Investment Advisor Liability In Canada: Common Claims And Recent Decisions

• Published date: 12 May 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Corporate and Company Law, Contracts and Commercial Law, Class Actions, Professional Negligence, Securities, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Borden Ladner Gervais LLP
• Author: Mr Hunter Parsons, Curtis Fawcett, Wesley Lui (Summer Student) and Sadie Howe
• topic: Civil Procedure

As global capital markets enter a period of volatility and retraction after several years of outsized gains during the COVID-19 pandemic, some investors may have occasion to make a critical assessment of their investment portfolios. Investors who have suffered losses during the recent market downturn may look to place blame on their investment advisors, which may result in an uptick in lawsuits and regulatory complaints against investment advisors and dealers. It is a good time for investment advisors and dealers to refresh their understanding of their civil and regulatory liability and catch up on recent decisions from Canadian courts.

In this article, we provide a high-level overview of investment advisor liability in Canada, including the most common claims brought against investment advisors and dealers in court proceedings. We also summarize recent notable decisions from Canadian courts involving some of those claims and provide a few brief comments on the new regulatory regime for investment advisors that commenced on Jan. 1, 2023.

Civil liability

The most common claims made against investment advisors are in negligence, breach of fiduciary duty and breach of contract, with fraud claims less common.

Negligence

In general, investment advisors owe their clients a duty to carry out client instructions with care, skill and diligence and provide investment advice fully, honestly and in good faith. In most cases, if the investment advisor discharges those duties, then the advisor will not be considered negligent if the resulting investment turns out to be unprofitable.

In some cases, investment advisors will owe additional duties to their client, which will depend on the type of advice requested and provided, the kind of investments at issue and the sophistication of the client. Canadian courts have expressed the duties that may be owed by investment advisors as existing on a "spectrum," ranging from an advisor who is a "mere order taker" at the low end of the spectrum, to heightened duties for advisors who have been provided discretionary authority by their clients to make trades without obtaining specific instructions for each transaction.

The "know your client" rule and the corresponding concept of suitability are the cornerstones of the duties owed by investment advisors and dealers to their clients. The "know your client" rule is both a regulatory requirement and a common law obligation that requires the advisor to know and monitor, among other things, the client's investment objectives, risk tolerance, investment timelines and investment knowledge. The related duty to make sure that the client is placed in suitable investments involves a consideration of the particular characteristics of the client, including age, income, net worth, investment knowledge, investment objectives and risk tolerance.

While investment advisors and dealers are not guarantors of investments made by their clients, they are required to ensure that the client is aware of all positive and negative factors involved in a potential investment. They must also anticipate and provide appropriate advice to mitigate against foreseeable market downturns.

While regulatory rules will provide guidance as to the duties owed by investment advisors to their clients, civil cases are determined on a case-by-case basis; a breach of a regulatory rule does not automatically lead to civil liability.

In order for a court to find that an investment advisor is liable in negligence, the plaintiff must prove that they suffered an investment loss caused by the investment advisor's act or omission...