Protecting Against Class Actions ACCP Compliance Forum May 6, 2013

1. Protecting Against Class ActionsACCP Compliance ForumMay 6, 2013 Presented by: James D. G. Douglas

2. Protecting Against Class ActionsIssues • Failure to supervise a common issue? • The regulatory process – can it ever be a preferable procedure to a class action? • The proposed statutory best interest duty • Tips to avoid class actions • Preventative action • Pre-certification strategies • Create disincentives for class counsel • Fight

3. 1. Your Regulatory Obligations – Failure to Supervise a Certifiable Issue? French v. Investia Financial Services, 2012 ONSC 1150 • Proposed representative plaintiffs in the above action claims damages for negligence in relation to two advisors’ recommendations regarding leveraging - claim is against both the advisors and the dealer.

4. Failure to Supervise – French v. Investia • The following issues are certified: • What is the scope of the duty owed by the Defendants to the Class Members? • Against the advisors: • Did the advisors breach their duty to Class Members by adopting a systematic or “one-size-fits-all” approach to leveraged investments; and • Did the advisors breach their duty to Class Members by systematically providing investment advice (a) without warning them of the true risks of the strategy, (b) without regard to the industry standards for leveraged investments set out by the MFDA, and (c) without regard to the internal standards for leveraged investments set out by the dealer?

5. Failure to Supervise – French v. Investia • Against the dealer: • Did the dealer breach its duty to Class Members by: • failing to monitor and supervise the conduct of Karas and Stephenson • failing to ensure its agents complied with its own guidelines and those of the MFDA • Failing to prevent its agents from providing advice that was contrary to its own guidelines and that of the MFDA • Failing to take steps to advise Class Members of breaches of duty by its agents or take steps to correct those breaches in a timely manner

6. Failure to Supervise – French v. Investia • “The responsibility of Investia, as the mutual fund dealer, to supervise its sales representatives (Karas and Stephenson) is likewise an issue common to all the class members. It is alleged that Investia failed to ensure compliance with the MFDA regulations and guidelines or the internal guidelines of [the dealer]”

7. Failure to Supervise – French v. InvestiaWhat does it all mean? • two significant new issues: • an advisor can be the subject of a class proceeding regarding the suitability of the advice given to his or her clients as a class • the issue of whether a dealer has properly supervised the recommendations made by advisors is a certifiable common issue in a class proceeding

8. Failure to Supervise – French v. InvestiaRegulatory Investigations as Fodder for Plaintiffs’ Counsel • The dealer in French v. Investia also had an ongoing regulatory issue with the Mutual Fund Dealers Association of Canada • Settlement reached with the MFDA regarding supervisory issues, plaintiff’s counsel tried to adduce it as evidence going to the supervision issue despite the fact it dealt with a different dealer • Result – not admissible at certification stage, but may be relevant at the discovery stage

9. Failure to Supervise – French v. InvestiaAvoiding Exposure • Compliance with regulatory requirements now key from a civil exposure perspective (not just with respect to the traditional areas of concern, i.e. misrepresentations) • In entering into regulatory settlements, need to be cognizant of ramifications of admissions relating to a breach of regulatory obligations regarding supervision • Need to take proactive steps to ensure internal policies re: supervision are being complied with – i.e. policies re: updating KYC information, etc.

10. 2. The Regulatory Process – can it ever be a preferable procedure to a class proceeding? • Participating in a settlement process sanctioned by the regulator may not be enough to prevent certification on the basis that the regulatory process is a “preferable procedure”

11. Preferable ProcedureFischer v. IG Investment Management Ltd. • Court of Appeal says OSC proceedings and class proceedings serve disparate purposes • Lack of participatory rights of investors in the OSC proceedings is an issue

12. Preferable ProcedureFrench v. Investia • Ombudsman for Banking and Investment Services process – mandatory participation by IIROC and MFDA dealers • Not a preferable procedure: • Cannot compel cooperation (despite regulatory requirement to cooperate) • Cannot compel participating firm to make a payment recommended by OBSI • Can only recommend payment of $350,000 or less • Punitive damages cannot be claimed • No hearing process

13. Preferable ProcedureHow to Make Preferable Procedures Work for You • Ensure the preferable procedure has broad remedial powers • Ensure participation by potential class members in the process • The more the preferable procedure looks like an adjudicative process the better

14. 3. Proposed Statutory Best Interest Duty • On October 25, 2012, the Canadian Securities Administrators (CSA) published for comment CSA Consultation Paper 33-403, The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients.

15. Proposed Statutory Best Interest DutyPotential Effect on Class Actions • Broker dealers and mutual fund dealers may see increase in class actions • Duty would be the same to all clients • Would take away defence of client individuality • Would make certification of the common issue of breach of duty much easier, especially if claim is in relation to one investment or one investment strategy • Fiduciary relationships bring with them the full range of equitable remedies and potentially lower causation thresholds and more generous measures of damages

16. 4. Avoiding Class ActionsThe Problem • Low Threshold  Certification • Certification  Settlement • Settlement  $ for Class Counsel • $ for Class Counsel More Class Actions

17. Avoiding Class ActionsThe Solution • preventative action • pre-certification strategies • create disincentives for class counsel • fight

18. Avoiding Class Actions1. Preventative Action • Know the situations that increase your risk of exposure: • internal risk: i.e. when implementing new agreements; new products; identify and monitor risk factors • external risk: i.e. changes in jurisprudential or regulatory regimes • Internal Monitoring: • compliance issues • public statements about company’s plans, prospects and finances • customer complaints – identify trends • employees – if someone is significantly out-performing their peers look closely at how they achieve their success

19. Avoiding Class Actions1. Preventative Action • External Monitoring: • comments and discussions on the internet (“the largest focus group in the world”) • media reports • information from regulators • U.S. class actions (This is where plaintiffs’ counsel get ideas – copycat actions adapted to Canadian regulatory climate) • significant legislative changes or court decisions

20. Avoiding Class Actions2. Pre-Certification Strategies • Class actions are front-end loaded with both legal and non-legal strategizing costs • Respond quickly and have legal counsel propose solutions in a timely manner • Ensure on-going internal risk monitoring continues with a view of how new class action may result in further previously unidentified risks

21. Avoiding Class Actions2. Pre-Certification Strategies • Consider whether you can: • strike the action? • attack the adequacy of the representative plaintiffs? • challenge the common interests on the basis of “insufficient commonality”? • limit the class? • reduce financial risk and increase incentive for plaintiffs to settle • restrict the time period? • move for summary judgment to dismiss the action?

22. Avoiding Class Actions2. Pre-Certification Strategies • To settle or not to settle? • Thorough review of the substantive issues required • Assess case to determine if settlement is appropriate • Consideration of pros and cons of a settlement including the: • Tactical advantages and disadvantages • Cost of negative publicity / reputation / customer relations • Likelihood of success at the certification motion • Benefits of a judgment • Scope of damages • Cost of defending the case • Certainty and finality of a settlement

23. Avoiding Class Actions3. Removing incentives for plaintiffs’ counsel • Structure settlements to minimize benefit to class counsel • Challenge plaintiffs’ fees • Costs

24. Avoiding Class Actions4. Fighting after Certification • Best way to discourage class actions may be to defend them! • Manage reputational risk