
implicitly, some discount brokers Clearpool obtained approval to sell its products in Canada
have excluded various invest- last year, and rang the opening bell on the Toronto Stock Ex-
ment firms who did not charge change last May. In July, the company licensed software to its
these types of fees to investors, first European bank.
while others made it very diffi- Mr. Wald previously founded an electronic stock-trading
cult for those fund companies platform called EdgeTrade Inc., then sold it to Knight Capital
who did not pay to play.” Group in 2008.

MIDDLEFIELD EXCHANGE OFFER AND CASH OPTION

Sustainable Infrastructure
DIVIDEND FUND TSX Symbol (Reserved): INF.UN

IF YOU OWN SECURITIES OF ANY OF THE FOLLOWING ISSUERS, YOU ARE INVITED TO EXCHANGE THOSE SECURITIES FOR UNITS OF
SUSTAINABLE INFRASTRUCTURE DIVIDEND FUND - DEADLINE: PRIOR TO 5:00 P.M. (TORONTO TIME) ON FEBRUARY 20, 2020

Sustainable Infrastructure Dividend Fund (the “Fund”), is offering units of the Fund to POWER & RENEWABLES ISSUERS
investors at a price of $10.00 per unit in exchange for the securities of any of the issuers
listed here or for cash subscriptions.
 
  

 
   


   
Prospective purchasers under the exchange option are required to deposit their

  
exchange eligible securities prior to 5:00 p.m. (Toronto time) on February 20, 2020, in  
the manner described in the preliminary prospectus.    
    
The Fund’s investment objectives are to provide holders of units with:     
   
   
(i) stable monthly cash distributions, and    
(ii) enhanced long-term total return through capital appreciation of the Fund’s        
investment portfolio       
    
through a diversified, actively managed portfolio comprised primarily of dividend    
paying securities of global issuers focused on, involved in, or that derive a significant  


portion of their revenue from physical infrastructure assets, which the advisor believes   


will generate attractive risk-adjusted returns for the Fund due to the tangible, difficult to    

       
replicate, long-term nature of such assets and their ability to shape and support global     
economic activity. In addition, the portfolio will be focused on sustainable infrastructure    
by investing in securities of issuers whose infrastructure assets the advisor believes
have been developed and operated taking into account environmental, social and WATER UTILITIES & WASTE TREATMENT ISSUERS
governance considerations.


 


The initial target distribution yield for the Fund is 5% per annum based on the original

  




subscription price (or $0.04167 per unit per month or $0.50 per unit per annum).






Middlefield Capital Corporation, the advisor, will provide investment management   


advice to the Fund.     

  
 

DATA NETWORKS & COMMUNICATIONS ISSUERS

   


 









   
    
   
  

   

    
   
   
 


OTHER ISSUERS
    
   

JEREMY BRASSEUR    DEAN ORRICO      
   
ROB LAUZON    SHANE OBATA        
    

To learn more about Sustainable Infrastructure Dividend Fund, speak with your financial
advisor or contact us at:
! !%  & #$& 

 $&"  !(  # #   &  #
" "  !(
""  # 
#& ( '  # &  &#  !
%