By Zach Lechner-Sung
Happy Friday CBLB readers! It is time for another installment of Friday Finds – our recurring series where we share the week’s top corporate and securities law news stories. This week we will be discussing a recently certified class action against RBC Global Asset Management, a IIROC bulletin re-released in light of the GameStop short squeeze, and the potential decriminalization of single-game sports betting.
Last week, the Supreme Court of British Columbia certified a class-action lawsuit filed against RBC Global Asset Management Inc. in April of 2019. The lawsuit alleges that the investment manager charged excessive management fees with respect to its RBC Canadian Equity Fund, one of the bank’s most widely held mutual funds. The plaintiffs argue that the fund charged fees reflecting “an investment strategy based on active management”, when in reality it employed a low-cost “closet indexing” strategy designed to replicate the performance of the S&P/TSX Composite Index. “Active management” describes an investment strategy where a manager actively makes changes to a fund’s portfolio with the goal of outperforming a given benchmark. Compared to passive investing, a strategy where the investor simply buys a portfolio that mirrors a particular index, active management is generally more costly as it requires continuous oversight. The law firms representing the plaintiffs argue that RBC GAM failed to properly disclose the fund’s “true investment objectives and strategies”, and in doing so, charged “unjustified fees” to investors. In recent years, the popularity of mutual funds has declined significantly as investors turn to low-cost index funds and do-it-yourself (DIY) trading platforms. Where active management can be inconsistent and costly, passive investing offers a low-fee option for investors who are not concerned with beating the market. The case raises interesting questions about how regulators should classify “active management” and how managers should disclose investment strategies when considering investor expectations regarding fees and performance. The CBLB will continue to update this story as it evolves.
In light of the GameStop short squeeze discussed in last week’s Friday Finds, the Investment Industry Regulatory Organization of Canada (IIROC) has recently re-issued an investor bulletin outlining Order Execution Only (OEO) firms and the risks of DIY investing. Pandemic-related factors and a growing lack of confidence in actively managed funds has led to a recent surge in retail investor activity. In 2020, Canadians opened more than 2.3 million new investment accounts, an increase of 1.4 million over the prior year. As a result, IIROC has reported that DIY investor inquiries and complaints increased by 270% over the same period. The GameStop short squeeze highlighted the increasing use of discount brokers like Questrade and Robinhood among retail investors, as well as the power of social media and word-of-mouth to influence investment decisions. While many large institutional investors targeted by the short squeeze suffered as the price of GameStop stock soared, many “unsophisticated” investors also experienced significant losses as the stock declined over the past week. The reissued bulletin seeks to warn investors about the risks of DIY investing, especially where investors take on leverage or rely on unregulated sources of information. However, it may be the case that these warnings fall on deaf ears, as the re-issued bulletin only provides basic information and may not reach many retail investors. In any case, regulators will continue to face difficult decisions with respect to the responsibilities of OEO firms and the level of freedom that should be afforded to retail investors using their platforms.
As Super Bowl LV celebrations continued throughout the week, provincial governments and gaming corporations had their eye on Bill C-13, An Act to amend the Criminal Code (single-event sports betting), which proposes to decriminalize single-event sports betting. Currently, Section 207(4)(b) of the Criminal Code prohibits betting on single games or events, which has contributed to the growth of the gray market and the funneling of money to large offshore gambling websites. If passed, Bill C-13 would provide provinces and territories the power to regulate single-event betting for all sporting events other than horse racing. Proponents of the amendments have focused on the significant government revenue single-event sports betting would generate, as well as the positive outcomes experienced in the U.S. when single-event sports betting was legalized in 2018. Following the overturning of the U.S. Professional and Amateur Sports Protection Act, revenue in the sports gaming market increased by over 65%. While previous attempts to lift the prohibition against single-event sports betting were unsuccessful, Bill C-13 represents the first time decriminalization was proposed through a government bill with the support of a Minister. With significant support from provincial members of parliament as well as crown corporations, many are optimistic that single event sports betting will be available in Canada in time for the next Super Bowl.
That wraps up this week’s Friday Finds! Thanks for reading and be sure to check back next week for more business law news stories.