Turpin v TD Asset Management Inc.

IN THE SUPREME COURT OF BRITISH COLUMBIA

Citation:

Turpin v. TD Asset Management Inc.,

2022 BCSC 1083

Date: 20220628

Docket: S194222

Registry: Vancouver

Between:

And

Dean Turpin

Plaintiff

TD Asset Management Inc.

Defendant

Brought under the Class Proceedings Act, R.S.B.C. 1996, c. 50

Before: The Honourable Justice Funt

Reasons for Judgment

Counsel for the Plaintiff, appearing in

person except for January 17 to 21, 2022

when counsel appeared via video

conference:

P. Bates

J. Archibald

Counsel for the Defendant, appearing in

person except for January 17 to 21, 2022

when counsel appeared via video

conference:

J. Yates

S.C. D’Souza

K. Hanowski

J. Choi

Place and Dates of Trial:

Vancouver, B.C.

August 30–31, Sept 1–3, 7–10

13– 17, 20–24, 27–29

October 1, November 22–26, 29–30

December 1–3, 2021 and

January 17–21, 2022

Place and Date of Judgment:

Vancouver, B.C.

June 28, 2022

Turpin v. TD Asset Management Inc.

Table of Contents

Page 2

1. INTRODUCTION ................................................................................................ 4

2. BACKGROUND ................................................................................................. 5

a) General ........................................................................................................... 5

b) Trailing Commissions.................................................................................... 10

c) Benchmark – No Effect on Returns............................................................... 11

3. PRINCIPLES OF PLEADINGS ........................................................................ 12

4. THE SECOND AMENDED NOTICE OF CIVIL CLAIM .................................... 13

5. STANDARD OF PROOF.................................................................................. 16

6. COMMON ISSUES........................................................................................... 16

7. PROSPECTUS DISCLOSURE......................................................................... 17

8. THE DECLARATION OF TRUST..................................................................... 18

9. UNITHOLDERS................................................................................................ 21

10. SECURITIES IN THE CEF, SECURITIES IN THE BENCHMARK................... 21

11. CLOSET INDEXING STRATEGY .................................................................... 22

12. TRUST DUTIES................................................................................................ 30

a) Mr. Turpin’s Position...................................................................................... 30

b) TDAM’s Position............................................................................................ 32

c) The DOT Should be Read in the Context of Trust Principles ........................ 33

13. TDAM – ORGANIZATIONAL OVERVIEW....................................................... 36

14. MR. TURPIN’S TESTIMONY AND OBJECTIVES ........................................... 40

15. KEY METRICS ................................................................................................. 45

a) Tracking Error, R-squared, and Active Share................................................ 45

b) Return on Equity ........................................................................................... 51

c) Alpha and Beta.............................................................................................. 52

d) Active Risk .................................................................................................... 52

e) Performance Tolerance Bands...................................................................... 53

16. ACTIVE MANAGEMENT OF THE CEF ........................................................... 55

17. EXPERT EVIDENCE........................................................................................ 69

a) Professor Martijn Cremers ............................................................................ 69

b) Professor Mikhail Simutin.............................................................................. 74

c) Professor Russell Wermers........................................................................... 80

d) Mr. David Jarvis ............................................................................................ 85

e) Mr. André Fok Kam....................................................................................... 87

Turpin v. TD Asset Management Inc.

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f) Mr. Daniel Bubis............................................................................................ 91

18. INTERNAL ANALYSIS IN RESPONSE TO PRESS REPORTS...................... 93

19. COMMON ISSUE NO. 1 – CLOSET INDEXING STRATEGY.......................... 95

20. COMMON ISSUE NO. 2................................................................................... 96

21. COMMON ISSUE NO. 3................................................................................. 107

22. COMMON ISSUES NOS. 4 TO 10 ................................................................. 108

23. RULINGS........................................................................................................ 109

a) Common Issue No. 1: In managing the Canadian Equity Fund, TDAM did not

use a Closet Indexing Strategy;.......................................................................... 109

b) Common Issue No. 2: TDAM, as trustee and manager of the Funds, did not

breach the Standard and Duty of Care;.............................................................. 109

c) Common Issue No. 3: None of the Public Disclosure Documents contained a

misrepresentation within the meaning of the BCSA or other Canadian Securities

Legislation; ......................................................................................................... 109

d) Common Issues Nos. 4 to 10: With the disposition of Common Issues Nos.

1 to 3, Common Issues Nos. 4 to 10 do not need to be engaged....................... 109

24. FURTHER MATTERS .................................................................................... 109

SCHEDULE “A”.................................................................................................... 110

SCHEDULE “B”.................................................................................................... 112

Turpin v. TD Asset Management Inc.

Page 4

1.

INTRODUCTION

By consent, on July 31, 2020, this action was certified as a class proceeding

[1]

(the “Certification Order”) under the Class Proceedings Act, R.S.B.C. 1996, c. 50

[CPA]. The Certification Order sets out ten common issues for trial. These are the

reasons relating to the trial of the common issues.

[2]

In this class action, the representative plaintiff, Mr. Turpin, says that the

defendant, TD Asset Management Inc. (“TDAM”), overcharged investors in specified

mutual funds for which TDAM was the trustee and manager. The central fund was

the Canadian Equity Fund (the “CEF”).

[3]

[4]

TDAM is a wholly-owned subsidiary of The Toronto-Dominion Bank.

By way of overview, Mr. Turpin, in his second amended notice of civil claim

(“Second ANOCC”), pleads:

Overview

[…]

3. Throughout the Class Period, the Defendant, trustee and manager of each

of the Funds, represented to Class Members that it actively managed the

Canadian Equity Fund. The Defendant charged the Canadian Equity Fund

and the Portfolio Funds (which were invested in the Canadian Equity

Fund) substantial fees for this purportedly active management.

4. In truth, the Defendant, as manager of the Canadian Equity Fund, carried

on a passive investment strategy designed to closely track or replicate, not

exceed, the performance of the Canadian Equity Fund’s benchmark index.

5. As a result of the Defendant’s undisclosed investment strategy, the

Canadian Equity Fund’s performance (before management fees) has

closely tracked the Benchmark and has never outperformed the

Benchmark once the Defendant’s management fees are taken into

account. The damage to Class Members resulting from this strategy and

the Defendant’s unjustified fees for purportedly active management has

been substantial.

[5]

The three key common issues read:

1. In managing the Canadian Equity Fund, did the Defendant use the Closet

Indexing Strategy?

2. Did the Defendant, as trustee and manager of the Funds, breach the

Standard and Duty of Care? If so, when and how?

Turpin v. TD Asset Management Inc.

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3. Did any of the Public Disclosure Documents contain a misrepresentation

within the meaning of the BCSA [BC Securities Act, R.S.B.C. 1996,

c. 418] (and, as applicable, the Other Canadian Securities Legislation)?

[6]

In both the Second ANOCC and the Certification Order, “Benchmark” and

“Closet Indexing Strategy” are defined as follows:

(b) “Benchmark” means the benchmark index of the Canadian Equity

Fund, which is the S&P/TSX Composite Total Return Index;

[…]

(f) “Closet Indexing Strategy” means an investment strategy designed

to closely track or replicate, not exceed, the performance of the

Benchmark;

[7]

For the reasons that follow, the Court finds that the plaintiff has failed to prove

any of the common issues.

2.

BACKGROUND

a) General

[8]

Counsel agreed upon a useful summary of many of the key background facts

and terms. With some minor stylistic changes and the removal of six schedules,

which give further particular detail, the summary reads:

About Mutual Funds

1. A mutual fund is a portfolio of investable assets that is managed by a

professional portfolio manager. A mutual fund allows investors to pool

their money and access professional management of investable assets

(including stocks, bonds, cash and units of other funds) that they may

otherwise not be able to access as individual investors.

2. Mutual funds are “manufactured” by an investment fund manager, such

as TDAM. An investment fund manager typically manufactures a variety

of mutual funds (which can include various series of units) that are

designed to cater to investors with different investment objectives, levels

of sophistication, portfolio preferences, risk tolerances, time horizons and

strategies (among other things).

3. Mutual funds are often set up through a trust structure and less

commonly, a corporate structure. In a trust structure, the trustee is the

legal owner of the mutual fund trust and is commonly also the investment

fund manager. Potential investors buy “units” of a mutual fund trust

through a dealer to become unitholders.

4. Mutual funds are “distributed” through various distribution channels such

as bank branches, private wealth management, financial planners and/or

Turpin v. TD Asset Management Inc.

advisors, full-service brokers/dealers, and discount brokers. Individual

Page 6

investors do not and cannot buy mutual fund units directly from TDAM.

TDAM Mutual Funds

5. TDAM’s mutual funds, including the CEF or the “Fund”, are organized

under a constating document called a declaration of trust (“DOT”). The

DOTs for TDAM’s mutual funds and its other documents prescribed by

securities law are publicly available online on SEDAR

(www.SEDAR.com), which is the System for Electronic Document

Analysis and Retrieval, used to access most securities-related

information with Canadian securities regulatory authorities. The CEF’s

disclosure on SEDAR goes back to 1997.

6. Like most mutual funds, TDAM mutual funds, including the Fund, have

several distinctive features compared to securities (i.e., stocks) of public

companies.

7. First, TDAM mutual funds are open-ended, meaning that new units of the

mutual fund are issued in the primary market every time an investor

purchases units of that fund. TDAM can manufacture an unlimited

number of units for the Fund and other mutual funds.

8. Second, there is no secondary market for TDAM mutual fund units (apart

from exchange traded funds). In other words, TDAM mutual fund units

are not traded between unitholders. The investment fund manager,

TDAM, is the counterparty to all transactions in which units of the mutual

fund are bought or redeemed through a dealer.

9. Third, the price of each mutual fund’s units is determined by TDAM, or its

agents, at the close of each business day, and is based on the net asset

value (“NAV”) of the fund (i.e., assets minus liabilities). The price of one

unit of a mutual fund is equivalent to the NAV divided by the number of

units of the fund. Where a TDAM mutual fund has multiple series, a

separate NAV (and NAV per unit) is calculated for each series.

10. Fourth, a unitholder who does not want to hold a TDAM mutual fund any

longer can redeem (i.e., sell) the units of the fund at any time, subject

only to exceptional circumstances in which redemptions may be

temporarily suspended.

11. Fifth, TDAM acts as both trustee and manager of all its mutual funds.

This is disclosed in the DOT and the mutual funds’ public disclosure.

Different Series of TDAM Mutual Funds

12. Investment fund managers may manufacture more than one “series”

(also known as a “class”) of the same mutual fund. Series allow

differently situated investors (e.g., investors from different distribution

channels) to participate in the same underlying mutual fund portfolio.

13. Each series of the same mutual fund is typically identified by a

designated name, letter or alphanumeric identifier. Different investment

fund managers may use different letters or alphanumeric designations for

similar series.

Turpin v. TD Asset Management Inc.

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14. Over the class period, TDAM has offered the following series of the CEF,

as described in the simplified prospectus:

Investor Series

(known as “A”

series at some

other mutual

funds)

Investors transacting on a no-load basis.

Large investors, such as institutions

and mutual funds, transacting on a

no-load basis who make the

O-Series

minimum investment as determined

by TDAM and have entered into an

O-series agreement with TDAM.

TDAM “fund of funds” (also known

as “portfolio funds”) hold O-Series

units

Advisor Series

Investors who are seeking

investment advice and want the

option of transacting on a front-end

load, back-end load, low-load or

low-load-2 basis.

Investors transacting on a no-load basis

who want to complete their transactions

through TD Direct Investing, a division of TD

Waterhouse Canada Inc., or other discount

brokers.

D-Series

F-Series

Investors participating in programs that

usually do not require the payment of sales

or redemption transaction charges by

investors or payment of service fees by

TDAM.

Large investors, such as group savings

plans and others, transacting on a no-load

basis who make the required minimum

investment, as determined by TDAM from

time to time.

Institutional Series

Premium Series

Large investors and others

transacting on a no-load basis who

make the required minimum

investment, as determined by TDAM

from time to time.

Large investors, such as institutions and

dealers, transacting on a no-load basis who

make the required minimum investment as

determined by TDAM and have entered into

a Private Series agreement with TDAM.

Private Series

Turpin v. TD Asset Management Inc.

Individual clients may hold Private Series

Page 8

and/or Private-EM Series Securities through

an account with a dealer or Financial

Advisor pursuant to a separate agreement

with such dealer or Financial Advisor.

15. During the class period, TDAM closed several of these series to

purchases by new investors (i.e., not all of the above-referenced series

were available for the duration of the class period).

Regulatory Disclosure

16. Securities legislation and regulation for mutual funds are provincially

regulated but harmonious throughout Canada. The thirteen provincial

and territorial securities regulators, working through an umbrella

organization known as the Canadian Securities Administrators (“CSA”)

have harmonized mutual fund regulation nationally through “National

Instruments”, which have been adopted in each province or territory.

17. All registrants in the mutual fund industry are guided and constrained by

the rules set out in various National Instruments (and their associated

companion policies and forms): NI 31-103, NI 81-101, NI 81-102, NI 81-

104, NI 81-105, NI 81-106, and NI 81-107 and the rules of self-regulatory

organizations, the Investment Industry Regulatory Organization of

Canada (“IIROC”) and the Mutual Fund Dealers Association of Canada

(“MFDA”).

18. TDAM is required to comply with the disclosure, reporting and other

requirements prescribed in the National Instruments. Among other things,

TDAM must provide investors and potential investors with information

about the Fund’s investment objectives and strategies, holdings, risks,

expenses and liabilities, and fee structure. TDAM must also regularly

report on the Fund’s performance. TDAM satisfies its various disclosure

and reporting obligations in relation to the Fund through the following

documents (the “Regulatory Disclosures and Reports”):

a) Simplified Prospectus: The simplified prospectus sets out a mutual

fund’s investment objectives and strategies, risks, suitability for certain

investors, distributions, and fund expenses, including trailing

commissions. Under securities law, a dealer must provide an investor

with the most recently filed simplified prospectus immediately after a

dealer accepts an instruction for the purchase of units of that mutual

fund. The content of the simplified prospectus is prescribed by NI 81-

101 and Form 81-101 F1.

b) Annual Information Forms: The annual information form, which is

incorporated by reference into the simplified prospectus, is intended to

provide disclosure about different matters than those discussed in the

fund facts documents and simplified prospectus, such as information

concerning the internal operations of the manager of the mutual fund.

c) Annual and Interim Management Reports of Fund Performance

(“MRFP”): The MRFP, which is incorporated by reference into the

simplified prospectus, is prescribed by Form 81-106F1. The MRFP

Turpin v. TD Asset Management Inc.

contains material updates about a mutual fund, including

Page 9

management’s discussion of the fund’s performance over the

reporting period. MRFPs are released semi-annually. They are filed

on SEDAR and are available on the TDAM website.

d) Fund Facts: The Fund Facts document, which is incorporated by

reference in to the simplified prospectus, is prescribed by Form 81-

101F3. A Fund Facts document is a concise and plain language

summary of key aspects of the mutual fund, including basic

information about the mutual fund, an explanation of mutual fund

expenses and fees, dealer compensation and investor rights. Under

current securities law, a dealer must provide an investor with the most

recently filed Fund Facts before a dealer accepts an instruction for the

purchase of units of that mutual fund.

e) Annual Financial Statements and Interim Financial Reports: The

financial statements, which are incorporated by reference into the

simplified prospectus, describe the financial position of the mutual

fund at the end of the financial year and at the end of the immediately

preceding year. The contents of the annual financial statement are

prescribed by NI 81-106. Interim financial reports are the financial

reports that may be produced for a mutual fund in the period between

the annual financial statements.

19. During the class period, the disclosure provided by TDAM with respect to

the CEF has evolved in response to regulatory requirements and

changes to the CEF.

Fees and Expenses

20. Mutual funds have expenses and fees that affect the investment return of

investors. The expenses and fees can vary depending on the mutual

fund or the series of the mutual fund.

21. The management expense ratio (“MER”) is the total of the administration

fees, management fees and fund costs (including taxes), expressed as a

percentage of the mutual fund’s assets. The MER is deducted from the

mutual fund’s assets. A mutual fund’s MER must be disclosed to

potential investors in the Simplified Prospectus, Fund Facts and other

documents and sources (e.g. online).

22. Administration fees are paid to investment fund managers like TDAM in

respect of certain series in consideration for TDAM paying certain

operating expenses of the fund. These operating expenses include fees

to cover their costs for accounting, legal, audit and filing, custodial,

record keeping, printing, mailing, stationary and other costs. Where an

administration fee is not charged in a mutual fund trust, the series of the

TD mutual fund trust will bear its respective pro rata share of these

operating expenses.

23. Fund Costs are costs and expenses associated with taxes, borrowing,

compliance with any new governmental and regulatory requirements, and

any new types of costs or expenses not incurred prior to the date of the

associated prospectus document. Generally TDAM mutual fund trusts

Turpin v. TD Asset Management Inc.

pay the Fund Costs, however, for some series TDAM will pay the Fund

Page 10

Costs.

24. Management fees are paid to investment fund managers like TDAM in

consideration of providing, or arranging for the provision of,

management, distribution, and portfolio management services and

oversight of any portfolio sub-advisory services provided to a mutual

fund. These include portfolio management fees to the investment

management firm for research, investment and professional

management, and if applicable, trailing commissions to mutual fund

dealers.

25. Portfolio transaction costs are the costs associated with portfolio

transactions, including brokerage commissions, to purchase and sell

portfolio securities and research and execution costs, if any. Portfolio

transaction costs, if any, are charged to the mutual fund. They are not

included in the MER calculation of the mutual fund and are disclosed as

a percentage of the daily average NAV of the mutual fund in the

management report of [fund] performance. This percentage is called the

trading expense ratio (“TER”).

26. Different fees are charged with respect to the different series of the CEF

based on, among other things, the services provided to the fund and

investors, and the distribution channel.

Portfolio Funds

27. Some investment fund products invest in units of other mutual funds (i.e.,

underlying funds) — these are called Fund of Funds or “portfolio funds”.

Unitholders of portfolio funds are not themselves unitholders of the

underlying funds in which the portfolio fund has invested.

28. Portfolio funds at TDAM hold O-series units of the underlying TDAM

mutual funds.

29. Portfolio funds are managed by a dedicated portfolio manager, whose

primary role is to determine which TDAM mutual funds to purchase as

well as the relative weights of those funds in the portfolio fund’s portfolio.

Portfolio funds at TDAM are classified by asset allocation and risk profile,

among other things.

The Benchmark

30. Since 2005, the Fund’s product benchmark has been the S&P/TSX

Composite Total Return Index (the “Benchmark”). The Benchmark is an

equity market index comprised of approximately 250 of the largest

companies on the Toronto Stock Exchange.

b) Trailing Commissions

[9]

Like most individual retail investors, Mr. Turpin acquired units of the Investor

Series. Mr. Turpin’s financial advisor was paid a trailing commission. The trailing

Turpin v. TD Asset Management Inc.

Page 11

commission continues so long as the investor continues to hold units (based on the

number of units then held).

[10] The annual trailing commission for an Investor Series unitholder is 1% based

on the average daily value of the unitholder’s units.

[11] The trailing commissions associated with Investor Series units are paid by

TDAM to the unitholder’s financial advisor as part of TDAM’s management fee. It is

deducted in computing the NAV related to the unitholder’s units.

[12] The disclosure documents, such as the July 24, 2014 Fund Facts, describe

the purpose of trailing commissions as follows:

It is for the services and advice that your representative and their firm provide

to you.

[13] Other disclosure documents have the same or similar descriptions.

[14] Mr. Turpin bought units in both the CEF and one of the TDAM Portfolio

Funds. As noted above, a unitholder of a Portfolio Fund holds units in that fund and

not CEF units.

[15] The necessary agreements are made to ensure that there is not a duplication

of fees or expenses. The trailing commissions associated with units in a Portfolio

Fund would be paid by that Portfolio Fund (reducing the NAV of the units held by the

unitholder in the Portfolio Fund accordingly). A TDAM Portfolio Fund that invested in

CEF units would hold O-Series units and, accordingly, trailing commissions are not

charged with respect to these units.

c) Benchmark – No Effect on Returns

[16] A unitholder’s return is based on the change in NAV of units of the particular

series, held by the unitholder, between the date of purchase and redemption.

[17] A unitholder’s return is not affected by the CEF’s performance relative to the

Benchmark.

Turpin v. TD Asset Management Inc.

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[18] TDAM’s fees and expenses are also independent of the Benchmark. TDAM is

not entitled to a performance fee, bonus, or any other amount tied to the Benchmark.

[19] TDAM does not represent that it will outperform the Benchmark.

3.

PRINCIPLES OF PLEADINGS

[20] In Mercantile Office Systems Private Limited v. Worldwide Warranty Life

Services Inc., 2021 BCCA 362, Justice Voith, writing for our Court of Appeal,

summarized the importance of pleadings:

[21]

Pleadings are foundational. They guide the litigation process. This is

true in relation to the discovery of documents, examinations for discovery,

many interlocutory applications and the trial itself.

[22]

Pleadings also give effect to the underlying policy objectives of the

Rules, which are to ensure the litigation process is fair and to promote justice

between the parties: Wong v. Wong, 2006 BCCA 540 at paras. 22–23. They

enable the parties and the court “to ascertain with precision the matters on

which parties differ and the points on which they agree; and thus to arrive at

certain clear issues on which both parties desire a judicial decision”: 1076586

Alberta Ltd. v. Stoneset Equities Ltd., 2015 BCCA 182 at para. 55, citing D.B.

Casson & I.H. Dennis, eds, Odgers’ Principles of Pleading and Practice in

Civil Actions in the High Court of Justice, 21st ed (London: Stevens & Sons,

1975) at 75–76.

[23]

For the court, pleadings serve the ultimate function of defining the

issues of fact and law that will be determined by the court. In order for the

court to fairly decide the issues before them, the pleadings must state the

material facts succinctly: Sahyoun v. Ho, 2013 BCSC 1143 at paras. 15–22;

Shoolestani v. Ichikawa, 2018 BCCA 155 at para. 30; Weaver v. Corcoran,

2017 BCCA 160 at para. 63. They must be organized in such a way that the

court can understand what issues the court will be called upon to decide:

Frederick M. Irvine, ed., McLachlin & Taylor, British Columbia Practice, 3rd

ed, vol 1 (Markham, Ont.: LexisNexis Canada Inc., 2006) (loose‑leaf updated

2021) at 3–6; Simon v. Canada (Attorney General), 2015 BCSC 924 at

paras. 17–18, aff’d 2016 BCCA 52.

[21] In Mercantile, Justice Voith further described that which constitutes a material

fact:

[45]

What constitutes a material fact is well understood. Material facts are

the elements essential to formulate a claim or a defence. In Danyluk v.

Ainsworth Technologies Inc., 2001 SCC 44, Justice Binnie said:

[54] A cause of action has traditionally been defined as comprising

every fact which it would be necessary for the plaintiff to prove, if

disputed, in order to support his or her right to the judgment of the

Turpin v. TD Asset Management Inc.

court …. Establishing each such fact (sometimes referred to as

Page 13

material facts) constitutes a precondition to success. …

[46]

This Court adopted a similar definition of material facts in Young v.

Borzoni et al, 2007 BCCA 16 at para. 20:

[20] … “Material fact” is defined in Delaney & Friends Cartoon

Productions Ltd. v. Radical Entertainment Inc., 2005 BCSC 371 at

paragraph 9 as, “one that is essential in order to formulate a

complete cause of action. If a material fact is omitted, a cause of

action is not effectively pleaded.”

[47]

In Jones v. Donaghey, 2011 BCCA 6 at para. 18, the Court said:

[18] Thus, a material fact is the ultimate fact, sometimes called

“ultimate issue”, to the proof of which evidence is directed. It is the last

in a series or progression of facts. It is the fact put “in issue” by the

pleadings. Facts that tend to prove the fact in issue, or to prove

another fact that tends to prove the fact in issue, are evidentiary or

“relevant” facts. …

[48]

Most recently, in Muldoe v. Derzak, 2021 BCCA 199 at para. 31, this

Court said:

[31]

… A material fact is one that is essential to formulate a cause

of action. If supporting material facts are omitted, a cause of action is

not effectively pleaded …

[22] In Saadati v. Moorhead, 2017 SCC 28, at para. 9, Justice Brown, writing for

the Supreme Court of Canada, stated that “cases should not be decided on grounds

not raised… This rule is an instance of natural justice; each party is entitled to know

and respond to the case it must answer”.

4.

THE SECOND AMENDED NOTICE OF CIVIL CLAIM

[23] In addition to the definitions of Benchmark, Closet Indexing Strategy, and the

overview paragraphs set forth above, the key portions of the Second ANOCC read:

2. […]

(u) “Funds” means collectively the Canadian Equity Fund and the

Portfolio Funds

[…]

29. Mutual funds are generally classified as either actively managed funds or

as passive (index) funds. Actively managed funds are operated with the

goal of producing excess risk-adjusted returns that outperform a

particular market benchmark (providing higher returns or lower risk than

the benchmark) by carefully choosing stocks that fit the fund’s investment

style and that the fund manager reasonably expects to collectively

outperform the fund’s benchmark. Index funds, by contrast, are designed

Turpin v. TD Asset Management Inc.

to closely track or replicate the performance of a specific benchmark,

Page 14

allowing investors to invest money knowing that they will get performance

roughly equal to the performance of that benchmark.

30. Actively managed funds change their portfolio positions on a regular

basis in order to hold securities that, in the fund manager’s view, are

likely to outperform their respective benchmarks. The managers of such

funds charge higher fees than index funds because of the higher

expenses associated with research to select stocks, and the expenses

associated with increased trading activity.

31. In managing the Canadian Equity Fund throughout the Class Period, the

Defendant implemented and used the Closet Indexing Strategy.

32. As a result of the Closet Indexing Strategy, the Canadian Equity Fund’s

performance throughout the Class Period has closely tracked the

Benchmark (before the Defendant’s management fees) and has not

outperformed the Benchmark once management fees are taken into

account:

[Charts Omitted]

33. The fees that the Defendant charged to the Funds for active

management of the Canadian Equity Fund were improper because the

Defendant’s Closet Indexing Strategy was a passive investment strategy.

The Defendant had no reasonable expectation that the Canadian Equity

Fund would outperform the Benchmark once its management fees were

taken into account.

34. The Defendant knows or ought to know, and at all material times knew or

ought to have known, the Closet Indexing Strategy would cause loss to

Class Members, including those who were unitholders of the Portfolio

Funds, which have or had invested in the Canadian Equity Fund.

35. Form 81-101F1 requires, inter alia, that a Simplified Prospectus set out

“the fundamental investment objectives of the mutual fund, including

information that describes the fundamental nature of the mutual fund, or

the fundamental features of the mutual fund”; “the principal investment

strategies that the mutual fund intends to use in achieving its investment

objectives”; and “the process by which the mutual fund’s portfolio adviser

selects securities for the funds portfolio, including any investment

approach, philosophy, practices or techniques used by the portfolio

adviser or any particular style of portfolio management that the portfolio

adviser intends to follow.”

36. During the Class Period, the Defendant, in violation of NI 81-101 and

Form 81-101F1, made representations about the investment objectives

and investment strategies applicable to the Canadian Equity Fund in

Simplified Prospectuses for the Canadian Equity Fund as follows:

Investment objectives

The fundamental investment objective is to achieve long-term capital

appreciation through investments in high-quality equity securities issued

principally by Canadian corporations judged to offer high growth

potential.

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[…]

Investment strategies

The portfolio adviser seeks to achieve the fundamental investment

objective of the Fund by emphasizing growth, while at the same time

containing investment risk. This is addressed by focusing on the quality

of management of individual companies and the long-term prospects for

individual industries.

In general, superior return on equity and a sound balance sheet are

important criteria in the individual security selection process.

[…]

41. The Simplified Prospectuses, Management Reports, and Fund Facts

Documents disseminated by the Defendant in respect of the Canadian

Equity Fund during the Class Period failed to disclose the Closet

Indexing Strategy.

42. The Simplified Prospectuses, Management Reports, and Fund Facts

Documents disseminated by the Defendant in respect of the Canadian

Equity Fund were incorporated by reference into the Simplified

Prospectuses and Management Reports of the Portfolio Funds.

43. The object, effect, and common import of the above representations in

the Simplified Prospectuses, Management Reports, and Fund Facts

Documents, in conjunction with the Defendant’s omission of the material

facts in respect of the Closet Indexing Strategy, is and was at all material

times to create the impression, and lead investors including the Plaintiff

and other Class Members to reasonably expect, that the Defendant

actively manages the Canadian Equity Fund with the aim of achieving

Fund performance that exceeds the performance of the Benchmark

(collectively, the “Active Management Representation”).

44. As a result of the Closet Indexing Strategy, the Active Management

Representation is and was at all material times false and misleading

because (i) the objective of the Closet Indexing Strategy — to match the

performance of a benchmark index — is and was at all material times

inconsistent with active management (such as, for e.g., researching

individual companies and industries and judging their high growth

potential) by the Defendant; (ii) the Defendant had no reasonable

expectation that the Canadian Equity Fund would outperform the

Benchmark once the Defendant’s management fees were taken into

account; or (iii) the Canadian Equity Fund had no reasonable prospect of

outperforming the Benchmark once the Defendant’s fees for managing

the Canadian Equity Fund were taken into account. The Defendant’s

implementation and use of the Closet Indexing Strategy meant that the

Defendant managed the Canadian Equity Fund in a manner which was

materially different than and/or contrary to the Canadian Equity Fund’s

stated investment objectives and strategies. The Closet Indexing

Strategy, which is a passive investment strategy, does not, and at all

Turpin v. TD Asset Management Inc.

material times did not, justify the Defendant’s receipt of the Excess

Page 16

Management Fees out of the Fund’s assets.

45. The Closet Indexing Strategy has involved the Defendant trading in and

out stocks in order to keep its overall portfolio highly correlated with the

underlying benchmark index, which trading activity also serves to conceal

that the Closet Indexing Strategy is passive in nature. At all material

times, the Defendant’s trading activity has been significantly greater than

the trading activity which has occurred in passive index funds that track

the same underlying benchmark. As a result of the more frequent trading

associated with Closet Indexing Strategy, Excess Trading Costs were

paid out of the Funds’ assets, reducing the value of Class Members’

units. The Defendant’s trading activity associated with the Closet

Indexing Strategy also unnecessarily triggered capital gains which were

passed on to investors including the Class Members.

46. Had the Defendant’s Closet Indexing Strategy been disclosed as

required by applicable Canadian securities laws and regulations

governing mutual funds, a reasonable investor would have invested in an

index mutual fund or an ETF [exchanged-traded fund] tracking the

Benchmark, because the management fees of those funds (in the range

of 0.05%-0.25% for the ETF during the Class Period), and the associated

trading costs, are, and were at all material times, a small fraction of the

management fees charged by the Defendant to manage the Canadian

Equity Fund (for e.g., 1.85% for the Canadian Equity Fund’s Investor

Series units).

5.

STANDARD OF PROOF

[24] In F.H. v. McDougall, 2008 SCC 53, the Supreme Court of Canada held that,

in civil cases, regardless of the seriousness of the allegation, proof on a balance of

probabilities is the standard. Justice Rothestein, writing for the Court, stated:

[49]

In the result, I would reaffirm that in civil cases there is only one

standard of proof and that is proof on a balance of probabilities. In all civil

cases, the trial judge must scrutinize the relevant evidence with care to

determine whether it is more likely than not that an alleged event occurred.

[25] Justice Rothestein also stated: “evidence must always be sufficiently clear,

convincing and cogent to satisfy the balance of probabilities test”: F.H. at para. 46.

6.

COMMON ISSUES

[26] The common issues read:

The Closet Indexing Strategy

1. In managing the Canadian Equity Fund, did the Defendant use the Closet

Indexing Strategy?

Turpin v. TD Asset Management Inc.

Page 17

Legal Obligations of the Trustee and Manager

2. Did the Defendant, as trustee and manager of the Funds, breach the

Standard and Duty of Care? If so, when and how?

Prospectus Misrepresentation

3. Did any of the Public Disclosure Documents contain a misrepresentation

within the meaning of the BCSA (and, as applicable, the Other Canadian

Securities Legislation)?

Unjust Enrichment

4. If the answer to (1) is yes, was the Defendant enriched by using the

Closet Indexing Strategy?

5. If the answer to (4) is yes, did some or all of the Class Members suffer a

corresponding deprivation?

6. If the answers to (4 and 5) are yes, was there a juristic reason for the

enrichment of the Defendant?

Remedies

7. If the Defendant is found liable for breach of trust, prospectus

misrepresentation, or unjust enrichment, can remedies be determined on

a class-wide basis? If so, how?

8. If the answer to (1) is yes, does the Court have the power to grant any

remedy in respect of Excess Management Fees and Excess Trading

Costs? If so, what remedy, if any, should be granted?

Interest

9. If the Defendant is found liable, should the Defendant be ordered to pay

an equitable rate of interest or pre-judgment and post-judgment interest

pursuant to the Court Order Interest Act? If so, on what basis and in what

amount?

Administration and Distribution

10. If the Defendant is found liable, should the Defendant pay some or all of

the costs of administering and distributing the recovery? If so, in what

amount?

7.

PROSPECTUS DISCLOSURE

[27] The CEF’s prospectus sets forth the investment objectives as follows:

Investment objectives

The fundamental investment objective is to achieve long-term capital

appreciation through investments in high-quality equity securities issued

principally by Canadian corporations judged to offer high growth potential.

The fundamental investment objective may only be changed with the

approval of a majority of unitholders, given at a meeting called for that

purpose.

Turpin v. TD Asset Management Inc.

Page 18

[28] For the matter at bar, the relevant portions of the CEF’s description of

investment strategies read (in part):

Investment strategies

The portfolio adviser seeks to achieve the fundamental investment objective

of the Fund by emphasizing growth, while at the same time containing

investment risk. This is addressed by focusing on the quality of management

of individual companies and the long-term prospects for individual industries.

In general, superior return on equity and a sound balance sheet are important

criteria in the individual security selection process. The Fund may invest in

exchange-traded funds.

[…]

The Fund may invest in foreign securities to an extent that will vary from time

to time but is not typically expected to exceed 30% of the total value of the

assets of the Fund at the time that foreign securities are purchased.

8.

THE DECLARATION OF TRUST

[29] As noted, the CEF was established under a declaration of trust (the “DOT”).

TDAM is the trustee of the CEF. Since the DOT was first settled, there have been

various amendments.

[30] For the purposes at bar, the various amendments have not affected the

DOT’s key provisions.

[31] The DOT’s key provisions read:

1.1

Definitions

In these Amended, Consolidated and Restated Declarations of Trust,

unless the subject matter or context otherwise requires, the expression

[…]

(h) “Fund” means any of the unit trusts, being the open-end mutual funds,

governed by these Declarations of Trust and listed on the attached

Schedule 1.1(h) and “Funds” means all of the open-end mutual funds

governed by these Declarations of Trust and listed on the attached

Schedule 1.1(h);

[…]

(x) “Standard and Duty of Care” means in respect of any person or

company performing duties on behalf of the Fund, the obligation to:

(i) exercise the powers and discharge the duties of its office

honestly, in good faith and in the best interests of the Fund; and

Turpin v. TD Asset Management Inc.

Page 19

(ii) exercise the degree of care, diligence and skill that a reasonably

prudent person would exercise in the circumstances;

[…]

1.9

Unitholder Rights

Unitholders shall have no rights other than those rights expressly

provided for unitholders herein or added by amendment hereto.

[…]

2.5

Ownership of Fund Assets

The Trustee in its capacity as trustee and on behalf of the unitholders

shall have sole legal title to the assets of the Fund. All assets of the Fund

shall at all times be considered as property held in trust by the Trustee as

trustee of the Fund according and subject to the provisions of these

Declarations of Trust and the Trustee shall be entitled to exercise, in its

discretion, all rights and powers of an owner of the assets of the Fund

including the power to enter into all agreements which it deems necessary on

behalf of the Fund. No unitholder shall have or be construed to have

individual ownership of any asset of the Fund and the interest of a unitholder

shall consist only of the right to receive payment from the Fund at the time,

place, in the manner and subject to the conditions herein expressly provided.

[…]

2.7

Legal Character of the Fund

The Fund is not intended to be and shall not be treated as anything

other than a trust of which the unitholders are beneficiaries with the rights

ascribed to them hereunder and with no other rights. Without limitation, the

Fund does not constitute a partnership, joint venture or corporation.

[…]

9.1

Powers of the Trustee

By way of supplement to the provisions of any act of any province of

Canada for the time being relating to trustees and in addition to any other

provision of these Declarations of Trust, it is expressly declared as follows:

[…]

(d) the Trustee may

(i)

employ and contract with, for and on behalf of the Fund, a

manager, investment advisers, brokers, agents (including sales

agents), bankers, chartered accountants, legal counsel,

notaries, officers and servants that the Trustee may reasonably

require for the proper discharge of its duties hereunder,

including with entities which may be affiliates of the Trustee;

(ii)

pay for, out of the assets of the Fund, reasonable remuneration

for all services performed for the Fund without taxation of any

costs or fees of legal counsel;

[…]

Turpin v. TD Asset Management Inc.

Page 20

[…]

9.2

Standard and Duty of Care

In performing its duties hereunder, the Trustee shall discharge such

duties in accordance with the Standard and Duty of Care.

9.3

Responsibility of Trustee as Manager

The Trustee shall be responsible for any loss that arises out of the

failure of the Trustee, or any person retained by the Trustee or the Fund, to

discharge any of the Trustee’s responsibilities as manager in accordance with

the Standard and Duty of Care.

[…]

11.1 Management Services

The Trustee shall provide, or arrange for the provision of, management

services to the Fund, including the day-to-day administration of the activity of

the Fund, the preparation and filing of a prospectus to permit continuous

offering of the Units to the public in those jurisdictions specified from time to

time by the Trustee, the preparation of all written and printed material for

distribution to potential investors and existing unitholders in compliance with

the registration, filing, reporting and similar requirements of all regulatory

bodies having jurisdiction over the Fund, the provision of office space and

facilities, clerical help, bookkeeping and the internal accounting and auditing

services required by the Fund, the provision of registry and transfer agency

services, distribution crediting services and all other unitholder services and

management services. In providing the said management services, the

Trustee shall be entitled to retain one or more persons or companies on such

terms and conditions as it considers appropriate and such persons or

companies, including TDAM, may be delegated full responsibility for all or

part only of such services and they may sub-delegate such responsibility with

the prior written consent of the Trustee. The Trustee has delegated full

responsibility for all such services to TDAM.

[…]

13.1 Fee

(a) […] In consideration of the management services provided by TDAM

as described in Article 11, the Trustee shall pay, as Trustee of the

Fund, to TDAM, the fee set out in Schedule 13.1 with respect to all

Series of Units other than the O-Series and Private Series Units. […]

[32] As noted, TDAM was the trustee of the CEF. Under s. 11.1 of the DOT,

TDAM, as trustee, also delegated full responsibility for all management services to

itself.

Turpin v. TD Asset Management Inc.

Page 21

[33] The applicable DOT provisions for the various Portfolio Funds are the same.

For each of the Portfolio Funds, TDAM, as trustee, has delegated full responsibility

for all management services to itself.

9.

UNITHOLDERS

[34] Attached as Schedule “A” are two charts which show the unitholders by series

in the CEF as of January 1, 2010 (the first day of the Class Period) and as of July 1,

2020 (the last day of the Class Period is July 31, 2020).

[35] During the Class Period, the CEF’s NAV increased from approximately $3

billion to approximately $5 billion.

10. SECURITIES IN THE CEF, SECURITIES IN THE BENCHMARK

[36] For illustrative purposes, I have attached as Schedule “B” a breakdown as of

January 1, 2015 of the securities held in the CEF relative to securities forming part of

the Benchmark. The breakdown shows:

a)

b)

c)

the securities held in the CEF and also part of the Benchmark;

the securities held in the CEF but not part of the Benchmark; and

the securities which are part of the Benchmark but not held in the CEF.

[37] As noted, the Second ANOCC and the Certification Order (by consent) each

defines Benchmark as meaning “the benchmark index of the Canadian Equity Fund,

which is the S&P/TSX Composite Total Return Index”.

[38] Professor Martijn Cremers, Dean of the Mendoza College of Business at the

University of Notre Dame, testified that he agreed with the following as a fair

definition of a benchmark:

Benchmarks are typically market indices that track the performance of a fixed

portfolio of assets of a particular type.

[39] As described below, Professor Cremers was qualified to provide opinion

evidence to assist the Court. Further below, I review aspects of Professor Cremers’s

Turpin v. TD Asset Management Inc.

Page 22

opinion evidence along with the other experts that were qualified to provide opinion

evidence.

11. CLOSET INDEXING STRATEGY

[40] In the case at bar, a key issue is whether TDAM used the “Closet Indexing

Strategy”.

[41] The Second ANOCC and the Certification Order (by consent) use the same

definition of Closet Indexing Strategy. For ease of reference, the definition reads:

“Closet Indexing Strategy” means an investment strategy designed to closely

track or replicate, not exceed, the performance of the Benchmark.

[42] The first two paragraphs of Mr. Turpin’s closing written submissions read:

1.

Is closet indexing limited to “pure indexing” – i.e., cases in which the

individual portfolio manager conducts little or no research and deceitfully

replicates the benchmark, while disclosing active management investment

strategies and charging active management fees? Or does closet indexing

encompass a strategy in which the portfolio manager – the enterprise not just

a lone individual – closely tracks the performance of the benchmark over time

by not taking sufficient active risk, such that the fund has no reasonable

prospect of outperformance after accounting for the manager's fees? If the

latter, what obligations arise in relation to disclosure and fees?

2.

The answers to these core questions must be developed by applying

the proper laws applicable to trustees and managers of Canadian mutual

fund trusts. They operate in a trust relationship with unitholders. Trustees

and managers have the highest possible obligations in law to put the interests

of the unitholders first (loyalty) and to always act with the level of due care

owed by professionals. In all dealings with unitholders, including those who

are considering a purchase of units, trustees and managers must provide full,

true and plain disclosure. Provincial securities laws impose strict disclosure

obligations of all material facts for which there is no due diligence defence.

Unitholders are deemed to rely on disclosures, which means they are

presumed to be prejudiced by misrepresentations, including those made in

the form of omissions to disclose material facts. It cannot be seriously

contested that a strategy to closely track an index must be disclosed to

investors. TDAM's CEO admitted that he would not expect an active

manager to use such a strategy. Indeed, no rational investor would pay

premium active management fees for a fund managed with that strategy.

[43] During oral submissions, Mr. Bates, counsel for Mr. Turpin, stated that the

first question of the first paragraph quoted above was intended to capture TDAM’s

position and that the second question was intended to capture Mr. Turpin’s position.

Turpin v. TD Asset Management Inc.

Page 23

Mr. Bates said that Mr. Turpin’s focus was on the words “closely track” and TDAM’s

focus was on the word “replicate” in the definition of the “Closet Indexing Strategy”.

Mr. Bates submitted that the word “replicate” is intended to capture “pure indexing”

(a phrase not defined in either the Second ANOCC or the Certification Order).

[44] Mr. Bates submitted that TDAM’s approach requires deceit, fraud, or

dishonesty for a finding of closet indexing. Mr. Bates further submitted that

Mr. Turpin’s approach is not so constrained. Mr. Bates further submitted that there

can be a “set of behaviours” that “closely track” the Benchmark and such may

constitute closet indexing.

[45] Mr. Turpin’s closing written submissions has further supportive detail:

101. The Certification Order: TDAM took the position in its opening and

in its challenges to the plaintiff's experts that the plaintiff was adducing

evidence that was inconsistent with the definition of the Closet Indexing

Strategy set out in the Certification Order. TDAM’s argument was based on

its subjective expectations about the meaning of terms in Common Issue

No. 1. TDAM claimed prejudice if its expectations were not accepted by the

Court.

102. Objective judicial interpretation prevails: TDAM’s approach

reflects serious legal error. Court orders are not interpreted based on

litigants’ subjective viewpoints. Court orders are an instance of the Court

exercising its jurisdiction, so orders reflect proper administration of justice. In

case of disagreement, the Court determines objectively the proper and

reasonable interpretation of its own order having regard to the circumstances

at the time that order was made as reflected in the pleadings, the notice of

application, and the affidavits filed on the application.

103. Context of the certification order: The definition of the Closet

Indexing [Strategy] in the Certification Order is the same as in the [Second

ANOCC]. It is the same definition that Prof. Simutin considered and

addressed in his affidavit in support of the plaintiff's application for

certification. There is no basis for TDAM to ask for an interpretation of the

Certification Order that differs from that contained in the materials filed on the

certification application. Nothing in those materials is consistent with TDAM's

chosen meaning of closet indexing and Common Issue No. 1 (deceitful

replication of the Benchmark) and its assertion that there is no closet indexing

if an individual portfolio manager has a process and a hope, belief, or

conviction that he might, at some point in time, outperform the fund's

benchmark.

104. The Closet Indexing Strategy: The definition of the Closet Indexing

Strategy must be construed objectively, consistent with the requirement of

full, plain, and true disclosure in prospectuses, the purpose of which is

investor protection. Disclosure is the touchstone of selling investment fund

Turpin v. TD Asset Management Inc.

Page 24

units to retail investors. National Instrument 81-101 – Contents of Prospectus

contemplates that a mutual fund's investment objectives and strategies be

presented to investors so that they can evaluate the costs and risks of owning

units of the mutual fund.

105. Elements in this case: The words used in the definition of the Closet

Indexing Strategy capture the following:



“investment strategy” refers to NI 81-101F1, which covers “any

investment approach, philosophy, practice, techniques” used in

the portfolio manager's investment process;

“designed” refers to an objective of the investment strategy on

the basis that accidental close tracking of the Benchmark's

performance over a long period of time is unlikely;

“closely track or replicate” distinguishes between replication,

which would be pure indexing, and close tracking. "Closely

track" reflects trading around a narrow margin of variation from

the Benchmark.



“not exceed” is intended to address the question: how close is

too close for the purpose of an investment strategy being closet

indexing? Closet tracking of the Benchmark harms investors

when it means that the fund has no reasonable prospect of

outperforming the Benchmark after fees. “Not exceed” means

not to exceed after fees, which is consistent with the plaintiff's

allegations in the [Second ANOCC] and Prof. Simutin's affidavit

in support of certification, in which he stated that the

“performance [of closet indexers] before fees are deducted can

be expected to closely track the performance of the Benchmark.

After investor fees are paid, these funds can be expected to

deliver below-benchmark performance to their investors.”



“performance of the Benchmark” refers to the risk-adjusted

returns of the Benchmark.

106. How closet indexing is “passive”: Contrary to TDAM's

representation in its written opening submission, Common Issue No. 1 does

not define the Closet Indexing Strategy as a "passive investment strategy".

The [Second ANOCC] pleads that the Closet Indexing Strategy is a passive

investment strategy providing additional allegations about what that means.

The plaintiff did not plead that closet indexing requires complete replication of

the index, lack of an active process on the part of the portfolio manager, or a

fraudulent or deceitful intent by an individual portfolio manager.

107. Evidentiary context: Dr. Simutin's affidavit in support of certification

was clear that funds using closet indexing are a "subset" of actively managed

funds (i.e. they are not passive funds). He explained what is meant by the

Closet Indexing Strategy being a "passive strategy":

“Closet indexers thus purport to be active but their investments are

more similar to those of passive index funds than truly active funds.

And yet, the passive nature of the investments by closet indexers

comes with active management fees.”

Turpin v. TD Asset Management Inc.

Page 25

…

“Unlike passive index funds, a fund pursuing a closet indexing strategy

is unlikely to buy and hold a portfolio that exactly mimics the

composition of its benchmark index as doing so would make it

blatantly obvious that the fund is pursuing a passive strategy. Instead,

the closet indexer can be expected to trade in and out stocks in a way

that keeps its overall portfolio highly correlated with the benchmark

index.”

108. TDAM’s definition of closet indexing: The Court should reject the

definition of "closet indexing" put forth by TDAM at trial: pure indexing

involving deliberate fraud/deceit to replicate the Benchmark with minimal or

no activity. This definition is not reflected in the Certification Order. It was

apparent from the testimony of Messrs. Cooper, Moore, and DaCosta that

TDAM adopted this definition after the litigation commenced. TDAM's experts

likewise adopted this erroneous definition of closet indexing.

[Footnotes omitted.] [Emphasis in original.]

[46] For several reasons, I will not adopt Mr. Bates’s reading of the definition of

Closet Indexing Strategy.

[47] First, as noted, Closet Indexing Strategy was defined identically in the Second

ANOCC and the Certification Order.

[48] With Closet Indexing Strategy defined in the Second ANOCC, the Second

ANOCC provides important context. In particular, as may be seen above, Mr. Turpin

at paragraph 4 of the Second ANOCC, pleads:

In truth, the Defendant, as manager of the Canadian Equity Fund, carried on

a passive investment strategy designed to closely track or replicate, not

exceed, the performance of the Canadian Equity Fund’s benchmark index.

[49] Paragraph 4 of the Second ANOCC refers specifically to a “passive

investment strategy” stated to be undertaken by TDAM. Such is pleaded in contrast

to active management as disclosed and represented to Class Members (the last

sentence of para. 5 of the Second ANOCC).

[50] Paragraphs 29 to 34 of the Second ANOCC (set forth above at paragraph 23)

plead further specific and consistent detail contrary to Mr. Turpin’s current

submission that closely tracking “the performance of the [B]enchmark over time by

not taking sufficient active risk” may constitute closet indexing for the case at bar.

Turpin v. TD Asset Management Inc.

Page 26

The focus of paragraphs 29 to 34 of the Second ANOCC is the use of the “Closet

Indexing Strategy”, as defined.

[51] Second, the aspect of deceit, fraud, or dishonesty is reinforced by the plaintiff

seeking punitive damages (although not sought at this trial of common issues).

Paragraph 82 of the Second ANOCC reads:

The Plaintiff states that the conduct of the Defendant has been reprehensible

and high-handed and deserving of sanction by way of punitive and exemplary

damages in such amount as may be deemed appropriate by this Honourable

Court.

[52] Third, the aspect of deceit, fraud, or dishonesty is also reinforced by the first

sentence of paragraph 45 of the Second ANOCC, which reads:

The Closet Indexing Strategy has involved the Defendant trading in and out

stocks in order to keep its overall portfolio highly correlated with the

underlying benchmark index, which trading activity also serves to conceal

that the Closet Indexing Strategy is passive in nature. At all material times,

the Defendant’s trading activity has been significantly greater than the trading

activity which has occurred in passive index funds that track the same

underlying benchmark. As a result of the more frequent trading associated

with Closet Indexing Strategy, Excess Trading Costs were paid out of the

Funds’ assets, reducing the value of Class Members’ units. The Defendant’s

trading activity associated with the Closet Indexing Strategy also

unnecessarily triggered capital gains which were passed on to investors

including the Class Members.

[Emphasis added.]

[53] Fourth, as noted, the Certification Order was by consent. Our common law

system is litigant-driven. The litigants frame the case and bring the evidence they

choose to court. In this context, a court is reluctant, absent a compelling reason, to

depart from the wording which the parties have agreed upon. Here, the definition of

Closet Indexing Strategy.

[54] I accept the proposition of law to which Mr. Bates refers set forth by Justice D.

Smith, writing for our Court of Appeal in Yu v. Jordan, 2012 BCCA 367 at para. 53. It

reads:

In my view, the interpretation of a court order is not governed by the

subjective views of one or more of the parties as to its meaning after the

order is made. Rather an order, whether by consent or awarded in an

Turpin v. TD Asset Management Inc.

Page 27

adjudicated disposition, is a decision of the court. As such, it is the court, not

the parties, that determines the meaning of its order. In my view, the correct

approach to interpreting the provisions of a court order is to examine the

pleadings of the action in which it is made, the language of the order itself,

and the circumstances in which the order was granted.

[55] Yu did not involve a class action, which is an important circumstance in the

case at bar having regard to the agreed upon common issues.

[56] The common issues for a class action must be grounded in the pleadings.

Otherwise, a common issue itself would become part of the pleadings. Neither the

Supreme Court Civil Rules [SCCR] nor the CPA contemplate a common issue as

forming part of the pleadings. The effect could be that the pleadings could be

effectively amended, thereby circumventing the SCCR as they apply to

amendments.

[57] In Abdulrahim v. Air France, 2010 ONSC 3953, Justice Strathy (as the Justice

then was) observed:

[15]

In one of the leading texts, Ward K. Branch, Class Actions in Canada,

(Canada Law Book, Aurora: 2009), the author states at para. 14.10:

Discovery prior to the common issues trial must be confined to the

common issues. The trial court will be more likely to grant individual

class member discovery after resolution of the common issues.

[16]

This reflects the usual practice that discovery of the representative

plaintiffs prior to the common issues trial is confined to the common issues. In

a procedural ruling in 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of

Canada, [2003] O.J. No. 5703 (S.C.J.), Master MacLeod stated at paras. 6

and 9:

In any proceeding the starting point to determine relevance is the

pleadings. Relevance of course is the touchstone in determining

whether or not a question is proper. A class proceeding, however,

takes place in two stages. Firstly there is a trial on the common

issues. Thereafter a mechanism is established for resolution of the

issues that have not been defined as common issues. Discovery of

the representative plaintiffs at the present stage in the case before me

is limited by the definition of common issues. In other words, the

pleadings inform interpretation of the common issues and set out the

facts to be relied upon but a question is only a proper question in this

phase of the action if it relates to the common issues and not the

individual claims. It is therefore the certification order as informed by

the pleadings and not the pleadings at large that define relevance for

the first phase of the trial.

Turpin v. TD Asset Management Inc.

Page 28

...

... The certification motion is procedural but, like any order defining the

issues for trial, it limits the scope of relevant inquiry. What a definition

of issues for trial does is to remove other items from consideration at

that trial. In that sense the certification order defining the common

issues is similar to an order for trial of an issue on an application or to

an order under Rule 20.05(1) defining the issues to be tried. The

issues that are not to be tried do not exist for purposes of discovery at

this time. Defining and narrowing the issues, does not guarantee

success on the issues and it narrows the issues for both parties. In

this case, the plaintiff is restricted to proving aggregate liability to the

class and can not advance a different theory of liability that would take

the trial outside of the common issues.

[Emphasis added.]

[58] Fifth, I reject Mr. Bates’s submission that the word “designed” as used in the

definition of Closet Indexing Strategy refers to:

[A]n objective of the investment strategy on the basis that accidental close

tracking of the Benchmark’s performance over a long period of time is

unlikely.

[59] “Design” requires an intent or plan to achieve a result. A particular result does

not determine that there was a design. A particular result may occur, for example, by

accident, by chance, or by design.

[60] The Oxford English Dictionary (2nd ed. 1989) defines “design” as follows:

I.

A mental plan

1. a. A plan or scheme conceived in the mind and intended for subsequent

execution; the preliminary conception of an idea that is to be carried into

effect by action; a project.

b. ‘A scheme formed to the detriment of another’ (J.); a plan or purpose

of attack upon or on.

c. phr. by (†out of, on, upon) design: on purpose, purposely,

intentionally.

[61] I accept that a particular result may be consistent with and possibly provide

evidence of a design. That said, “design” still requires a plan or an intent to achieve

the result.

Turpin v. TD Asset Management Inc.

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[62] The requirement of a plan or an intent in connection with “design” is also

consistent with respect to the description of index funds in the Second ANOCC. For

ease of reference, the last sentence of paragraph 29 of the Second ANOCC reads:

Index funds, by contrast, are designed to closely track or replicate the

performance of a specific benchmark, allowing investors to invest money

knowing that they will get performance roughly equal to the performance of

that benchmark.

[Emphasis added.]

[63] Finally, the Certification Notice, which was approved under the Certification

Order, describes the central issue as follows (in part):

The Representative Plaintiff alleges that throughout the Class Period the

defendant did not actively manage the TD Canadian Equity Fund, instead

employing a passive investment strategy, the Closet Indexing Strategy, the

purpose of which was to closely track or replicate, and not exceed, the

Canadian Equity Fund’s benchmark, the S&P/TSX Composite Index.

[64] The foregoing description is consistent with the first question posed in the first

paragraph of Mr. Turpin’s written submissions (at para. 42 above) and is not

consistent with the second posed question.

[65] As may be seen, Mr. Bates submits that the focus of a Closet Indexing

Strategy is not necessarily limited to the individual portfolio manager. I agree.

[66] Undoubtedly, if an individual portfolio manager designed the portfolio to

closely track or replicate the Benchmark’s performance, while portraying active

management, the definition of Closet Indexing Strategy would be met. However, the

definition of Closet Indexing Strategy is not limited to only the foregoing type of

situation. TDAM is a large institution.

[67] If, for example, TDAM as an institution had a remuneration structure for an

individual portfolio manager or other methods that effectively limited the individual

portfolio manager to select securities and positions which would effectively closely

track or replicate the Benchmark, a finding of a Closet Indexing Strategy could

result. A finding of a breach of the Standard and Duty of Care could also result

(particularly relevant to Common Issue No. 2). I will discuss the remuneration of

Turpin v. TD Asset Management Inc.

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individual portfolio managers and metrics, including performance metrics, such as

“performance tolerance bands” described below.

[68] In sum, the definition of Closet Indexing Strategy within the pleaded facts of

the Second ANOCC requires deceit, fraud, or dishonesty by one or more individual

portfolio managers or by TDAM operating as an institution.

12. TRUST DUTIES

[69] In connection with TDAM’s trust duties (particularly relevant to Common Issue

No. 2), the rub arises from the fact that TDAM was both the trustee and the manager

of the CEF (and the various Portfolio Funds). As noted, under the DOT, TDAM qua

trustee could (and did) delegate itself as also the CEF’s manager.

a) Mr. Turpin’s Position

[70] Mr. Turpin, in his written submissions, first notes the “Standard and Duty of

Care” set forth in the CEF’s DOT (and in the DOT for the Portfolio Funds).

[71] Mr. Turpin then submits:

138. The Standard and Duty of Care as set out in each DOT is consistent

with the obligation of an investment fund manager in s. 125 of the BCSA

which has been recognized as a fiduciary duty to protect the best interests of

the fund's unitholders as [a] whole: Wright v. Horizons ETFS Management

(Canada) Inc., 2020 ONCA 337 at para. 113; Gilani v. BMO Investments Inc.,

2021 ONSC 3589 at para. 139; Stenzler v. TD Asset Management Inc., 2020

ONSC 111 at para. 17; 1426505 Ontario Inc. v. Jovian Capital Corporation,

2019 ONSC 3799 at para. 65; Re AGF Funds Inc. (2004), 28 OSCB 73 at

para. 6; Crown Hill Capital Corporation et al., 2013 ONSEC [32] at paras 107-

115.

[72] Section 125 of the Securities Act, R.S.B.C. 1996, c. 418 reads:

125 Every investment fund manager must

(a) exercise the powers and discharge the duties of its office honestly,

in good faith and in the best interests of the investment fund, and

(b) exercise the degree of care, diligence and skill that a reasonably

prudent person would exercise in the circumstances.

[73] Mr. Turpin’s submissions on the standard and duty of care continue:

Turpin v. TD Asset Management Inc.

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139. The Standard and Duty of Care is also consistent with the "hallmark"

characteristic of a trust: namely, the fiduciary relationship existing between

the trustee and the beneficiary pursuant to which the trustee must act

honestly and with that level of skill and prudence which would be expected of

the reasonable person of business administering his or her own affairs. The

trustee must secure trust assets, and safeguard, preserve and enhance their

value: Valard Construction Ltd. v. Bird Construction Co., 2008 SCC 8 at

para. 17; Fales v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302

(“Fales”) at pp. 316, 318.

140. Trust Expenses: Any discretionary power conferred on the trustee –

such as the power to pay management fees – must be exercised in a fair and

proper manner, consistent with the trustee's fundamental duties: D.W.M.

Waters et al., Waters' Law of Trusts in Canada, 5^thed. (Toronto: Thomson

Reuters, 2021) (“Waters' Law of Trusts”) at p. 1049-1051.

141. The corollary is that trustees are only allowed to recover expenses

that are "properly incurred". Under the equitable principle of indemnification,

trustees incur expenses at their own risk and improperly incurred expenses,

such as unreasonable management fees, must fall upon the trustee

personally: Waters' Law of Trusts at pp. 1288-90.

142. In TDAM's case, the DOTs required that any remuneration paid by

TDAM for services performed for the CEF and Portfolio Funds must be

“reasonable remuneration”: [Second ANOCC] at para. 21, s. 9.1(d)(ii) of the

CEF DOT, s. 9.01(d)(i) of the Portfolio Funds DOT.

Prior to DOT amendments in July and October 2017, the DOTs also set out

maximum management fees stated as being “up to” a specified percentage of

the net asset value of each series of each Fund: See Schedule 13.1 of the

CEF DOT and Schedule 13.01 of the Portfolio Funds DOT.

This "up to" language was simply in furtherance of TDAM's fiduciary

obligations to ensure that remuneration paid to itself as manager was

reasonable. Throughout the Class Period, TDAM had discretion to waive and

rebate a portion or all its management fees in respect of the Funds: See

s. 6.1(e) of the CEF DOT and s. 6.01(d) of the Portfolio Funds DOT.

143. Conflict of interest: As a fiduciary, the manager of a mutual fund is

not permitted to appropriate the assets of the fund for its own benefit or

advantage, except as expressly authorized by the declaration of trust or as

consented to by unitholders. It must meet the highest standard of ethical

conduct where a conflict of interest arises in which assets of the fund are to

be used for the benefit of, or are to be advanced to, the manager. Where

such a conflict of interest arises, the manager has the onus of establishing

that it complied with its fiduciary duty. The failure to appropriately address a

material conflict of interest itself constitutes a breach of fiduciary duty: Crown

Hill Capital Corporation et al., 2013 ONSEC [32] at paras 107-115.

144. Disclosure obligation: Fiduciaries must also disclose any material

facts or information affecting the trust relationship: Fales at pp. 316, 318;

Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23 at

para. 155. This duty of candour is broader than disclosure obligations arising

Turpin v. TD Asset Management Inc.

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[from] provincial securities laws which assess materiality based on potential

impact on the security's price or value.

145. Duty to account: The beneficiary of the trust has the right to hold the

trustee to account for administering the trust property and to enforce the

terms of the trust: Valard Construction at para. 18. The Court has supervisory

jurisdiction over trusts and, where a trustee is in a conflict of interest, must

intervene to assess the reasonableness of expenses paid out of trust with the

full benefit of hindsight: Canson Enterprises Ltd. v. Boughton & Co., [1991] 3

S.C.R. 534 at paras. 24-27; Carroll v. Toronto-Dominion Bank, 2021 ONCA

38 at paras. 18-20.

b) TDAM’s Position

[74] TDAM submits that the DOT governs the relationship between it and the CEF

unitholders (as does the DOT for unitholders of a Portfolio Fund).

[75] In support of its submissions, TDAM emphasizes ss. 1.9, 2.5, 2.7, 9.2, 11.1,

and 13.1 and the definition of the Standard and Duty of Care in s. 1.1(x) of the DOT.

[76] TDAM says that qua trustee it holds legal title to the CEF’s assets on behalf

of the unitholders. TDAM recognizes that unitholders are beneficiaries but says their

rights “are expressly limited to the rights ascribed to them”: s. 1.9 of the DOT.

[77] TDAM notes that s. 2.5 of the DOT provides:

… the interest of a unitholder shall consist only of the right to receive

payment from the Fund at the time, place, in the manner and subject to the

conditions herein expressly provided.

[78] TDAM further notes that it has broad powers under the DOT to invest and

reinvest the CEF’s assets in accordance with the CEF’s fundamental objective, “to

achieve long-term capital appreciation through investments in high-quality equity

securities issued principally by Canadian corporations judged to offer high growth

potential”.

[79] In its written submissions, TDAM states:

134. The DOT imposes on TDAM a duty to act in the best interests of the

Fund. Nothing in the DOT imposes a duty on TDAM to act in the best

interest of individual unitholders. Section 9.2, entitled “Standard of Care

and Duties”, states:

Turpin v. TD Asset Management Inc.

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9.2 Standard and Duty of Care

In performing its duties hereunder, the Trustee shall discharge such

duties in accordance with the Standard and Duty of Care.

135. The definition of “Standard and Duty of Care” is found in section 1.1(x):

“Standard and Duty of Care” means in respect of any person or

company performing duties on behalf of the Fund, the obligation to:

(i) exercise the powers and discharge the duties of its office

honestly, in good faith and in the best interests of the Fund; and

(ii) exercise the degree of care, diligence and skill that a

reasonably prudent person would exercise in the circumstances.

[Emphasis in original.]

[80] TDAM says that qua manager it “has no legal relationship with unitholders

and owes no duties to the unitholders pursuant to the terms of the DOT or

otherwise”.

[81] TDAM also notes that s. 13.1 of the DOT addresses specifically the fact that

TDAM, qua trustee, shall pay to TDAM, qua manager, the fee set forth in the

referenced schedule where TDAM, qua trustee, has delegated itself as the manager

of the CEF. As a member of the Investor Series, Mr. Turpin was charged fees that

were consistent with the referenced schedule.

[82] TDAM also submits that the securities market is highly regulated with laws

and regulations designed to protect investors, including provisions for extensive

disclosure.

c) The DOT Should be Read in the Context of Trust Principles

[83] Rather than delegating itself as the CEF’s manager, TDAM, qua trustee,

could have contracted with an arm’s length manager.

[84] In discharging its duties as trustee contracting with and overseeing an arm’s

length manager and having further regard to the Standard and Duty of Care set forth

in the DOT, TDAM would be expected to review, on an ongoing basis, matters such

as whether the manager was discharging its obligations in a professional manner,

whether the manager managed in accordance with the CEF’s stated fundamental

Turpin v. TD Asset Management Inc.

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objective, and whether the manager’s fees and expenses were proper and

reasonable.

[85] The beneficiaries of a trust are exposed to the actions of a trust’s trustee(s).

[86] In short, unitholders as a whole should not be placed in a less favourable

position by virtue of TDAM, qua trustee, delegating itself as manager.

[87] The Court recognizes that the CEF is a commercial trust operating within a

highly regulated securities law environment designed to protect investors.

Accordingly, TDAM’s fiduciary obligations must be viewed and judged in this context.

[88] The Court also recognizes that TDAM, qua trustee, by delegating itself as

manager, could result in costs savings, which, in turn, could in some measure,

benefit the CEF’s unitholders as a whole.

[89] In Donovan W.M. Waters, Mark R. Gillen, & Lionel D. Smith, Waters’ Law of

Trusts in Canada, 5th ed. (Thomson Reuters, 2021), the authors state (1048):

Not only is a trustee a fiduciary, a person whose essential character cannot

be taken away even by the creator of the trust, but the essence of a trust is a

beneficiary’s right of recourse against the trustee for proper administration,

and if the beneficiary is altogether denied that recourse it is highly

questionable whether the settlor has created a trust at all.

[90] In Pirani v. Pirani, 2022 BCCA 65, Justice Harris, writing for our Court of

Appeal, sets forth the rule as to the approach to determine the scope and content of

a trustee’s obligations:

[100] … What is useful to note, however, is how important it is to the proper

interpretation and articulation of the scope and content of a trustee’s

obligations to understand the circumstances in which powers and duties are

created and conferred, and the principles upon which parties base an

arrangement (here, an exercise in estate planning). […]

[91] The Court is also satisfied that its supervisory jurisdiction over trusts is not

jettisoned by the DOT or securities law. Justice Paciocco, writing for the Ontario

Court of Appeal in Carroll v. Toronto Dominion Bank, 2021 ONCA 38, summarized

matters neatly:

Turpin v. TD Asset Management Inc.

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[18]

Courts assumed inherent jurisdiction to supervise and administer

trusts so that trusts could be given legal force: Donovan W.M. Waters, Q.C.,

Mark R. Gillen & Lionel D. Smith, Waters' Law of Trusts in Canada, 4th ed.

(Toronto: Carswell, 2012), at pp. 1165-66; Daniel Clarry, The Supervisory

Jurisdiction Over Trust Administration (Oxford: Oxford University Press,

2019), at para. 2.11. The enforcement of trusts was not achieved by

empowering courts to act as roving commissions of inquiry into their proper

performance, but by empowering courts to assist those with an interest in

trusts in enforcing and compelling the performance of those trusts.

[19]

Initially, the inherent jurisdiction to supervise and administer trusts

was recognized "primarily to protect the interest of beneficiaries": Crociani v.

Crociani, [2014] UKPC 40, 17 ITELR 624, at para. 36. Without the

assumption of jurisdiction by courts, beneficiaries would lack legal authority to

enforce trusts because trustees are the legal owners of trust property, and

therefore hold the bundle of enforceable legal rights that property enjoyment

entails. The only way to ensure that beneficiaries can enjoy trust property

they do not own is for courts to take jurisdiction and impose personal

obligations on trustees to use the legal rights they hold for the benefit of the

beneficiaries, according to the terms of the trust: McLean v. Burns Philp

Trustee Co. Pty. Ltd. (1985), 2 N.S.W.L.R. 623, 9 ACLR 926 (Aus. S.C.), at

p. 933 ACLR.

[20]

Given that trusts are enforced by imposing personal obligations on

trustees, if courts did not intervene, a trust would fail where a trustee would

not or could not discharge their personal obligations because of refusal or

incapacity. Courts therefore accepted the inherent jurisdiction to assume the

administration of such trusts, based on the maxim of equity that no trust

should fail for want of a trustee: Clarry, at para. 1.04.

[21]

In this way, courts of equity claimed the inherent jurisdiction at the

behest of beneficiaries "to supervise, and where appropriate intervene in, the

administration of a trust where there is no trustee to carry it on, or where the

trustee wrongfully declines to act or refuses to disclose trust accounts and

supporting information or is otherwise acting improperly": Halsbury's Laws of

England, 5th ed., Vol. 98, "Trusts and Powers" (London: LexisNexis, 2019),

at para. 626.

[22]

Given the significant obligations that courts impose on trustees and

the desire to "enable practical effect to be given to a trust", courts have also

recognized the inherent jurisdiction to assist trustees in the administration of

trusts where such assistance is required: MF Global UK Ltd. (In Special

Administration) (Re), [2013] EWHC 1655, [2013] 1 W.L.R. 3874 (Ch.), at

paras. 26, 32. For example, there is inherent jurisdiction to assist trustees

"where difficulties have arisen which cannot be removed without the

assistance of the court, or where the decision of the court on a doubtful

question connected with the trust or on its proper administration is sought by

the trustee": Halsbury's, Vol. 98, at para. 626; Waters' Law of Trusts, at

pp. 1165-66.

[23]

To be sure, on occasion access to the inherent jurisdiction of courts

has been extended to others who have an interest in a trust, such as

creditors or those with contingent interests, particularly where that jurisdiction

Turpin v. TD Asset Management Inc.

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is supported by statute: see McLean v. Burns Philp; Waters' Law of Trusts, at

p. 1122. However, it can readily be seen that the inherent jurisdiction to

supervise and administer trusts exists to assist the parties to the trust

relationship or those who are interested in the trusts. As such, the inherent

jurisdiction of courts to supervise and administer trusts is not inconsistent with

the imposition of standing requirements. To the contrary, it is entirely in

keeping with the role inherent jurisdiction performs to ensure that those who

seek to invoke the inherent jurisdiction to supervise or administer trusts have

an interest in the trusts they seek to enforce.

[92] In sum, the Court should interpret the DOT and consider TDAM’s actions in

the context of trust principles, having particular regard to the commercial nature of

the DOT and applicable securities law.

13. TDAM – ORGANIZATIONAL OVERVIEW

[93] TDAM has approximately 850 employees with approximately $400 billion

under management.

[94] TDAM is the trustee for approximately 250 mutual funds of which

approximately 180 are described as actively managed.

[95] Approximately half of TDAM’s client base comprises of pension funds,

insurance companies, and other institutional clients. The other half is comprised of

retail clients such as Mr. Turpin.

[96] The individual portfolio manager responsible for the CEF is Mr. M. O’Brien.

Mr. J. Flowerday is shown as a co-manager but any decision to buy, sell, or hold a

security rests solely with Mr. O’Brien.

[97] Mr. O’Brien’s immediate supervisor is Mr. D. Sykes, who heads the “Public

Equities Group”.

[98] Mr. O’Brien is supported by members of the Public Equities Group.

Approximately 20 members of the Public Equities Group analyze financial equity

markets to screen for potential investments and then analyze in greater detail such

potential investments. Among other aspects, the financial and competitive position of

Turpin v. TD Asset Management Inc.

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a potential investment is analyzed in order to understand fully the value of the

investment relative to its market value.

[99] Once an investment is made, the investment will continue to be monitored on

an ongoing basis.

[100] The analysis of an appropriate investment and ongoing monitoring will often

involve meeting with one or more senior executives of the particular corporation.

[101] In advance of making an investment, a financial analyst will prepare a

detailed report which, in turn, is circulated to the appropriate members of the Public

Equities Group and portfolio managers for presentation and discussion.

[102] A typical report is approximately 20 pages in length and will address topics

such as the company’s competitive position, the quality and approach of its

management, its financial aspects in detail, and general and specific risks.

[103] It is not unusual for such reports to take over a month to prepare.

[104] As noted, Mr. O’Brien, makes the decision to buy, sell, or hold a particular

CEF investment. He has few constraints other than those stated in the securities

disclosure and Investment Guidelines to which he has agreed to with the Investment

Risk Group (“IR Group”) and the Product Management Group.

[105] The Investment Guidelines are not onerous. For example, the CEF is

expected to invest in at least six sectors, the exposure to any single Canadian

company is not to exceed 10%, and the value of the non-Canadian equities held is

not to exceed 20% of the CEF’s market value. If at any time the Investment

Guidelines impede the CEF’s objective, Mr. O’Brien may request a temporary

exemption.

[106] The IR Group undertakes performance and risk analysis of TDAM’s mutual

funds. The IR Group reports directly to TDAM’s Chief Executive Officer (“CEO”),

currently, Mr. B. Cooper. Mr. Cooper described the IR Group’s role as follows:

Turpin v. TD Asset Management Inc.

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We’ve articulated a philosophy and process to our clients and you want to

make sure that in the actual management of the fund, that process is being

reflected in the way the portfolio is constructed.

[107] Mr. Cooper is also TDAM’s Ultimate Designated Person (“UDP”).

[108] Under s. 11.2(2) of the National Instrument 31-103, TDAM, as a “registered

firm”, its CEO is its UDP. Section 5.1 of the National Instrument requires:

The ultimate designated person of a registered firm must do all of the

following:

(a) supervise the activities of the firm that are directed towards

ensuring compliance with securities legislation by the firm and each

individual acting on the firm’s behalf;

(b) promote compliance by the firm, and individuals acting on its

behalf, with securities legislation.

[109] Mr. Cooper has been with TDAM for approximately 25 years. He started as a

proprietary trader whose role was to invest TD Bank’s own capital. After two years,

he became a research analyst as part of the Public Equities Group in supporting

portfolio managers who actively managed funds.

[110] After approximately four years as a research analyst, Mr. Cooper became a

portfolio manager. He was a portfolio manager for approximately 15 years. He

managed six to seven different funds, all of which were actively managed funds.

[111] In 2007, Mr. Cooper became responsible for the active management portion

of the Public Equities Group which also included quantitative equity management.

Quantitative equity management uses statistical techniques, quantitative models

including variables such as momentum, the size of the company, and various factors

to make and monitor investments.

[112] Mutual funds using either fundamental analysis or quantitative analysis are

managed with the goal of outperforming the particular fund’s benchmark.

[113] TDAM does not manage hedge funds.

Turpin v. TD Asset Management Inc.

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[114] In 2015, Mr. Cooper became TDAM’s Chief Investment Officer (“CIO”). As

CIO, Mr. Cooper oversaw TDAM’s full investment team (which would include index

funds).

[115] In 2016, Mr. Cooper became TDAM’s CEO. The current CIO reports to

Mr. Cooper. In addition, the IR Group, the Product Group, and the Distribution Group

report to him. As noted above, Mr. Cooper is TDAM’s UDP.

[116] TDAM’s Compliance Group ensures compliance with securities law. The

Compliance Group is headed by Mr. B. Moore, TDAM’s Chief Compliance Officer

(“CCO”).

[117] Under s. 11.3(1) of the National Instrument 31-103, TDAM must also have a

CCO. Section 5.2 of the National Instrument requires the CCO to do all of the

following:

(a) establish and maintain policies and procedures for assessing compliance

by the firm, and individuals acting on its behalf, with securities legislation;

(b) monitor and assess compliance by the firm, and individuals acting on its

behalf, with securities legislation;

(c) report to the ultimate designated person of the firm as soon as possible if

the chief compliance officer becomes aware of any circumstances

indicating that the firm, or any individual acting on its behalf, may be in

non-compliance with securities legislation and any of the following apply:

(i)

the non-compliance creates, in the opinion of a reasonable person,

a risk of harm to a client;

(ii) the non-compliance creates, in the opinion of a reasonable person,

a risk of harm to the capital markets;

(iii) the non-compliance is part of a pattern of non-compliance;

(d) submit an annual report to the firm’s board of directors, or individuals

acting in a similar capacity for the firm, for the purpose of assessing

compliance by the firm, and individuals acting on its behalf, with

securities legislation.

[118] TDAM also has the Internal Audit Group which audits TDAM’s processes,

policies, and procedures. The Internal Audit Group reports to TD Bank’s chief

auditor.

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[119] The IR Group will also prepare analyses for TDAM’s Investment Performance

Oversight Committee (“IPOC”).

[120] As CEO, Mr. Cooper chairs IPOC meetings. Other members of IPOC include

TDAM’s CIO and the head of the IR Group. IPOC is TDAM’s most senior level of

investment performance oversight.

[121] In its written submissions, TDAM summarizes IPOC’s role based on

Mr. Cooper’s testimony, which I accept, as follows:

A fund may be referred to IPOC for a variety of reasons, including because its

performance is lagging behind expectations or because there are questions

about whether the philosophy and process that the portfolio manager is

employing is consistent with the fund’s mandate. IPOC reviews are not

routine — they occur only if TDAM has identified a performance or process

issue that needs a closer look.

[122] During the Class Period, IPOC undertook two reviews involving Mr. O’Brien.

[123] The IR Group also prepares quarterly reports for each of TDAM’s mutual

funds. A quarterly report is in a two-page dashboard format with a list of statistics

and metrics falling under headings such as “Performance & Metrics”, “Attribution – 3

Month Period”, “Portfolio Characteristics”, “Largest Weights”, “Risk Estimates”,

“Active Risk Decomposition”, “Largest Style Factor Bets”, “Risk Hot Spots”, and

“Sensitivity Stress Tests”. Many of the statistics and metrics are compared to the

Benchmark or are calculated relative to the Benchmark (e.g., tracking error).

[124] An individual portfolio manager is not bound or constrained by the quarterly

reports. Their purpose is to provide possible further insight into the composition and

performance (including risks) of the particular mutual fund.

14. MR. TURPIN’S TESTIMONY AND OBJECTIVES

[125] Mr. Bates, in his written submissions, describes Mr. Turpin as “a candid and

accurate witness who admirably represented the prototypical retail investor in the

CEF”.

Turpin v. TD Asset Management Inc.

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[126] I found Mr. Turpin to be a candid and accurate witness. I am satisfied that he

represented the Class well as a retail investor in both the CEF and in the TD

Managed Income Portfolio (a Portfolio Fund).

[127] Mr. Turpin works as a librarian. He is a man of modest means. He wishes that

his investments may serve to supplement his pension income upon retirement.

[128] Mr. Turpin has no particular financial knowledge beyond reading some best-

selling books on investing and many of the disclosure documents related to his

investment in the CEF and one of the Portfolio Funds.

[129] With respect to risk, Mr. Turpin, in cross-examination, testified:

Q

A

What about risk, what role does risk play in your investment goals?

I’m risk averse and I’ve -- I’ve also expressed that to my advisor. Kind

of loss of capital. I -- I don’t -- I try not to take big chances. I’m not

expecting big returns, so I’m not -- so I don’t -- I don’t take big

chances with most of the portfolio.

Q

So picking up on that last point, how would you -- how would you rank

the relative importance of significant returns upside versus insulating

from downside risk, where are those for you in terms of balancing

your goals?

A

I don’t know how to respond to that, so.

Q

Equally important to -- to go up and to not go down, or is one more

important to you than the other?

A

I would say they’re equal.

and further:

Q

Okay. And I think you’ve also said capital preservation is really

important to you?

A

Q

A

Yes.

Is that fair?

Yes.

and then further:

Okay. And -- and what about returns, if -- if it meant more modest

Q

returns, would you -- would you accept that to -- to obtain reduced

volatility?

Turpin v. TD Asset Management Inc.

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A

Q

A

Yes.

And you’ve said you’re becoming increasingly risk averse?

That’s right.

[130] With respect to the disclosure of expenses, Mr. Turpin, in cross-examination,

testified:

Q

And in addition to that, you understand that MER and pricing

information have to be disclosed?

A

Yes.

Q

So was that also information that was included in the disclosure that

you’ve described yourself as reading?

A

Yes.

Q

And -- and so when you would go to the consumer press to look at the

rankings of -- of the MER, you were satisfied that -- that the MER for --

for the fund was in line with the industry?

A

Yes.

[131] With respect to his investment goals, Mr. Turpin, in cross-examination,

testified:

Q

And so just to -- to step back, I’d summarize what you told me about

your goals as being to provide for the future but -- but overall keep it

simple, low volatility, fairly low risk, and quite diversified, those were

your goals and -- and in your view this product meets those goals?

A

Yes.

[132] With respect to fees and expenses, including trailing commissions,

Mr. Turpin, in cross-examination, testified:

Q

In terms of cost, right below the box you see the heading, “How much

does it cost?” You see that?

A

Yes.

Q

So it says:

The following tables show the fees and expenses you could pay

to buy, own and sell Investor Series securities of the fund. The

fees and expenses — including any commissions — can vary

among series of a fund and among funds. Higher commissions

can influence representatives to recommend one investment

over another. Ask about other funds and investments that may

be suitable for you at a lower cost.

You saw that?

Turpin v. TD Asset Management Inc.

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A

Q

A

I see that now, yes.

And you understood that you could do that at -- at the time and now?

Yes.

[133] Mr. Turpin also testified that he had read and understood the CEF’s

Investment Objective and Investment Strategies before he purchased his units.

[134] With respect to his returns on investment in the CEF, Mr. Turpin, in cross-

examination, testified:

Q

And -- and so, you know, in terms of your overall return, as we -- from

the time of purchase in 2010 to redemption in 2017, would it surprise

you to know that the return was 39.71 percent? Or is that about --

about what your sense of what it would be?

A

Q

A

As compounded over seven years.

Yeah, 10 -- 2010 to 2017?

That would be -- that -- that would be reasonable to me, yes. That

would be -- that would be consistent with my perception.

Q

A

And that 39.71 percent is after fees?

Okay, if you say so.

[135] In 2010, Mr. Turpin purchased his units in the CEF. In 2014, he redeemed

some of his units. In 2017, he redeemed the balance of his units.

[136] With respect to active management, Mr. Turpin, in cross-examination,

testified:

Q

So active management -- I’m -- I’m just going to summarize and you

tell me if I’m being fair. Active management involves research in order

to inform the skills and expertise -- sorry, it involves research, skills

and expertise in order to inform the decisions that the manager is

making about what to hold?

A

Yes.

Q

And those are being applied I think you said towards the objectives

that they’re supposed to be pursuing?

A

Q

A

Q

Yes.

And that’s -- we looked at that in the prospectus.

Yes.

There was some wording about what the objectives were supposed to

be?

Turpin v. TD Asset Management Inc.

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A

Yes.

Q

And so broadly speaking, the goal is to -- is to accomplish that,

whether that’s in returns or that’s risk, it’s to do something different,

something better than what the benchmark is doing?

A

Q

A

Q

Yes.

Is that fair?

Yes.

And -- and so the active manager is trying to find and include good

stocks and exclude bad ones? We’re going to be very sympathetic –

very simplistic about it.

A

Yes.

Q

And -- and so, just as an example of that, and -- and just because I

touched on it when we were in the MRFP, an example of a -- of a

stock might be Valeant Pharmaceuticals which is infamous in Canada

for it having a big increase and then a big crash, and so it’s included

in the benchmark, but one might hope that a skilled manager with

access to the research and all the training, might see that coming and

so exclude it, not have it in the fund?

A

Q

A

Q

M’mm—hmm.

Correct?

Yes.

And that’s -- that’s what you would expect that your -- the fund

manager is exercising a bit of a screening function so that the bad

stuff that’s going to crash isn’t being included?

A

It could have been a good coincidence, but, yes, I would -- I would

hope that a manager is doing that; that -- spotting potential turkeys,

you know.

Q

A

Q

A

Q

A

Q

A

Q

Yeah.

Okay.

Or at least trying to?

Trying to.

Maybe not succeeding in spotting all the turkeys but --

Yeah.

-- that’s the goal?

Yes. Yeah.

And -- and so what would you see then as, broadly speaking, the

benefits of -- of active management?

A

Well, it -- it -- active management would – if done properly, would -- it

would... Would make the fund perform according to its stated

objectives.

Turpin v. TD Asset Management Inc.

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Q

Active management would include applying the knowledge, the

research, the skill that you identified?

A

Yes.

Q

To try to keep the turkeys out and to identify the -- whatever kind of

bird is that’s going to fly, an eagle?

A

Q

A

Yes.

Something that’s going up?

Yes.

Q

And -- and so that -- the goal of that would be, as you said what the

objective is, but for you as an investor, it’s also to increase overall and

hopefully also reduce your risk; is that fair?

A

Q

A

Yes.

Is that -- is that what your goal is in this?

Yes.

15. KEY METRICS

a) Tracking Error, R-squared, and Active Share

[137] Three key metrics related to portfolio management are “tracking error

volatility”, “R-squared”, and “active share”. Professor Cremers describes these

metrics as follows:

First, tracking error volatility — often shortened, by dropping ‘volatility’, to

‘tracking error’ — is the volatility of the difference in the return of the fund and

its benchmark index. This is calculated by taking some historic time series of

fund returns, subtracting the returns of the fund’s benchmark index over the

same time periods, and then calculating the volatility of this difference. For

example, you could use daily returns over e.g. the past year, but people also

use weekly or even monthly returns.

As closet index funds have assets that largely mirror the assets of a

benchmark index, the tracking error volatility of closet index funds would be

expected to be low relative to the average tracking error volatility of actively

managed funds with a similar investment style as the fund.

The main assumption when using tracking error volatility as a metric for

closet indexing is that the benchmark index is appropriate for the fund, such

that (i) the assets in the benchmark index cover most of the investment

universe of the fund, and (ii) the risk exposures of the benchmark index are

similar to the risk exposures of the fund.

Related to the latter condition: one limitation of tracking error volatility as a

metric of closet indexing is that the closet index fund may have different

systematic risk exposures than the fund’s benchmark index. In particular, the

closet index fund may have assets that largely mirror those of a benchmark

Turpin v. TD Asset Management Inc.

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index, but take more risk in the relatively small proportion of assets that are

different from the benchmark index. If the closet index fund is considerably

more risky than the benchmark index, then the benchmark index returns are

not a good comparison for the closet index fund returns. This is because

investors are (or, from a prudent investor perspective, should be) primarily

interested in the risk adjusted returns of the fund. In order to evaluate

whether a fund is worthwhile to invest in, they would (or, from a prudent

investor perspective, should) compare the risk-adjusted net return of [the]

fund to the risk-adjusted net return of the available passive funds that track

the fund’s benchmark index. Here, ‘net’ return refers to the return to the

investor after all fees and other costs are incorporated.

Second, the R-squared metric measures the proportion of the returns of a

fund that can be explained by the returns of its benchmark index. It is

possible to expand that to a set of multiple passive funds (rather than using

the returns of a single passive fund), but for the sake of simplicity I will focus

on the basic and most widely used case of explaining the returns of a fund

using only the returns of its benchmark index.

The R-squared metric is calculated through a linear regression of a fund’s

returns on the returns of its benchmark index. Like the calculation of tracking

error volatility, this requires having some historic time series of fund returns

and the returns of the fund’s benchmark index over the same time periods,

and then regressing the former on the latter. For example, you could use

daily returns over e.g. the past year, but people also use weekly or even

monthly returns. The R-squared metric is the proportion of the square of the

volatility (where the square of the volatility — i.e., (volatility) or the product of

the volatility times itself — is called the ‘variance’) of the fund’s return that is

explained by this regression. By construction, as a proportion, the R-squared

will fall in between 0% and 100%. The R-squared measure can be interpreted

as the percentage of the fund returns that can be explained by the returns of

its benchmark index.

As closet index funds have assets that largely mirror the assets of a

benchmark index, the returns of the benchmark index would be expected to

explain most of the returns of the closet index fund, such that the R-squared

metric of closet index funds would be expected to be high (i.e., between 95%

and 100%). The main assumption when using R-squared as a metric for

closet indexing is that the benchmark index is appropriate for the fund, such

that (i) the assets in the benchmark index cover most of the investment

universe of the fund, and (ii) the risk exposures of the fund are well captured

through its exposure to the benchmark index (which exposure is estimated in

the regression of the fund’s returns on the returns of its benchmark index).

Third, the active share metric measures the proportion of assets in the fund

that is different in terms of portfolio weights than the assets in the benchmark

index. Rather than using returns as in the calculations of tracking error

volatility and R-squared, the active share metric uses the holdings (or

portfolio weights) of the securities in the fund and the holdings (or portfolio

weights) of the securities in the benchmark index. As a result, the active

share metric can be calculated at any particular point in time, while tracking

error volatility and R-squared require a history of returns and are thus

calculated over a period of time rather than at a particular point in time.

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The active share metric is calculated by comparing the portfolio weights of

the securities in the fund to the portfolio weights of the securities in the

benchmark index. By construction, the sum of the portfolio weights of the

securities in each equals 100%. For simplicity, we will assume that the fund

does not borrow securities or cash, though either can easily be incorporated

into the active share calculation. Active share measures the proportion of

portfolio weights in the fund that is different from the portfolio weights in the

benchmark index. An active share of 100% means that the portfolio weights

(and thus security holdings) in the fund are completely different from the

portfolio weights in the benchmark index. An active share of 0% means that

the portfolio weights in the fund are identical to the portfolio weights in the

benchmark index.

Only positions that overlap in both the fund and the benchmark index can

lower active share. For example, say security ‘A’ has a portfolio weight of 5%

in the benchmark. Then if the portfolio weight of security ‘A’ in the fund equals

3%, then both the fund and the benchmark index have a weight of at least 3%

in the security, and so the overlapping weight of security ‘A’ equals 3%. If the

portfolio weight of security ‘A’ in the fund equals 5% or higher, then the

overlapping weight of security ‘A’ equals 5%. If the fund does not have a

positive portfolio weight in security ‘A’ (either because the security is not held

by the fund at all or because the fund shorts — i.e., borrows — the security),

then there is no overlapping weight, or the overlap equals 0%. Active share

can be calculated as 100% minus the sum of the overlapping weights,

calculated across all securities held by both the fund and the benchmark.

[138] I wish to emphasize that there is nothing necessarily improper or illegal in

managing an index fund. Index funds are common. Investors are harmed where a

fund is represented to be actively managed when in fact it is not and the higher fees

associated with an actively managed fund are charged.

[139] The manager of an index fund will strive to have a low tracking error, a R-

squared of 100%, and an active share of 0%.

[140] In cross-examination, Professor Cremers was referred to a 2020 Working

Paper of the European Securities and Markets Authority (“ESMA”) relating to closet

indexing indicators. He testified:

Q

And if we go to page 5, the page numbers are small but they are at

the top right, and it’s at the end of that very first paragraph. It says:

Throughout this work, ESMA has recognised that data-based

metrics used to identify potential closet indexers among large

samples of funds, while imperfect screening tools, are

nonetheless a useful source of evidence to help direct

supervisory focus.

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And that’s consistent with everything we’ve talked about?

I think so, yes.

A

[141] Professor Mikhail Simutin, an Associate Professor of Finance at the Rotman

School of Management at the University of Toronto who was also qualified to

provide opinion evidence, testified:

Q

So this statement is too strong, isn’t it? The ESMA is not using these

metrics to identify closet indexing. They’re using it as an imperfect

screening device to identify potential closet indexing?

A

Q

A

So they --

Isn’t that so?

They are using it to identify potential instances of closet indexing, the -

- the ESMA specifically, yes.

Q

A

And so the regulators do not establish a bar for closet indexing, do

they?

The regulators have used the same quantitative tools and have used

thresholds for potential closet indexing. But -- but ESMA does not

explicitly state that if you are above 0.6 over 10-year -- sorry, below

0.6 active share and have these additional characteristics, therefore

you’re a closet indexer.

Q

Yesterday you said there was a bar, and if you’re on the wrong side of

it, then you’re a closet indexer. But that’s not what the regulators have

said, is it? They do not give a specific threshold that is definitive or

prescriptive. At most, they identify a threshold that can be used as a

potential screening device; correct?

A

ESMA identifies three measures that they apply at a point in time to

identify potential closet indexing.

Q

A

So it’s not a bar?

Those thresholds I regard them as a bar. So if -- if funds that are

above that bar, in a sense that they are more active than that -- that

bar, they would not be identified as potential closet indexers.

Q

A

You’re entitled to your view, sir, but this sentence says that regulators

have used these thresholds to identify closet indexing. And that’s too

strong, isn’t it?

I think that’s -- the sentence taken as whole is -- is correct. I’m happy

to qualify that sentence to say that ESMA uses the thresholds to

identify potential closet indexers.

Turpin v. TD Asset Management Inc.

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[142] I find that the three metrics are useful for screening for closet indexing.

Whether there was closet indexing, especially within the definition of Closet Indexing

Strategy, requires further analysis to make the appropriate determination.

[143] Professor Simutin calculated the CEF’s average active share during the Class

Period to be 48%.

[144] From the start of the Class Period (January 1, 2010) to early 2013, active

share was generally within 50% and 60%. For the rest of the Class Period, active

share was near 50% or somewhat below. In February 2013, Mr. O’Brien succeeded

Mr. J. Smolinski as the CEF’s portfolio manager. Mr. Smolinski’s investment style

engaged more frequent trading (as may be seen from a relatively higher trading

expense ratio (the “TER”)) and was more focused on faster-growing companies than

Mr. O’Brien’s style.

[145] When used as a metric screen, an active share of less than 50% would be, to

use the ESMA’s language, “a useful source of evidence to help direct supervisory

focus”.

[146] With respect to active share, I will make several observations. First, for there

to be an active share of approximately 50%, a significant mimicking of the

Benchmark is not required. For example, when one looks at Schedule “B” showing

the CEF January 1, 2015 holdings of the approximately 250 Benchmark securities,

the CEF held 43 securities. The CEF also held 19 securities (I have disregarded I-

Pulse Inc. with a 0.00% weight) which were not part of the Benchmark. Accordingly,

as of January 1, 2015, the CEF held 62 securities (43 + 19). As of December 31,

2014, TDAM calculated the CEF’s active share to be 49.2%.

[147] Second, the CEF’s largest holding during the Class Period has been the

Royal Bank of Canada (“RBC”). If, in considering active share, one looks, for

example, at the CEF’s holding in RBC as of January 1, 2015 (at Schedule “B”), the

relevant weights are:

Turpin v. TD Asset Management Inc.

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Weight in the CEF

8.38%

Weight in Benchmark Difference in Weight

6.34% 2.04%

[148] From an active share perspective, although the portfolio manager may judge

that RBC will perform well within the CEF’s objective “to achieve long-term capital

appreciation through investments in high-quality equity securities issued principally

by Canadian corporations”, the active share related to the CEF’s RBC holding is

relatively small.

[149] As of January 1, 2010 and January 1, 2020, RBC was also the CEF’s largest

holding with overweights of 1.08% and 2.07% respectively.

[150] Third, as may be seen from Schedule “B”, as of January 1, 2015, the CEF’s

weight in JPMorgan Chase & Co. (“JPMorgan”) was 1.02%. JPMorgan is not a

Benchmark security. If the CEF had, at that time, sold its RBC holdings and used the

proceeds to increase its holdings in JPMorgan (or had spread the proceeds over its

then US holdings), the CEF’s active share would have immediately increased.

[151] The role of the Court is not to second guess the bona fide decisions of

portfolio managers or to create rules whereby portfolio managers are encouraged to

have greater active share where it may not accord with the portfolio manager’s

judgment as to the best interests of the fund’s unitholders as a whole.

[152] Finally, there is nothing unusual for an actively managed fund to hold

benchmark securities. Professor Cremers testified:

Q

And since we’ve talked about overweighting, underweighting, I

thought we’d just, again, just talk about that a little bit more, Professor

Cremers. It is typical for an actively managed mutual fund to hold

stocks in the benchmark?

A

Q

A

Correct.

There’s nothing unusual with that?

No, you -- that’s very much what you would expect that -- that,

generally, the stocks that the mutual fund owns, that most of those

would also be in the benchmark.

Q

And that’s especially true for large cap mutual funds, right?

Turpin v. TD Asset Management Inc.

I think it applies to all funds. You know, for -- the difference for large

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A

caps is that for in the large cap space, the benchmarks tend to be

more comprehensive. There’s generally fewer large cap stocks, and

so the benchmark generally provides a more comprehensive list of

stocks for large cap stocks than for small cap stocks where

sometimes often the benchmark’s not as comprehensive.

[153] Mr. Bates notes that the tracking error as calculated by TDAM was generally

within a range of 2.5% to 3.5% with 2019 ranging between 1.7% and 2.1%.

Professor Simutin calculated the tracking error over the Class Period to be 3.22%.

[154] Professor Simutin calculated the CEF’s R-squared over the Class Period to

be 95.2%.

[155] In sum, especially having regard to the agreed definition of Closet Indexing

Strategy, I agree with ESMA’s description that data-based metrics, “while imperfect

screening tools, are nonetheless a useful source of evidence to help direct

supervisory focus”.

b) Return on Equity

[156] As may be seen above, the CEF’s prospectus referred to a specific metric

under the heading, Investment Strategies. The prospectus reads:

In general, superior return on equity and a sound balance sheet are important

criteria in the individual security selection process.

[157] At trial, Mr. Flowerday defined return on equity as “net earnings divided by

book value”.

[158] I realize that return on equity as a metric has limitations. In particular, it is

based on book value which may or may not represent the current fair market value.

That said, one requires net earnings for there to be a return on equity.

[159] Mr. Cooper testified that, in his view, companies with a high return on equity

tend to reflect a higher quality investment than those companies with a low return on

equity.

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[160] The quarterly performance and metrics summaries prepared by the IR Group

and provided to Mr. O’Brien show that from the quarter ending March 31, 2014 to the

end of the Class Period, the CEF’s return on equity of the stocks held by the CEF on

a quarterly basis exceeded the return on equity of the Benchmark securities. Such

figures are consistent with the CEF’s stated Investment Strategies.

[161] Prior to the quarter ending March 31, 2014, the information on return on

equity was not included in the quarterly reports.

c) Alpha and Beta

[162] In its written submissions, TDAM describes alpha and beta metrics as follow:

255. Alpha is a measure of excess returns generated by a portfolio relative

to the Benchmark. If the Benchmark generates a 5% return and the

portfolio generates a 6% return, the Alpha is 1%.

256. Beta, conversely, is a measure of how much risk the portfolio has

relative to the Benchmark – a beta of 1.0 means that the portfolio’s

risk is in line with the Benchmark. A beta below 1.0 means that the

portfolio has less risk, and a beta above 1.0 means that the portfolio

has more risk than the Benchmark.

[163] I accept the foregoing descriptions of alpha and beta which are based on

Mr. O’Brien’s testimony.

d) Active Risk

[164] As noted above at paragraph 42, Mr. Turpin submits that TDAM did not take

“sufficient active risk”.

[165] In Mr. Turpin’s written submissions, Mr. Turpin describes active risk as

follows:

123. Active risk: Active risk is the risk assumed by the portfolio manager

to attempt to outperform the Benchmark and achieve higher returns for

unitholders. It is synonymous with taking "active bets" in stock selection. […]

[166] I accept the foregoing description of active risk. The testimony of Mr. A.

DaCosta, the Vice President of the IR Group, supports the foregoing description.

The IR Group’s quarterly reports also lists the top “Security Bets”. The quarterly

Turpin v. TD Asset Management Inc.

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reports describe Security Bets as “Security positions that contribute significantly to

active risk (contribution to TE is > 3%)”.

[167] The concept of active risk (or bets) is not an unknown or novel concept with

respect to investment management.

[168] TDAM submits:

6. On the plaintiff’s second (unpleaded) theory, there is no legal obligation

for TDAM to take a particular level of “active risk.” The plaintiff would

have this Court micro-manage the portfolio manager’s discretionary

investment process with a standard that is not referenced, let alone

established, in the Declaration of Trust, in TDAM’s Disclosure

Documents or by the harmonized national regulatory regime that governs

mutual funds and mutual fund managers in Canada. The plaintiff has cut

this obligation to take sufficient “active risk” from whole cloth, perhaps

after recognizing that he cannot prove that TDAM engaged in the Closet

Indexing Strategy.

[169] Active risk does not appear in either the Second ANOCC or the Certification

Order. I will address active risk below in connection to Common Issue No. 3.

e) Performance Tolerance Bands

[170] The IR Group developed “Performance Tolerance Bands” to rank the

performance of fund managers, with grades of A, B, or C. The rankings are

consolidated in a report called the “ABC Report”. The Performance Tolerance Bands

represent a model the IR Group developed to help measure a portfolio manager’s

performance. The Performance Tolerance Bands are not constraints or metrics that

a portfolio manager must follow.

[171] For the CEF, the expected added value was 2.0% with an expected tracking

error of 4.0%. Added value divided by tracking error is described as the “information

ratio”. A favourable adjustment is contemplated where the beta is below 0.95.

[172] Mr. DaCosta testified that a 0.5 information ratio would be considered in the

industry to represent an excellent manager.

Turpin v. TD Asset Management Inc.

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[173] In examination-in-chief, Mr. DaCosta described the purpose of the ABC

Reports:

A

So for us -- I mean, at the end of the day, what Investment Risk is

trying to do is trying to identify the outliers, so which funds

outperformed -- were excellent in terms of performance and which

ones struggled or didn’t perform so well.

So what we want to -- it’s a tool that we use in terms of looking

at all our strategies, all our funds to be able to help us to easily

identify what the As are and what the C-rated strategies would be. So

those -- typically the C strategies and the A strategies, those are what

kind of gets escalated or kind of summarized and provided in terms of

for the investment committee to review to scrutinize a little bit more

and potentially escalate it up further to IPOC.

[174] In cross-examination, Mr. Cooper testified:

Q

A

You would have looked at 4 percent. And just explain that phrase, “we

would have typically looked.” What do you mean?

So we think of the tolerance bands, as we discussed, as an early

warning system. It’s just once again oversight and governance around

performance. It combines objective measures and subjective

measures. And so, you know, it’s one of the things we looked at to

assess how the portfolio manager is doing.

[175] It was not put to either Mr. DaCosta or Mr. Cooper that the Performance

Tolerance Bands were used by TDAM to constrain a portfolio manager in the

investment management of the portfolio manager’s particular fund.

[176] It was also not put to either Mr. DaCosta or Mr. Cooper that TDAM as a large

institution used a combination of metrics, portfolio manager remuneration, or other

measures or methods to constrain the CEF’s individual portfolio manager so that the

portfolio manager would construct a portfolio that would closely track or replicate the

Benchmark.

[177] It was also not put to Mr. DaCosta or Mr. Cooper that a “strategy was set in

TDAM using metrics which were known to have the effect of keeping the

performance of the [CEF] very … close to the Benchmark” as Mr. Bates asserted

during the opening discussion of opinion evidence.

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[178] Especially where reputations with significant personal and financial

consequences are at stake, the rule in Browne v. Dunn (1893), 6 R. 67 (H.L.) is

engaged: see generally, Sopinka, Lederman & Bryant, The Law of Evidence in

Canada, 5th ed. (Canada: LexisNexis, 2018) at 1251–1258.

[179] I find that TDAM’s use of its Performance Tolerance Bands was to identify

“outliers” as part of an “early warning system” for senior management review

(including by IPOC). The Performance Tolerance Bands were not used (or

designed) to constrain a portfolio manager in the selection of securities for the

portfolio manager’s particular fund.

16. ACTIVE MANAGEMENT OF THE CEF

[180] As may be seen above, paragraph 29 of the Second ANOCC reads (in part):

29. […] Actively managed funds are operated with the goal of producing

excess risk-adjusted returns that outperform a particular market

benchmark (providing higher returns or lower risk than the benchmark)

by carefully choosing stocks that fit the fund’s investment style and that

the fund manager reasonably expects to collectively outperform the

fund’s benchmark. […]

[181] The MFRPs identify the CEF’s benchmark to be the Benchmark (as defined in

the Second ANOCC and the Certification Order).

[182] In retrospect, I did not need the assistance of expert opinion evidence

(although supportive) to find that the CEF was actively managed in the manner as

set forth in the Second ANOCC.

[183] As noted, since February 2013, Mr. O’Brien has been the CEF’s portfolio

manager.

[184] I accept Mr. O’Brien’s testimony. It was clear that he diligently and carefully

analyzed any potential security to be held by the CEF and monitored the investment

on an ongoing basis. Although not required to do so by TDAM or securities law,

Mr. O’Brien prepared a short aide-mémoire for each acquisition or disposition setting

forth his rationale.

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[185] In addition to the aide-mémoires, under Mr. O’Brien’s supervision, monthly

“New and Eliminated Write-Ups” were prepared by the responsible research analyst.

[186] Mr. O’Brien uses both a top-down and a bottom-up analysis. That is,

Mr. O’Brien, with the support of the Public Equities Group, will identify sectors that

will outperform the market on a top-down basis, and, with the support of the Public

Equities Group, he will identify particular stocks on a bottom-up basis.

[187] Mr. O’Brien’s approach also includes limiting the number of stocks held by the

CEF to approximately 60 in order to monitor closely each CEF holding.

[188] Mr. O’Brien also focusses on determining the risk associated with a particular

investment.

[189] In my review of the IR Group quarterly reports, as noted, I can see that the

CEF’s portfolio held stocks with a more favourable return on equity than generally

those of the Benchmark. I can also see that the relative market capitalization

(weighted average) of the stocks held by the CEF exceeded generally those of the

Benchmark. While I realize that such metrics do not necessarily represent or predict

better relative market performance, these two metrics are consistent with

Mr. O’Brien selecting stocks in accordance with the CEF’s stated investment

objective and strategies.

[190] TDAM’s Portfolio Funds are managed by the Asset Allocation Group. Mr. M.

Craig is the portfolio manager for all of TDAM’s Portfolio Funds. Several of the

Portfolio Funds hold O-Series units in the CEF. As may be seen from Schedule “A”,

as of July 1, 2020, Portfolio Funds held approximately 80% of all current outstanding

units. The total value as of July 1, 2020 was around $4 billion.

[191] Mr. Craig described his rationale for having some of the Portfolio Funds he

manages hold the O-Series units as follows:

Q

[…] What about the Canadian Equity Fund? What are the reasons you

might want to hold the Canadian Equity Fund?

Turpin v. TD Asset Management Inc.

The Canadian Equity Fund under the current manager has a

Page 57

A

preference for what I would call older economy companies, energy,

pipelines, banks, financials, materials. That has been the strength of

that manager. His knowledge of those assets is very strong. Where

that kind of fits in is in a period of accelerating global growth, those

assets tend to perform very well. As demand increases around the

world, energy consumption goes up. As growth accelerates, you tend

to see the bond markets start to – the curve in the bond market start

to steepen but which means longer-term interest rates start to rise

faster than shorter-term interest rates, which is generally very, very

constructive for financials. So that's an environment where this fund

we would expect to add material value over a broader basket of

equities.

[192] One of the Portfolio Funds managed by Mr. Craig is the “TD Managed Income

Portfolio”. In examination-in-chief, Mr. Craig testified:

Q

Am I reading this table right to conclude that during this period, the

Canadian Managed Income Portfolio held both the Canadian Equity

Fund and a product called the TD Canadian Equity Index ETF?

A

Q

A

Q

That’s correct.

What is the TD Canadian Equity Index ETF?

It’s an ETF that simply replicates the returns of the TSX.

Why would you hold both the Canadian Equity Fund and a Canadian

index fund in the same fund-of-fund product?

A

Well, the challenge -- you know, the Canadian Equity Fund does run

material risk; it has a zero weight in Shopify, which is the largest

company in the TSX right now. We felt that was in – you know, in

terms of our needs, in terms of what we’re doing with the strategy,

thought that was too much and so we added a bit of the TD Canadian

Index to offset a bit of that risk within our Canadian allocation.

[193] In cross-examination, it was not suggested that Mr. Craig would have

financially benefitted personally by way of his remuneration or that TDAM generally

would have financially benefitted from having the TD Managed Income Portfolio (or

any of the other Portfolio Funds) holding units in the CEF rather than units in the TD

Canadian Index ETF.

[194] There was no evidence that a retail investor’s advisor could not have

analyzed matters in the same manner as Mr. Craig.

Turpin v. TD Asset Management Inc.

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[195] Several examples support my finding that the CEF was actively managed

“with the goal of producing excess risk adjusted returns that outperform” the

Benchmark: Second ANOCC at para. 29.

[196] First, Mr. O’Brien refused to have the CEF invest in Valeant Pharmaceuticals

International Inc. (“Valeant”). From 2012 to mid 2015, Valeant’s market price rose

quickly. For a brief period in 2015, it was Canada’s most valuable company (market

capitalization). Valeant is shown as Bausch Health Companies Inc. in Schedule “B”

with a 2.83% Benchmark weight as of January 1, 2015. As of June 30, 2015,

Valeant’s Benchmark weight was 4.84%.

[197] Based on a research report dated February 13, 2014 prepared by

Ms. Bruinsma, one of TDAM’s analysts, and his own analysis, Mr. O’Brien

considered Valeant to be not an appropriate investment. Ms. Bruinsma’s

recommendation in the February 13, 2014 report reads:

I do not recommend Valeant as a core holding in TDAM portfolios. The

company is executing a strategy of growth by acquisition at a very rapid pace.

To date, the strategy has appeared to work. However, there are many risks

that could cause the stock price to decline very rapidly and by a significant

amount. Although the company is likely to have short-term success and the

stock price is likely to rise further in 2014, longer term growth and financial

stability is much less visible.

[198] With respect to Valeant, Mr. O’Brien testified:

Q

A

Okay. So due to time constraints we won’t be able to go through all of

this, but did the CEF own any Valeant stock during the class period?

So when I was the portfolio manager Valeant never appeared in the

portfolio.

Q

A

Why not?

All of the -- all of fundamental analyses that we do, all that research

that we talked about, all those research reports, what we’re doing is

we are doing a deep dive on all these companies to try to identify red

flags or risks or things that don’t sit well with us in terms of managing

that company’s specific risk.

So Valeant triggered just about all of them in terms of red

flags. We weren’t happy with the accounting. We had questions

around the sustainability of their tax rate. We felt that their disclosure

was poor. So we had a lot of concerns, you know, from that

Turpin v. TD Asset Management Inc.

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fundamental perspective. Sorry, I lost my train of thought. Where were

we?

Q

A

Why did you not buy Valeant in the CEF.

It brings back memories. So like I said, we did the fundamental

analysis. We did a very deep dive. And so at the time our research

analyst for this sector, her name was Anita Bruinsma. Anita did a very,

very in-depth initiation report similar to the one we looked at for Justin

Flowerday in CP Rail.

Again it was a very deep dive. She covered all the bases,

identified all the red flags, and we had a pretty good internal debate

with all the equity portfolio managers and analysts to discuss her

findings. And as I was, you know, absorbing her report and based on

my own knowledge and what I had been seeing, you know, my

conclusion was that this was not a quality company. This was not

suitable for our mandate, and so my decision for the Canadian Equity

Fund was to not own this stock.

[199] The negative effect on the CEF’s performance triggered a review by the

IPOC. By the time Mr. O’Brien appeared before the IPOC on October 14, 2015 to

explain his rationale, Valeant’s stock price had started its collapse.

[200] The IPOC minutes read (in part):

MOB [Mr. O’Brien] provided his views and rational for not owning Valeant. He

discussed the multiple red flags and would not consider it a quality company.

The company has went through 140-odd M&A deals and has excessive

leverage with opaque and misleading financials. There are large differences

between GAAP earning and cash earnings, and GAAP cash flow and

adjusted cash flow. MOB is concerned about the sustainability of the growth

and earnings by acquisition story. Valeant has a tax rate of 3% to 5% vs. JNJ

of 20% with the Biovail executives testifying in front of Congress or IRS on

the abuse of the original tax structure. Additionally, there has been a public

outcry on the recent price increases of drugs.

[201] The IPOC took no action. Valeant’s share price continued to fall, losing over

90% of its value from its peak.

[202] Mr. O’Brien testified that other Canadian mutual funds owned Valeant. In any

event, I am satisfied that with the billions of dollars involved, certainly some

sophisticated investors did not appreciate the risks and may have suffered the

consequences associated with the subsequent collapse in Valeant’s stock price. An

Turpin v. TD Asset Management Inc.

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index fund would seek to hold Valeant (with the Benchmark weight) in order to

replicate the Benchmark, regardless of risk.

[203] I find that Mr. O’Brien showed the necessary conviction associated with active

management. He was not trying to closely track or replicate (or follow or mimic) the

Benchmark. Mr. O’Brien testified:

Q

Now, if Valeant is such a prominent part of the benchmark and its

position continues increasing over time and the smart money is also in

Valeant, why again did you not buy any Valeant?

A

Because at the end of the day I have always tried to put the interests

of my unit holders first and I take this very seriously. It would have

been an easier thing for me personally to say you know what, I'm just

going to go benchmark weight Valeant and everybody will shut up and

they will leave me alone. I'm just going to have the same exposure to

Valeant as the index does and then it can't hurt me on a relative

performance. Doesn't matter if it goes up or down anymore; it's just it

can't hurt me anymore. That would have been an easy thing to do. It

wasn't the right thing to do. That was something that I would have

been doing for myself; it wasn't the right thing to do for my unit

holders. And I don't know, maybe it sounds trite, but I really believe in

that. I have always tried to put the unit holders ahead of any of my

own considerations. Like, we're here, you know, to take care of the

unit holders. And so in good conscience I could not buy a company

that I had no conviction in, a company that did not satisfy any of the

criteria that we had laid out from a fundamental analysis perspective,

a company that we didn't trust and we thought was being very evasive

in terms of how they disclosed information. I just couldn't do it. So I

didn't. I never owned a share of it.

[204] With respect to metrics, if the CEF had bought Valeant as it rose in price by

replicating its Benchmark weight by raising funds on a relatively weighted basis from

the other securities by the CEF, the CEF’s active share would have decreased,

although increasing the CEF’s returns (pre-collapse).

[205] Shopify Inc. (“Shopify”) is a second example. It is a Canadian based company

that provides online platforms from which businesses may sell goods and services.

Its trading symbol is SHOP.

[206] Based on an initiation report prepared by one of TDAM’s financial analysts

and his own analysis in September 2016, Mr. O’Brien had the CEF acquire a

position in Shopify. 111,500 shares were acquired with a cost of approximately

Turpin v. TD Asset Management Inc.

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$55.25 per share. The total value was approximately $6.2 million. The CEF portfolio

weight was 0.1%, which accorded with its target weight of 0.1%.

[207] In January 2017, the financial analyst changed his recommendation on

Shopify from a “buy” to a “hold” based on its price appreciation.

[208] On June 16, 2017, Shopify was added to the Benchmark. As a result, the

CEF’s active share would have decreased.

[209] In October and November 2017, Mr. O’Brien caused the CEF to sell its

interest in Shopify. Mr. O’Brien’s October 27, 2017 aide-mémoire reads:

Trade Rationale:

SHOP has regained a lot of lost ground from Citron’s short attack;

Val’n still very high, and suspect this “short” campaign has not yet run its

course.

(i) we lightened up a bit today on strength.

(ii) If the stock pops next week on a strong EPS result I will sell the

remainder.

[210] At the time of Mr. O’Brien’s aide-mémoire, Shopify was trading at

approximately $137.75 per share. The total value of the CEF’s holding was

approximately $15.3 million.

[211] After November 2017, the share price of Shopify continued to increase

dramatically. As of July 1, 2020, it was the company with the greatest market

capitalization in the Benchmark with a Benchmark weight of 6.37% (RBC was

second with a 6.02% Benchmark weight). Mr. Cooper, who testified on September

20, 2021, stated that Shopify was then trading at around $1,800 per share. As the

result of the CEF not holding Shopify after November 2017, the CEF’s relative

performance to the Benchmark suffered.

[212] In September 2020, Mr. O’Brien was again required to appear before the

IPOC. At the meeting, Mr. O’Brien explained his valuation concerns with respect to

Shopify. Instead of owning Shopify, the CEF took positions in Amazon and

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Microsoft. Mr. O’Brien’s view was that each was more established and more

reasonably valued.

[213] The IPOC took no action.

[214] By taking positions in Amazon and Microsoft, the CEF’s active share

increased relative to having invested the same funds in Shopify. This is because

neither Amazon nor Microsoft is part of the Benchmark, while Shopify is.

Accordingly, unless the CEF’s Amazon and Microsoft holdings outperformed

Shopify’s dramatic increase, the CEF would have performed more poorly than if it

had retained its then non-active share shareholding in Shopify.

[215] Further, I note that Mr. O’Brien’s conviction is again reflected in his testimony:

Q

I just want to focus on the class period. But so there's mandates at

TDAM that own Shopify. There are portfolio managers and research

analysts supporting a buy recommendation on Shopify. Shopify's

position is increasing dramatically on the benchmark. Why not just

buy it?

A

Because that's not what we do. Again, same answer I gave with

Valeant, you know, when you're given this responsibility, which I take

very seriously, you know, I'm taking care of – you know, I'm managing

and protecting and growing other people's money, I take that very

seriously. And the number one rule always and forever is put your --

put the interests of your unit holders first. That is the rule. Whenever

you make a decision it has to be in the interests of the unit holders.

Given the fundamental views that I have on Shopify's valuation, I can't

in good conscience say I'm going to buy it anyway because it's going

to make my life easier. I don't think that's the right thing to do for my

unit holders and I will be held accountable for the performance in the

end.

[216] A third example is Mr. O’Brien’s approach to the health sector. As noted,

under the agreed-upon Investment Guidelines, Mr. O’Brien is required to have sector

diversification. With respect to his investment approach to the health sector,

Mr. O’Brien testified:

Q

Okay. Let’s look at another example just to make sure we get the

point. Health care. So the fund’s average weight is 2.92 percent

relative to the Benchmark being 1.56 percent, and is that consistent

with the closet indexing?

Turpin v. TD Asset Management Inc.

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A

Q

A

No, it’s not.

Why?

Again, if you’re closet indexing you would be very, very close to these.

You know, the weights would not have a significant variance.

But even more to the case here, again -- actually this is a good

example of why we can’t just take a number at face value. You got to

get underneath and find out why it is what it is, you know, what

produces it.

So health care, our 2.92 percent exposure, that is zero

exposure to the Canadian health care names. We have no Canadian

health care names in our portfolio. We haven’t had any Canadian

health care names in our portfolio in years because the Canadian

health care portfolio is terrible. It’s garbage. It’s a bunch of broken

companies that, you know, the leftover of Valeant which is now called

Bausch Health is one of members, but it’s also dominated right now

by cannabis stocks. They are very low quality stocks. And so this

does not suit our investment style. We don’t want any part of that.

However, the reason we’ve got 2.9 percent of our fund in

health care is because if you go across the border there is similar

wonderful blue chip defensive US health care names that we can

choose from, names like Medtronic, Johnson & Johnson, United

Health Care, you know, with blue chip global franchises. And they

also tend to be very defensive names.

So two completely different profiles. The Canadian health care

space is all about, you know, low quality, high risk stuff. The US

health care names that we can access and include in the Canadian

Equity Fund are high quality, much lower risk, very stable blue chip

companies.

And so in this case, you know, we have 2.9 percent exposure

to health care names that aren’t represented at all in the Canadian

benchmark and we have zero exposure to the 1.5 percent, or what’s

the number, 1.56 percent, that is Canadian cannabis stocks and what

not.

[217] I find that the foregoing again reflects active management with no attempt to

closely track or replicate the Benchmark.

[218] I will add that the Court is not determining whether Mr. O’Brien’s analysis was

or was not correct. It may, for example, be the case that Mr. O’Brien is entirely

wrong that the Canadian “health care space is all about … low quality high risk stuff”.

My purpose in quoting Mr. O’Brien’s testimony is to show the support for my finding

that Mr. O’Brien was engaged in active management and not selecting securities

Turpin v. TD Asset Management Inc.

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with the goal to closely track or replicate the Benchmark. Similarly, with respect to

Shopify, the Court’s role is not to determine whether a particular security is suitable

as an investment.

[219] The CEF has also outperformed the Benchmark for various 12-month periods

by more than the total of the management expense ratio (the “MER”) and the TER of

2.20% [2.17% + 0.03]. I have identified the following 12-month periods ending on the

dates shown:

a) December 31, 2013;

b) March 31, 2014;

c) June 30, 2014;

d) December 31, 2015;

e) March 31, 2016;

f) June 30, 2016;

g) September 30, 2016; and

h) March 31, 2020.

[220] There are also examples of three-month periods of outperformance of the

CEF relative to the Benchmark after fees (2.20 ÷ 4 = .55). These include the

following three-month periods:

a) June 30, 2014;

b) September 30, 2015;

c) December 31, 2015;

d) March 31, 2016;

e) September 30, 2018;

f) June 30, 2019;

g) September 30, 2019; and

h) March 31, 2020.

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[221] In comparing the CEF to the Benchmark, there are no expenses in relation to

the Benchmark. If one were to buy an index fund or ETF that replicated the

Benchmark, there would be some expenses associated with it (albeit far less than

the expenses associated with an actively managed fund).

[222] The foregoing examples of after-fees performance are contrary to the

plaintiff’s pleading that the CEF’s “performance (before management fees) has

closely tracked the Benchmark and has never outperformed the Benchmark once

the defendant’s management fees are taken into account”: Second ANOCC at

para. 5.

[223] While the foregoing pleading may be accurate if a unitholder bought units on

the first day of the Class Period and then continued to hold these units throughout

the Class Period (without further additions or dispositions), in terms of examining

whether the CEF was actively managed, it is appropriate to look at 12-month and

other periods.

[224] By using the TER and the MER, which includes the 1% trailing commission,

I have taken an accountant’s conservative approach. As noted above, trailing

commissions are stated by TDAM to be intended “for the services and advice” the

unitholder receives from his or her representative.

[225] For illustration purposes, instead of selling its position in Shopify, the CEF

could have increased its portfolio weight to say, 1% (a reasonable weight having

regard to the fact that the CEF tended to hold 50 to 60 positions). At the time the

Shopify position was sold in October and November 2017, the CEF’s net asset value

was approximately $5 billion. If, instead of selling its position in Shopify, the CEF had

in October and November 2017 increased Shopify’s CEF portfolio weight to 1%,

Shopify’s market value would have been $50 million ($5 billion x 1%).

[226] On July 31, 2020 (the end of the Class Period), Shopify was trading at

approximately $1,370 per share—a ten-fold increase from November 2017. (Exh

#59).

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[227] As of December 31, 2017, the IR Group’s quarterly metrics report shows

Shopify as having a Benchmark weight of 0.5%. With a 1% portfolio weight, the

CEF’s holdings in Shopify would have contributed to CEF’s active share having

regard to its overweight relative to the Benchmark weight.

[228] If Shopify were then sold at the end of the Class Period, a ten-fold increase

would have resulted with a gain of around $450 million ($500 million - $50 million).

Assuming the rest of the CEF’s portfolio performed roughly the same as it actually

performed (I realize I have taken $50 million from the CEF’s portfolio to have the 1%

portfolio weight in Shopify as of October/November 2017), the contribution to the

CEF’s performance (disregarding risk) would have been significant.

[229] The purpose of the foregoing hypothetical is not to speculate but to illustrate

that there were “reasonable prospect[s] of outperformance after accounting for the

manager’s fees” of which the foregoing Shopify scenario is one.

[230] Mr. O’Brien’s basis for remuneration also reflects active management.

Mr. O’Brien receives a base salary (competitive with other firms), restricted share

units, and a cash bonus.

[231] Mr. Sykes explained that the cash bonus may be significant and is based, in

large measure, on the performance of the mutual fund the portfolio manager is

managing relative to its benchmark. Passive managers earn approximately one-third

of what active managers earn because a passive manager’s job is to simply

replicate the benchmark for the particular index fund.

[232] I can see nothing in Mr. O’Brien’s remuneration framework which would give

him an incentive to closely track or replicate the Benchmark.

[233] Under the Investment Guidelines, the “Return Goals” were set forth as

follows:

I.

Fund returns (before fees and expenses) are targeted to outperform

the following benchmark on a total return basis over rolling 3 year

periods:

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S&P/TSX Composite Total Return Index

Page 67

II.

Fund returns (net of fees and expenses) are expected to rank

consistently above median over 3-year periods within its CIFSC fund

category peer group.

[234] Mr. O’Brien testified that he was not aware of the fees charged to unitholders.

That said, the CEF’s return goals included ranking consistently above the median

over three-year periods of competitors within the CEF’s fund category (net of fees

and expenses). All in, the focus was on net returns while managing risk (such as

through diversification).

[235] Mr. Cooper emphasized that TDAM focuses on risk-adjusted returns and not

simply straight performance.

[236] Mr. Cooper noted that in recent years, the CEF has underperformed the

Benchmark with a “big part of the difference” explained by Shopify’s performance.

He further noted that with a “very, very, very high” valuation, there is an associated

risk.

[237] In terms of the 4% tracking error, Mr. Cooper testified:

A

So tracking error refers to the amount of risk that a [portfolio manager]

takes relative to the Benchmark. So it’s a sort of complex

mathematical formula. But the way to think of it is, how different the

performance of the fund is going to be from that of the Benchmark. To

be really precise, what percent means in this case is if you had

percent tracking error two-thirds of the time, the performance of your

fund would be the same as the Benchmark plus or minus 4 percent.

This is what is called a normal distribution curve. So in a normal

distribution curve or a bell curve, two-thirds of the observations -- one

standard deviation accounts for two-thirds of the observations.

[238] With respect to Shopify and tracking error, Mr. Cooper testified:

A

One of the biggest contributors to tracking error in the Canadian

Equity Fund today would be that it has under weighed Shopify,

meaning it owns less Shopify than the Benchmark. We own zero and

the Benchmark has a big weight. So we’ve had a bet on Shopify,

meaning we’re different from the Benchmark, which has actually been

a negative for performance because, you know, over the last three

years that’s been incorrect. But, you know, our job is to look forward

and we think looking forward, the valuation of Shopify is very high and

Turpin v. TD Asset Management Inc.

the risk is that it could fall quite a lot. In which case, going forward it

Page 68

will help us. Things are a lot easier looking backwards because you

have the facts. Looking forward is a lot tougher.

[239] With respect to active share, Mr. Cooper observed that active share does not

capture volatility. In this regard, he stated:

A

[…] I think arithmetically it’s just too simplistic in our view. And I think

Shopify is a great example. If that stock is very volatile relative to the

index, an overweight or underweight versus Shopify is very different

than an overweight underweight versus, for example, a utility stock

that is not very volatile.

In active share -- the thought process behind active share

doesn’t cover that. It doesn’t address that. So that’s why we were

aware of active share, and we do include it on the dashboard, but it

has significant shortcomings as a tool.

[240] Mr. Cooper agrees that tracking error is a measure of investment risk arising

from active management. He agrees that it gives an indication of how closely the

portfolio tracks the benchmark. He says tracking error is the fluctuation of returns of

the portfolio relative to the fluctuation of the benchmark. He emphasizes that

tracking error is calculated by looking at the past.

[241] In Mr. Turpin’s written submissions, he says that the reasonableness of the

fees TDAM charged must be considered. As noted, TDAM, as trustee of the CEF,

had delegated itself as the CEF’s manager. He submits:

130. No realistic prospect of outperformance after fees: TDAM had a

responsibility to assess the reasonableness of its fees based on the degree

to which the CEF closely tracked Benchmark performance during the Class

Period. It never did so. TDAM's view then, as now, was that the fees were

disclosed and there was an "active process" involving Mr. O'Brien and his

team who made some "active bets". By maintaining its high fees, it failed to

appreciate that the CEF's persistently low active risk and thus close tracking

of Benchmark performance over time meant that the CEF's prospect of

outperforming the Benchmark after fees was minimal.

[242] I will address this argument further under Common Issue No. 2 below. As

may be seen above, there were various 12-month and three-month periods where

the CEF outperformed the Benchmark on a net basis.

Turpin v. TD Asset Management Inc.

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17. EXPERT EVIDENCE

a) Professor Martijn Cremers

[243] Professor Cremers holds a Ph.D. degree in Finance and has particular

expertise with respect to investment funds. He was qualified to provide opinion

evidence with respect to investment funds, including the classification of investment

funds, associated metrics, and related features and aspects. He was called by the

plaintiff.

[244] Professor Cremers prepared a first report dated June 3, 2021 and a reply

report dated August 16, 2021.

[245] As may be seen above, Professor Cremers described tracking error, R-

squared, and active share. Professor Cremers is recognized as having authored (or

co-authored) academic papers addressing closet index funds (funds “that have

assets that largely mirror the assets of a benchmark index”). He is particularly

associated with his writings on active share.

[246] For the preparation of his report, Professor Cremers did not review the

pleadings, the Certification Order, or the agreed upon definition of Closet Indexing

Strategy (he was unaware when preparing his reports of the definition). He also did

not review TDAM documents for comment or analysis.

[247] Professor Cremers readily acknowledged that he did not opine on whether

TDAM used “an investment strategy designed to closely track or replicate, not

exceed, the performance of the Benchmark”. He also was not asked to opine either

upon the investment process undertaken by Mr. O’Brien or TDAM’s management of

the CEF. Further, he also was not asked and did not consider TDAM’s Performance

Tolerance Bands and their use. In short, he was not asked to consider TDAM’s or

the CEF’s specific circumstances.

[248] Professor Cremers, in his reply report, states: “what’s at stake is whether the

CEF’s fees are appropriate given its relatively low active share”. Professor

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Cremers’s statement leaves open the consideration of the actual management of the

CEF, in the context of its stated investment objective and strategies.

[249] A low active share does not lead to necessarily a finding of closet indexing

(as Professor Cremers uses the term). In cross-examination, he testified in relation

to ESMA:

Q

So they’re not coming out and saying that if you have a particular

active share or if you have a particular tracking error, that you are in

fact a closet indexer?

A

Correct, they use much more tentative language.

Q

And that’s similar to what your 2016 Virginia Law Review article said

as well?

A

Correct.

[250] In sum, Professor Cremers views the use of metrics as useful screening tools

to identify potential closet index funds. He viewed his reports as “conceptual”.

Professor Cremers testified:

Q

A

Q

A

Q

But you’ve not addressed TDAM’s specific circumstances, right?

Correct.

Or the circumstances of the CEF’s investors, right?

Correct.

Or the circumstances of the portfolio managers who operate the CEF,

right?

A

Correct. My report was conceptual and then it’s really up to others to

apply that to the particulars of this case.

[251] In cross-examination, Professor Cremers testified that the description of

actively managed funds (found in para. 29 of the Second ANOCC) was a “fair

definition”.

[252] Professor Cremers agreed that the portfolio manager of an actively managed

fund needs “to care about both returns and risk”.

[253] Professor Cremers also agreed that TDAM would have no influence over the

Benchmark’s composition.

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[254] Professor Cremers testified that it is typical for an actively managed fund to

hold securities that are part of its benchmark.

[255] With respect to active share, Professor Cremers, in cross-examination,

testified:

Q

A

Q

A

The active share metric does not tell you how the portfolio is

constructed, right?

Correct. It -- it doesn’t say anything about how the over or under

weights are -- are done or are chosen.

It doesn’t say why the portfolio is the same or different than the

benchmark?

Correct. It also doesn’t say how it is different or the same. It doesn’t

tell you what is overlapping, what is not overlapping. It just tells you

that this fund that is overlapping.

Q

It doesn’t tell you why the portfolio manager made those decisions

that led to that overlap; correct?

A

Correct.

Q

It doesn’t tell you whether the manager was looking to control risk or

achieve higher returns or both?

A

Q

A

No, it doesn’t -- it doesn’t say anything about the intentions of the

manager in terms of, you know, controlling risk or -- correct.

It doesn’t tell you what the rationale was behind the investment

decisions made by the manager?

Correct, other than the rationale that the manager wants to have this

overlapping position.

Q

A

Yes, but you don’t know why he made that decision?

Correct.

Q

And the metric doesn’t speak to the triad of process that the manager

might have followed?

A

Q

A

No, the manage -- the -- it does to some extent.

Well --

So active share is the outcome of that process. And so if the manager

has strong convictions about the manager's ability to outperform the

benchmark, you would naturally expect that those strong convictions

would result in a portfolio with more differentiation from -- from the

benchmark. And so the outcome of the process is active share. So if

you have a really low active share, you would expect that the -- the

manager has -- low active share means generally the manager has

less conviction about their -- about their -- about being different.

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Q

Well, let's be fair, Professor Cremers, that's the output. You don't

know what the input of the decision is, right?

A

Q

A

Q

A

Correct. Correct.

So --

Active share is the outcome of the process.

So you don't --

That's just one aspect of the out -- I'm sorry. The out -- active share

measures one aspect of the outcome of the process.

Q

A

Q

A

Q

A

Q

So it doesn't tell you what research the manager did?

Correct.

It doesn't tell you the diligence the manager did? Right?

Correct.

It doesn’t tell you the research team around the manager?

Correct.

Whether there was internal research or external research relied on by

the manager?

A

Q

A

Yes, yes.

And as you've said, it doesn't tell you the manager's intentions?

Correct, other than assuming that the extent of overlap is in fact, that's

under the control of the manager.

Q

A

But that's an assumption. You'd have to ask the manager, right, to be

sure?

No, I — I think it's a fair assumption that an active manager controls

their portfolio. No one tells the active manager within the mandate

what to own. So the active manager has under her or his control what

the active share would be.

Q

A

Correct, but you don't know the manager's intention for why that

decision was made?

Correct.

[256] With respect to “large cap” mutual funds, Professor Cremers further testified

in cross-examination:

Q

And just so there’s no confusion, on the flip side of that, based on

your research, larger cap equity -- mutual funds have typically lower

active share than smaller cap mutual funds, right?

A

Correct.

Q

And these differences can be explained by large cap funds having a

more limited investment universe and generally more concentrated

benchmark than the small cap funds?

Turpin v. TD Asset Management Inc.

Correct.

Page 73

A

[257] Professor Cremers was asked by counsel in preparing his June 3, 2021

report to “describe regulatory developments (U.S. or elsewhere) that you have

observed respecting closet indexing”.

[258] In answering this question, in my view, Professor Cremers intended to be

helpful and not to be an advocate. In his report, Professor Cremers stated (in part):

First, probably the most significant judgement in international courts is the

2020 judgement from the Norwegian Supreme Court that can be found here:

[link provided].

[259] Professor Cremers, in his report, then provided a related summary which he

quotes in full.

[260] In cross-examination, Professor Cremers admitted:

a) he was not aware of the facts of the case;

b) he assumed the related summary was a fair one;

c) he just copied and pasted the summary into his report;

d) he was not able to find the full reasons of the Supreme Court of Norway in

English; and

e) he did not know that the reasons of the Supreme Court of Norway

described a tracking error of 1.28% and an active share of 12.25%.

[261] I accept Professor Cremers’s comment that he intended to help the Court.

That said, his approach fell far short of the academic rigour he must usually apply in

order to have established the reputation he now enjoys with respect to finance,

including particular academic knowledge of investment funds.

[262] I accept Professor Cremers’s first report and reply report and his testimony to

be reliable and may be weighed with other evidence except to the extent that his

reports and testimony relate to regulatory developments (including the decision of

the Supreme Court of Norway).

Turpin v. TD Asset Management Inc.

Page 74

b) Professor Mikhail Simutin

[263] Professor Simutin holds a Ph.D. degree in Finance and has particular

empirical expertise in respect of asset management and investment performance

evaluation with a particular focus on investment funds. He was qualified to give

opinion evidence with respect to the classification and performance of investment

funds, including associated metrics and related features, aspects and illustrative

calculations. Professor Simutin was called by the plaintiff.

[264] Professor Simutin prepared three reports: an initial report dated June 4, 2021,

a second report dated June 14, 2021, and a reply report dated August 16, 2021. At

trial, he also prepared a handwritten sur-reply report to Professor Wermers’s August

26, 2021 report.

[265] In forming his opinions, Professor Simutin undertook an empirical approach.

He used the active share, tracking error, and R-squared, with a further metric,

“active weight”.

[266] “Active weight” is a measure developed by Professor Simutin and two other

academics. In his June 4, 2021 report, Professor Simutin described active weight:

The motivation for this measure stems from the insight that a closet indexer is

more likely to "value-weight” stocks in the portfolio, that is, to invest in stocks

in proportion to their market value. The main reason for this insight is that

mutual fund benchmarks are overwhelmingly value-weighted portfolios, and

hence to minimize the risk of underperforming the benchmark, a closet

indexer is better off value-weighting the portfolio. Active weight is defined by

comparing actual weights of stocks in a fund and hypothetical weights the

stocks would have had if the manager value-weighted the portfolio.

[267] As may be seen above, Professor Simutin accepts that metrics serve as a

screening mechanism to identify potential closet indexing. In his further analysis,

Professor Simutin relies entirely on metrics. For example, with respect to active

share, in cross-examination, he testified:

Q

So you can have on the left hand a fund where stocks have been

carefully selected, according to your definition of active management,

and it has an active share of X, and on the right hand, you can have a

Turpin v. TD Asset Management Inc.

random collection of stocks and it too can have an active share of X;

Page 75

correct?

A

Q

A

And -- correct. And those two portfolios are going to have the same

low or high probability of outperformance or underperformance.

And you can't distinguish between the two of them just based on

active share; correct?

I can -- I can -- I can show -- I can say what I just said, that they —

that those two portfolios are going to have the same likelihood of

outperforming the benchmark.

Q

But that's not what I asked you. If you have the result of a careful

active management process, active share X and a totally random

collection of stocks, active share X, you can't distinguish between the

two of them on the basis of the active share, they have the same one?

A

Q

A

So -- so if I observe two --

Correct ?

So — so let me just rephrase it and I will answer your question and let

me just build up to the answer.

If I have the two identical active share numbers, you're

absolutely correct that I cannot infer whether one came from a

random stock selection and one came from a non-random stock

selection, so I'm agreeing with you. But where I'm providing some

qualifying statements is that whatever the process was, it led to the

same active share. So the random process led to that active share

through some randomness. The non-random process led through the

-- to the same active share through non-randomness. And given

whatever the processes were, they ended up in the same point. And

you're right, I cannot distinguish whether process A was random or --

and process B was non-random, but I do know through the processes

this is where we ended up and because we ended up where we

ended up through the processes going forward, the expectation of

outperformance for those two funds is about the same.

Q

A

From a pure math perspective?

Not just math, I mean, we're talking about very fundamental

economics and this is not -- this is not a nebulous mathematical

discussion.

Q

A

But it gives absolutely no weight to the possibility of skill, that -- that

the active manager could identify a really good stock that's going to do

good things for the fund whereas on the other hand it's entirely

random, so – so that element is gone from the conclusion you just

identified; correct?

So again with the caveat that it's a function of -- it's a function of the

size of active share. I can tell you that if active share is low, even

though the manager may have gone through careful process, if active

share is low enough, the possibility of outperforming -- of

outperformance after fees is low enough. So – so -- so the

Turpin v. TD Asset Management Inc.

expectation of outperformance may be trivially small, and in my

Page 76

estimation, if that expectation of outperformance is extremely small, it

is not consistent with the definition of active management where the

aim is to outperform.

[268] Plaintiff’s counsel asked Professor Simutin, in preparing his report, to answer

various questions, including:

a. What is an active investment strategy?;

b. What is a passive investment strategy?; and

c. What is closet indexing? How is it consistent or not consistent with an

active investment strategy?

[269] With the agreed definition of Closet Indexing Strategy, it was not readily

apparent as to the reason the third question was asked (other than possibly related

to Common Issue No. 2).

[270] In his June 4, 2021 report, Professor Simutin described “closet indexers” as

follows:

25.

Within the category of actively managed funds, some funds, known as

“closet indexers”, purport to be engaging in genuine active management and

charge correspondingly high fees. However, their portfolios deliver before-

expenses performance that closely tracks performance of the benchmark

index. A closet indexer can achieve this by, for example, holding a portfolio

whose composition significantly overlaps with the composition of the

benchmark portfolio.

[271] In reference to the foregoing description of closet indexers, in cross-

examination, Professor Simutin testified:

Q

Okay. I put to you, sir, that that is not the same definition as in this

case which is set out in the certification order that I know you say you

didn't review, but set out in the certification order is:

The Closet Indexing Strategy is defined as "investment strategy

designed to closely track or replicate, not exceed, the

performance of the benchmark".

A

Q

A

Yes.

So those two definitions are different, aren't they?

I completely disagree and we had this discussion yesterday. This is

the same definition in my own words. If a closet indexer is closely

Turpin v. TD Asset Management Inc.

tracking the benchmark, if the objective of the closet indexer is to

Page 77

closely track the benchmark, by extension, the objective is not to

outperform, it's to closely track. And I elaborate on the possibility of

outperformance or -- or underperformance of the closet indexing when

I -- when I discuss the possibility of outperformance, so

underperformance of funds that closet index.

So you’re correct, while I don't use the same words, the

economic essence of my definition is exactly the same as what's in

the certification that you just read.

Q

A

Q

A

You don't know what Mike O'Brien designed the components of the

fund to do, do you?

I don't know what Mike O'Brien designed the components to do, so

what do you mean by components and what do you mean by do?

Active share doesn't tell you what's in this fund, correct, it doesn't tell

you what the components were, that's your word?

Yes, so we have discussed that before the break. I don't know what

the -- by -- by knowing the active share number, again repeating

myself, by knowing the active share number, I don't know the

components.

Q

A

Q

A

Q

And you never talked to Mr. O'Brien?

I have not.

And you didn't look at the prospectus?

I have looked at prospectuses.

Well, you didn't identify it as a reliance document, did you not see it as

relevant? And did you not rely on it for your analysis?

A

I didn't think it added incremental -- incremental evidence in addition

to what I have already outlined as my reliance documents.

Q

A

So it wasn't useful to your analysis?

That's not what I'm saying.

Q

Okay, what are you saying? What – what relevance does the

prospectus have or not have to your analysis?

A

Yeah, so the prospectus may outline the investment objectives of the

fund, and investment objective of the fund impacts -- if the investment

objectives of the fund said that the fund aims to closely track the

benchmark, obviously that would impact whether I would, you know,

how I would interpret the evidence. If the investment objective said

that the fund is closely tracking -- is -- is replicating the benchmark,

then the fund is replicating the benchmark. So the objective is -- is in

the prospectus.

Q

A

Right. And so the objective for this fund is not to replicate the

benchmark?

It's not.

Turpin v. TD Asset Management Inc.

Page 78

Q

A

Right. And is it not still -- is that not still an important element of your

analysis, or is that beside the point for the purposes of your analysis?

So I was -- what I was asked to do is outlined in one of the -- one of

the previous paragraphs . And for the purposes of determining

whether the CEF was a closet indexer, it is important to have a clear

definition of closet indexing, which is what I have. It is important to

conduct thorough analysis based on metrics established in academic

literature used in practice, which is what I have done, and conduct

additional analysis that I have done.

Q

A

But none of that had to do with what the investment objectives or

strategies were for this particular fund; correct?

The determination of the -- of -- my determination of this fund being a

closet indexer was based on the factors I analyzed and the -- and the

definition of closet indexing. If the objective of the fund stated that it is

a closet indexer, I would still conclude that it is a closet indexer. If the

objective of the fund stated that it is intending to outperform the

benchmark, I would still conclude that it is a closet indexer.

Q

A

So you're telling me that the investment objective and strategy as

stated in the prospectus is beside the point for your analysis?

I'm saying that the definition of the closet indexing as provided both in

the certification documents and in my analysis, whether a fund --

according to that definition, whether a fund is or is not a closet indexer

can be determined via the analysis that I have provided.

[272] In empirically analyzing matters, Professor Simutin undertook a simulation

analysis. In general terms, in his June 4, 2021 report, Professor Simutin described

the simulation analysis which incorporated both active share and tracking error as

follows:

87.

This exercise can be compared to giving 10,000 people 127 coins to

flip (one for each month of the class period) and having them count the

number of flips that land on heads. For any given flip, we would expect about

the same number of people flipping heads or tails. Over time spanning 127

flips, the likelihood that any given person flips a disproportionately large

number of heads or tails will be small. The average person will end up with

approximately as many heads as tails but there will be a small proportion of

people who “beat the odds” and flip many heads or many tails. We can then

plot a histogram of the average number of heads flipped by each person to

gauge the likelihood of the average number of heads being higher than some

threshold of interest.

88.

With the simulation of pseudo funds, we are interested in the

proportion of funds beating the benchmark by more than the level of

expenses. To show this proportion visually, Figure 7 plots the histogram of

average returns of pseudo funds in excess of benchmark returns. The vertical

dashed line marks the average MER of the Investor Series of the CEF during

Turpin v. TD Asset Management Inc.

Page 79

the class period (2.17%). Only 56 of 10,000 pseudo funds generate average

returns that beat the benchmark by more than this expense. Put differently,

the probability that a pseudo fund with active share characteristics similar to

those of the CEF outperforms the benchmark after expenses is just 0.56%, or

1 in 179.

[273] Professor Simutin’s conclusion as set forth in his June 4, 2021 report reads:

14.

Simulation analysis suggests that the probability that a fund with

activeness characteristics and expenses like those of the CEF outperforms

the benchmark after expenses during the class period is trivially small,

approximately 1 in 179 or 0.56%. Investors in a fund like this do not have a

reasonable chance of after-expenses outperformance versus the fund's

benchmark.

[274] Professor Simutin did not speak to Mr. O’Brien or anyone on TDAM’s

management team. He did not review trade rationales or trade reasons, some of

which were forwarded to him. He testified that “they were not necessary for me to

compute the metrics I have computed”. For his pseudo funds simulation, he also

assumed that managers of pseudo funds do not possess skill.

[275] In his report, Professor Simutin, after setting forth his empirical analysis,

commented:

107. Overall, despite the non-random nature of how the CEF may be

selecting stocks, the outcome of that selection, as manifested in the

performance of the fund, reveals no evidence of superior managerial skill.

This result lends support to the appropriateness of choosing stocks randomly

or otherwise assuming no significant managerial skill when performing the

simulation exercises.

[276] Professor Simutin’s comment recognizes that “superior management skill”

could impact matters. As noted, Professor Simutin did not choose to examine trade

rationales or trade reasons.

[277] Professor Simutin’s comment that his metrics reveal “no evidence of superior

management skill” also reflects an ex post analysis which incorporates a degree of

hindsight.

Turpin v. TD Asset Management Inc.

Page 80

[278] As noted, the CEF outperformed the Benchmark net of the fees for various

12-month and other periods. The Shopify illustration also reflects a real prospect of

outperforming (after fees) the Benchmark.

[279] Similar to the Shopify illustration, I am confident that if the CEF had bought

Valeant shares before their dramatic rise and sold them shortly before their dramatic

fall, the CEF’s performance would have been favourably impacted. That said, I am

not critical of Mr. O’Brien (he was also focussed on risk).

[280] Professor Simutin did not consider various periods where the CEF

outperformed the Benchmark on an after-fee basis.

[281] Mr. O’Brien’s mandate was not straight performance returns. He had to

consider the possible straight performance along with potential risk. With respect to

Valeant, he identified many possible risks. The risks did not come to be realized for

some time. From Mr. Turpin’s testimony and his investment goals, it is apparent that

Mr. Turpin was looking for the type of analysis that Mr. O’Brien undertook with

respect to Valeant.

[282] In sum, I reject Professor Simutin’s empirical modelling as conclusive for the

findings the plaintiff seeks. The stated empirical results are not sufficiently reliable

having regard to many actual results, and illustrative examples, such as the Shopify

illustration.

c) Professor Russell Wermers

[283] Professor Wermers holds a Ph.D. in Finance from the University of California,

Los Angeles, and has particular expertise in the analysis and classification of

investment funds and in assessing performance and strategies of asset managers.

He was called by the defendant. He was qualified to give opinion evidence with

respect to the classification and performance of investment funds and the strategies

employed by asset managers, including associated metrics and related features and

aspects, and damages analysis.

Turpin v. TD Asset Management Inc.

Page 81

[284] Professor Wermers prepared a first report dated July 16, 2021 and a reply

report dated August 26, 2021.

[285] In the May 7, 2021 defendant’s counsel’s letter of instruction, Professor

Wermers was specifically instructed:

As stated above, you must be fully familiar with all of the work done in

forming and expressing your opinions. Anyone who assists you should be

identified, and your report should identify, with respect to any portion for

which the assistance of another person was given, the name of that person,

the precise portion of the report on which they worked, and a complete

description of their role. You should also be familiar enough with their

methodology and conclusions to be able to answer any questions in relation

thereto.

[286] In his report, Professor Wermers does not state that he used Analysis Group

Inc. (“AGI”) to assist him.

[287] In cross-examination, Professor Wermers testified:

Q

A

Q

A

Who crunched figures, tables, and numbers? Who’s the person?

Well, my contact was Lee Heavner.

Spelling, please?

H-e-a-v-n-e-r. He’s the lead economist. Another gentleman named

Frederico -- and I’m sorry, I’m forgetting his last name now -- is his

subordinate. Another, a gentleman named Xiao, X-i-a-o, something

like that, who is, I think, Frederico’s subordinate in the DC office of

Analysis Group. But there were others, too, that I am unaware of,

potentially, that may have also crunched numbers. I’m not sure if

Mr. Xiao did all the number crunching or Frederico and Mr. Xiao or

they had any other analysts helping them.

[288] In cross-examination, Professor Wermers further testified:

Q

Now, I’m going to look at a couple of parts of your report. Let’s start at

paragraph 99. And I want to be very specific, please, Dr. Wermers, so

bear with me. In paragraph 99, you say, “I also calculated.” Do you

see that statement?

A

Yes.

Q

Would it be more accurate to say that Analysis Group did that

calculation than to say that you did it?

A

I think it would be appropriate to say that Analysis Group did the

calculations under my supervision.

Turpin v. TD Asset Management Inc.

Page 82

[289] With respect to supervision, Professor Wermers, in further cross-examination,

testified:

Thank you. Now, I acknowledge you have said that you supervised Analysis

Group. May I see the documents? May I see the records of the

supervision, please?

A

The supervision generally occurred through phone calls or through

Zoom meetings There’s no paper trail of the supervision.

Q

It’s quite obvious that the exhibits I went through with you were

generated by the use of computers to crunch data; right?

A

Q

A

Q

A

Yes.

Analysis Group had the data and the computers; correct?

That’s correct.

Not you?

They had -- for the exhibits, for building the exhibits, Analysis Group

crunched the data and created the exhibits; that is correct.

[290] Professor Wermers’s inattention to counsel’s instructions “fell far short of the

academic rigour he must usually apply in order to have established the reputation he

now enjoys with respect to finance, including particular academic knowledge of

investment funds”.

[291] AGI’s work resulted in various illustrative charts and calculations set forth in

16 exhibits forming part of Professor Wermers’s first report.

[292] The calculations and charts are purportedly derived from information in

evidence (e.g., the CEF’s holdings throughout the Class Period and the composition

of the Benchmark throughout the Class Period).

[293] TDAM’s counsel offered to have an AGI representative attend Court to testify.

Mr. Turpin’s counsel declined the offer and decided not to bring an application.

[294] I am disquieted as to the reliability of the charts, calculations, or other aspects

for which AGI was engaged. No notes or other documents were produced to show,

for example, Professor Wermers sample-tested AGI’s calculations to confirm the

accuracy of AGI’s charges and calculations. Professor Wermers was not familiar

with many of the individuals who undertook the calculations and prepared the charts.

Turpin v. TD Asset Management Inc.

Page 83

Such is quite different from a university professor relying on the work of a

postdoctorate’s calculations with whom the professor works closely on a frequent or

ongoing basis.

[295] I have not relied on the charts, calculations, or aspects related specifically to

TDAM arising from AGI’s work in Professor Wermers’s report or his related

testimony. I am not satisfied that Professor Wermers was sufficiently rigorous in his

oversight of the calculations and the preparation of the charts.

[296] Rule 11-6(c) of the Supreme Court Civil Rules requires that an expert report

to be tendered at trial must include “the instructions provided to the expert in relation

to the proceedings”. Professor Wermers’s report fulfills this requirement by including

as exhibits to his reports the respective instructing letters from TDAM’s counsel.

[297] However, with respect to the instructions for his July 16, 2021 report (set forth

at para. 285 above), Professor Wermers failed to follow them. Whether the failure

was the result of busyness, casualness, or forgetfulness, the standard of care the

Court expects of an expert is not met. Opinion evidence is an exception to the

hearsay rule which, in turn, requires rigour on behalf of the expert to ensure

reliability in order to fall within the exception.

[298] Where the charts, calculations, or aspects related specifically to TDAM arising

from AGI’s work arose in connection with other witnesses at trial, I have disregarded

that portion of the evidence of those other witnesses so far as it relates to Professor

Wermers’s opinion evidence based on AGI materials.

[299] As noted above, TDAM had calculated during the Class Period tracking error,

R-squared, and active share. In his June 4, 2021 report, Professor Simutin provides

charts for the Class Period showing monthly active share, a rolling three-year

tracking error, and a rolling three-year R-squared.

[300] I have considered Professor Wermers’s testimony and reports as to general

aspects related to the area of expertise for which he was qualified. He is clearly a

leading expert in the area.

Turpin v. TD Asset Management Inc.

Page 84

[301] Among other matters, Professor Wermers was asked by TDAM’s counsel, in

preparing his June 4, 2021 report, to describe what constitutes closet indexing. In his

July 16, 2021 report, Professor Wermers described closet indexing:

The concept of “closet indexing” is, in its most basic form, a deliberate

attempt by a portfolio manager or an investment company to masquerade, to

investors, as being active and charging fees at the level of actively managed

funds—while on very superficially (if at all) engaging in the research, analysis,

and investment strategies associated with active management.

[302] In his July 16, 2021 report, Professor Wermers also stated his views as to the

limits of metrics to conclude conclusively whether an investment fund is “closet

indexing”:

As indicated above, there is no single precise metric of active management.

There exist a multitude of different approaches to forming and implementing

an active management strategy (e.g., different relative levels of top-down

versus bottom-up analysis), which cannot be summarized in one or a few

“sufficient statistics.” Thus, simple quantitative metrics, by themselves, cannot

be used to conclusively infer whether a fund manager actually implemented a

professional active management strategy, rather than simply “pretending” to

actively manage the fund, as implied by the term “closet indexing.”

[303] The footnote for “sufficient statistics” reads:

In econometrics, a “sufficient statistic” is an estimator that, by itself, contains

all of the necessary information to evaluate the characteristics of a random

variable (in this case, the time-series of returns generated by an active fund).

[304] In cross-examination, Professor Wermers testified:

Q

And when you identify a single precise metric, I take it as well that you

are not suggesting that there’s no utility to taking these metrics

together; correct?

A

I agree with that. With the same limitations. They are -- as a set

collectively, they are still imprecise.

[305] In cross-examination, Professor Wermers, with respect to the consideration of

fees, testified:

Q

So what would be your views, sir, when comparing the performance of

the fund and the Benchmark? Should fees be disregarded?

Turpin v. TD Asset Management Inc.

Page 85

A

No. I think it’s useful to look at returns both unadjusted for risk and

risk adjusted prior to fees being subtracted as well as after fees being

subtracted. I think those are both useful statistics.

[306] In analyzing matters, I have no difficulty finding that fees should be

considered, especially in connection with Common Issue No. 2.

[307] Professor Wermers’s testimony further buttresses my finding that metrics,

while useful in identifying potential closet indexing, cannot alone be used to make a

finding of closet indexing, especially having regard to the agreed definition of “Closet

Indexing Strategy” in the case at bar.

d) Mr. David Jarvis

[308] Mr. Jarvis was called by the plaintiff. Mr. Jarvis is an investment manager with

background experience in the securities industry, particularly, in connection with

hedge funds (including merger arbitrage and the use of derivatives). The two hedge

funds he currently manages have approximately $2.5 million under management.

[309] Mr. Jarvis holds a Masters of Business Administration from Queen’s

University and is a chartered financial analyst with registration as a portfolio

manager. He also has experience as a CCO and as a UDP.

[310] Mr. Jarvis was qualified to give opinion evidence with respect to investment

fund management and operations, including compliance, classification, performance

evaluation, and the fees of investment funds.

[311] Mr. Jarvis prepared a first report dated June 4, 2021 and a reply report dated

August 16, 2021.

[312] Mr. Jarvis’s main opinion was that the CEF was a closet index fund, which he

based in large measure on metrics (active share, tracking error, and beta).

[313] With respect to this opinion, he stated that it was consistent with academic

research citing the following statement that a “fund with an Active Share less than

50% is always a hybrid between a purely active and purely passive fund”: M.

Turpin v. TD Asset Management Inc.

Page 86

Cremers & A. Petajisto, How Active is your Fund Manager? A New Measure that

Predicts Performance, (Oxford University Press on behalf of The Society for

Financial Studies, 2009).

[314] In his reply report, Mr. Jarvis stated:

I do not agree that one can simply look at process to characterize a fund’s

management style and its investment strategies. Active management, closet

indexing and passive management all are rooted in substantive processes.

That is, to be an active manager, closet indexer, or passive manager

inevitably involves work. The work will be different depending on what goal is

ultimately being sought and will depend on the work ethic and competence of

those involved in that work. Whether consciously or unconsciously, the work

will result in an outcome that will either be close or far from the goal being

sought. To assess whether the TD Canadian Equity Fund is closet indexing, it

is not sufficient to simply look at the amount of “work” done.

[315] In cross-examination, Mr. Jarvis was asked about Mr. O’Brien’s decision not

to buy Valeant:

Q

A

Good. Because while he lost out on returns by not buying Valeant, he

derisked the portfolio by not buying Valeant; right?

I agree. As you and I have talked about earlier, Valeant is one of

those what we call portfolio killer stocks.

Q

And so in 2016, the next year, when Valeant’s market capitalization

fell by over 100 billion dollars, the CEF would have been less

impacted by that; right?

A

Q

A

Correct.

And an index fund would have been significantly impacted by that?

Absolutely.

[316] With respect, I cannot accept Mr. Jarvis’s opinion that the CEF was a closet

indexer. The substantive process in analyzing and deciding not to invest in a

Benchmark security evidences active management. The Valeant example is the

antithesis of both passive management and closet indexing. There was no intent,

desire, plan, or design to follow the Benchmark’s weight in Valeant.

[317] I have given little weight to Mr. Jarvis’s opinions. The Court must look at what

actually occurred. Mr. O’Brien actively managed the CEF within the plaintiff’s

Turpin v. TD Asset Management Inc.

Page 87

pleaded description found at paragraph 29 of the Second ANOCC. There was no

design to closely track or replicate the Benchmark.

e) Mr. André Fok Kam

[318] Mr. Fok Kam is a chartered accountant (FCA) with a Bachelor of Science in

Economics from the London School of Economics and a Masters of Business

Administration with a concentration in finance from McGill University. He has worked

extensively in the financial services industry, including investment funds and related

regulatory compliance in management and managerial matters. He was called by

the plaintiff.

[319] Mr. Fok Kam was qualified to provide opinion evidence with respect to

matters relating to investment fund governance, regulations, and the role of an

Independent Review Committee (“IRC”) in addressing conflicts of interests.

[320] Section 3.1 of NI 81-107 requires every investment fund to have an IRC.

[321] An IRC’s primary role is to advise on conflicts of interests matters that may be

referred to it by a portfolio manager: NI 81-107, s. 4.1(1).

[322] An IRC also “must perform any other functions required by securities

legislation”: NI 81-107, s. 4.1(2).

[323] Every member of the IRC must act honestly and in good faith, with a view to

the best interests of the investment fund and exercise the degree of care, diligence,

and skill that a reasonably prudent person would exercise in comparable

circumstances when exercising their powers and discharging their duties: NI 81-107,

s. 3.9.

[324] The authority of the IRC includes, but is not limited to, requesting information

it determines useful or necessary from the manager and its officers to carry out its

duties: NI 81-107, s. 4.1(5).

Turpin v. TD Asset Management Inc.

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[325] The IRC must review and provide its decision on a conflict of interest matter

that the manager refers to the IRC for review: NI 81-107, s. 4.1(1).

[326] The IRC has “no power, authority, or responsibility for the operation of the

investment fund or the manager, except as provided” for by NI 81-107, s. 4.1.

[327] Mr. Fok Kam has served as a member of the IRC for several mutual funds. At

present, he is a member of the IRC for Sun Life’s mutual funds.

[328] Mr. Fok Kam prepared an initial report dated June 2, 2021, a reply report

dated August 16, 2021, and a sur-reply report dated August 26, 2021.

[329] In his initial report, Mr. Fok Kam stated:

Several matters are readily apparent from this brief description of the role of

an IRC:

a) The IRC exercises considerable authority over conflict of interest

matters. Even in those situations where the committee only has the

authority to provide a recommendation, most fund managers would

probably choose to avoid the very real risks associated with

disregarding a recommendation.

b) The responsibility to initiate the process lies with the fund manager. It

is up to the fund manager to identify a conflict of interest, decide on a

proposed course of action to address the conflict and refer the matter

to the IRC. The IRC reviews the matter and provides a decision to the

fund manager.

c) The authority of the IRC extends only over conflict of interest matters.

In particular, the committee exercises no oversight over compliance

except as it relates to conflicts of interest.

[330] Of particular note for the case at bar, Mr. Fok Kam also stated:

The management fees charged by the fund manager to the fund are not

subject to review or approval by the IRC. However, if the fund manager

wishes to increase a fee that it charges to the mutual fund or its investors, it

must first obtain the approval of the investors.

[331] Mr. Fok Kam’s reports and testimony do not focus on TDAM specifically. As

TDAM’s counsel notes, Mr. Fok Kam’s list of reliance documents to his initial report

does not include any TDAM documents.

Turpin v. TD Asset Management Inc.

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[332] Mr. Fok Kam discussed generally the regulatory securities law environment in

which the investment funds operate, including the role of IRCs.

[333] With respect to closet indexing (not with reference to the pleaded definition of

“Closet Indexing Strategy”), Mr. Fok Kam stated that metrics are only a “starting

point” and not the “finishing line”.

[334] In his initial report, Mr. Fok Kam makes two observations in particular which

he views as contributing to some investment funds performing in a manner similar to

indexing.

[335] First, Mr. Fok Kam observed:

51.

[…] The trading activity of a large fund may have an impact on market

prices. Suppose a mutual fund wishes to build a large position in the shares

of ABC Company. The current price is $50 per share. There is a risk that the

fund’s buying activity may drive the price up to, say, $55 per share, thereby

making it more expensive to complete its buying programme. Market impact

is a major cost of trading, more so than direct costs such as the executing

dealer’s commissions. One way for large funds to minimise market impact

would be to invest proportionately in stocks according to their market

capitalisation, in other words, invest more in larger stocks and less in smaller

stocks. This is similar to indexing.

[336] Second, Mr. Fok Kam observed:

53.

Another explanation for closet indexing lies in human nature, more

particularly, the instinct for self-preservation. Individual portfolio managers

live or die by their success at beating the benchmark index. The

consequences of success and failure are not symmetrical. Portfolio managers

who consistently outperform their benchmark by a wide margin can expect

recognition and a larger bonus. Those who consistently underperform by a

wide margin stand to lose their job altogether. Furthermore, they will face an

uphill climb to find new employment because prospective employers will

inevitably look at their unflattering track record.

54.

Given this asymmetry, it requires some conviction on the part of

portfolio managers to take positions which diverge considerably from the

index. A portfolio which is very different from the index will either outperform

or underperform it by a wide margin. Portfolio managers are instinctively

driven to take less personal risk by staying close to the index, thereby

reducing the possibility of significant underperformance. Most portfolio

managers are aware of this innate tendency, which they do their best to

resist, though not all are successful. [Footnote omitted.]

Turpin v. TD Asset Management Inc.

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[337] The footnote for paragraph 54 of Mr. Fok Kam’s initial report reads:

See Stoffman, Daniel, The Money Machine: How the Mutual Fund Industry

works and How to Make it Work for You (Toronto: Macfarlane Walter & Ross,

2000). At page 107, the author documents a case of closet indexing and the

motivations of the portfolio manager. The portfolio manager justified her

ownership of the shares of an admittedly “not ... very good” company in this

way: “Because it’s 10% of the index and I have to own it. I’m an active

manager but I have to be close to the index.” This is a clear case of closet

indexing motivated by the instinct for self-preservation.

[338] With respect to the first observation, a key CEF investment objective was

“long-term capital appreciation”. With such an objective, the orderly accumulation of

a security is not incongruent with the stated objective and could be undertaken, in

most cases, without “making it more expensive” for the CEF “to complete its buying

programme”.

[339] The investment objectives and investment strategies for the CEF also

reflected a portfolio that would have many established Canadian corporations within

its portfolio. The characteristics of “long-term capital appreciation”, “superior return

on equity”, and a “sound balance sheet” are often associated with large

corporations.

[340] With respect to Mr. Fok Kam’s second observation as to human nature, I find

that Mr. O’Brien managed the CEF in a principled manner with conviction. He

resisted the temptation Mr. Fok Kam outlined.

[341] In cross-examination, Mr. Fok Kam confirmed his understanding of his role as

to particulars relating to the CEF:

Q

A

Q

A

Q

A

Q

A

You’re not here to make any accusations against TDAM?

No, of course not.

Or the Canadian Equity Fund?

No.

Its project -- its portfolio managers?

No.

Or its IRC?

No.

Turpin v. TD Asset Management Inc.

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Q

And so your report does not opine on whether TDAM in fact designed

an investment strategy to closely track or replicate, not exceed, the

performance of the benchmark?

A

Correct.

Q

Your reports also do not address whether TDAM in fact made a

misrepresentation to investors?

A

Q

A

Correct.

Those were not questions that you were instructed to consider, right?

Exactly.

[342] I found Mr. Fok Kam’s reports and testimony helpful with respect to obtaining

a better understanding of the securities law environment for investment funds,

although the environment is primarily one of laws, regulations, and jurisprudence.

[343] As Mr. Fok Kam acknowledged, he did not opine on whether the CEF used a

“Closet Indexing Strategy”.

[344] Again, the Court must look at what actually occurred in answering the

Common Issues as they arise from the pleadings.

f) Mr. Daniel Bubis

[345] Mr. Bubis has approximately 30 years of experience in investment

management. From about 2007 to 2017, he managed a Canadian equity fund with

many similarities to the CEF, including a focus of large capitalization Canadian

equities and the fund he managed had a similar size ($5 billion to $7 billion of assets

under management).

[346] Among other investment finance activities, Mr. Bubis was, from May 2016 to

May 2020, the chair of the investment committee of the Manitoba Public Insurance

Corporation which has a $3 billion investment portfolio.

[347] Mr. Bubis holds a Bachelor of Arts in Business Administration (Hons.) from

the Ivey School of Business, Western University and is a Chartered Financial

Analyst. Mr. Bubis prepared a reply report dated July 16, 2021 and a sur-reply report

dated August 26, 2021. He was called by the defendant.

Turpin v. TD Asset Management Inc.

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[348] Mr. Bubis was qualified to give opinion evidence with respect to the

management, operations, classifications, and performance of investment funds,

including metrics and related features and aspects.

[349] Mr. Bubis was of the opinion that “the CEF was not designed to ‘closely track

or replicate’” the Benchmark. In connection with his opinion, Mr. Bubis, in his July

16, 2021 report, stated:

Perhaps most telling is what the fund has not held that indicates the lack of

intention or design to replicate the performance of the benchmark. On two

different occasions during the class period, the CEF did not hold the largest

stocks in the benchmark index. When Valeant Pharmaceuticals rose to

become 6% of the TSX Composite Index in 2015 and more recently with

Shopify at over 6.5% of the index. Having zero exposure to the largest

company in the index for an extended period of time, and in particular

companies that are a massive driver of benchmark index performance is a

sort of litmus test for closet indexing. A portfolio manager who was engaged

in closet indexing does not ignore the single largest driver of the benchmark’s

performance and exclude it from a portfolio that is intentionally closet

indexed. The portfolio manager of the CEF intentionally left these stocks out

the portfolio as they did not meet the standards of the fund’s investment

strategy, from his active perspective. The pressure to own these stocks would

have been immense especially since these stocks were doing very well. It

was not uncommon for the media to characterise each as “must own” stocks

during their respective ascendancies.

In the case of Shopify, the TDAM analyst who covers the company liked the

stock, providing Mr. O’Brien with the cover to buy the shares for the CEF if he

chose to do so and thereby closely replicate the index. There were many

research reports from sell-side firms recommending Shopify with “Buy” or

“Outperform” ratings such as a May 6, 2020 report from National Bank. For

calendar year 2020, Shopify rose nearly 187.4%, a very strong follow-up to

the 173.5% return over 2019. For 2020, Shopify contributed 85.5% of the

S&P/TSX Index’s return of 5.6%, i.e., without Shopify the S&P/TSX Index

would have returned 0.8%. From the disclosure documents, it appears that

Mr. O’Brien’s issue with Shopify was primarily based around valuation; he

thought that the valuation of Shopify was too high and did not meet his

investment criteria. This fundamentally-based active decision kept Shopify

out of the CEF, costing investors relative performance over much of the class

period. Ironically, Mr. O’Brien’s discipline on valuation, which helps to protect

investors from loss of capital, cost investors capital appreciation and relative

performance to the benchmark. Stated differently, Mr. O’Brien had plenty of

reasons to buy Shopify and Valeant if he was a closet indexer. He chose not

to buy those stocks and those decisions (i.e., active management decisions)

adversely affected the CEF’s performance.

It remains to be seen how not owning Shopify will affect relative performance,

positively or negatively on a go forward basis, but its exclusion is a very bold

decision that almost ensures a performance result that will differ from that of

Turpin v. TD Asset Management Inc.

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the benchmark. By design, the portfolio manager has excluded Shopify with

the expectation that this will help the CEF have greater future risk adjusted

returns than that of the benchmark.

[350] Again, the Court must look at what actually occurred, as Mr. Bubis did. As

Mr. Bubis described, Mr. O’Brien’s decisions with respect to Valeant and Shopify are

contrary to any design to “closely track or replicate, not exceed, the performance of

the Benchmark”.

[351] I also note Mr. Bubis’s correct focus on “risk adjusted returns” which is

consistent with the CEF’s stated represented strategy of “containing investment

risk”.

[352] I have given considerable weight to Mr. Bubis’s testimony and opinions.

[353] Although the Benchmark may consist of approximately 250 securities, it is

readily apparent that a particular security may have a significant impact on the

Benchmark return. Mr. Craig’s testimony above (at para. 192) reflects this fact.

[354] In short, in the Canadian market, a portfolio manager’s decision to buy, hold,

or sell any particular security may have, at least in some cases, a significant impact

on the returns of the fund (not risk-adjusted) relative to the Benchmark.

[355] The CEF’s stated investment strategies address “containing investment risk”,

including the downside risks that may be associated with a particular security.

18. INTERNAL ANALYSIS IN RESPONSE TO PRESS REPORTS

[356] In 2015 and 2016 in the financial press two separate articles appeared and

each referred to active share and tracking error in relation to closet indexing. The

first article contained a chart from the 2009 academic article of which Professor

Cremers was one of the authors to which Mr. Jarvis also referred.

[357] With respect to each article, the IR Group prepared an internal analysis,

which included the Cremers/Petajisto chart with the CEF plotted on the chart. .

[358] Mr. Sykes, the head of the Public Equities Group, testified:

Turpin v. TD Asset Management Inc.

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Q.

As far as you’re aware, was any additional analysis or investigation

done as a result of these plots, including the plot of the TD Canadian

Equity Fund in the location that it finds itself in on these graphs?

A.

Q.

A.

No. As far as I’m aware, no other action was taken.

Why not?

Again, knowing Mike the way I knew him and still know him, and as

his people manager then, I would have witnessed his process, I would

have been privy to his bets or his positions and I would have been

privy to his performance, and certainly would have concluded that

closet indexing was not occurring.

Q.

A.

Do these graphs, in the way that they’re displayed, including seeing

the CEF plotted in the place that it is with the label in that quadrant of

closet indexing, does this document represent a conclusion or a

finding by TDAM that closet indexing was occurring in respect of the

CEF?

No, this document would not be a conclusion. I think this document

was an attempt by our risk group to say there’s a new metric that has

been evolving in academia. We should take a look, replicate, see if we

have anything to understand further from this new metric, but there

was certainly no conclusion made from the replication of this chart.

[359] Mr. Cooper viewed the reports as information from the IR Group consistent

with its role in TDAM. The reports provided background financial analysis.

[360] Mr. Bates criticized that TDAM took no action in response to the reports

prepared by the IR Group.

[361] I accept Mr. Sykes’s testimony that he was “privy to [Mr. O’Brien’s] bets or his

positions” and he “would have been privy to his performance, and certainly would

have concluded that closet indexing was not occurring”.

[362] I also accept that Mr. Cooper had little recollection of receiving the analyses

and did not “agree with the quadrants full stop”. In particular, he described: “An

active share is a number we have in our reports, but we find flawed”.

[363] Mr. Bates submitted that the charts prepared by the IR Group should be

admitted for the truth of their contents under either the business records or the

declaration against interest exception to the rule against hearsay.

Turpin v. TD Asset Management Inc.

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[364] With respect, neither exception can apply. The chart from the 2009

(Cremers/Petajisto) article represents only a model by which active share and

tracking error are plotted on an x and y graph.

[365] The IR Group’s plotting of the CEF’s active share and tracking error on a

Cremers/Petajisto chart (or a similar chart) is neither a fact nor an opinion arising

from the plot.

[366] The plot represented nothing more than the CEF’s data of active share and

tracking error as shown on a chart with a format developed by others.

[367] In sum, the exceptions to the hearsay rule do not apply.

19. COMMON ISSUE NO. 1 – CLOSET INDEXING STRATEGY

[368] Common Issue No. 1 reads:

The Closet Indexing Strategy

1. In managing the Canadian Equity Fund, did the Defendant use the

Closet Indexing Strategy?

[369] As described above, the definition of “Closet Indexing Strategy” requires a

strategy designed to closely track or replicate, not exceed, the performance of the

Benchmark. For there to be a design, there must be a plan or intent.

[370] I find that Mr. O’Brien actively managed the CEF with the goal of

outperforming the Benchmark. He did not intend to closely track or replicate the

Benchmark. The CEF was actively managed as active management is described in

paragraph 29 the Second ANOCC.

[371] As noted, under the Return Goals set forth in the Investment Guidelines, the

CEF’s returns (net of fees and expenses) were “expected to rank consistently above

[the] median over three-year periods” within the CEF’s peer group of similar funds.

[372] The framework for Mr. O’Brien’s remuneration also incentivized Mr. O’Brien to

outperform the Benchmark and not to closely track or replicate the Benchmark (as

would be the case for an index fund portfolio manager).

Turpin v. TD Asset Management Inc.

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[373] I find that there also was a reasonable prospect of outperforming the

Benchmark throughout the Class Period. As noted, there are at least eight 12-month

periods and other three-month periods where the CEF outperformed (after fees) the

Benchmark. With the benefit of hindsight, the CEF’s returns could have been greater

(certainly if one were to ignore a prudent approach to “containing investment risk”).

[374] In sum, I find that Mr. O’Brien and his predecessor, Mr. Smolinski, actively

managed the CEF and did not attempt to closely track or replicate the Benchmark.

As Mr. Bubis describes, Mr. O’Brien’s approach to Valeant and Shopify would be

contrary to an attempt to closely track or replicate the Benchmark. Each situation

shows Mr. O’Brien taking significant active risks.

[375] I also do not find that the Investment Guidelines, the Performance Tolerance

Bands, or some combination of each, would constrain Mr. O’Brien’s active

management so that it would prevent him from achieving the represented goal of

outperforming the Benchmark.

[376] I find that the purpose of the Performance Tolerance Bands was to identify

“outliers” to ensure, in part, that the CEF was being managed on an ongoing basis in

accordance with its represented investment objective and strategies.

[377] I also find that TDAM did not set a strategy using metrics to keep the

performance of the CEF very close to the Benchmark.

[378] In sum, TDAM, as a large institution, did not act, or have policies or

procedures in place that would cause the CEF to closely track or replicate the

Benchmark.

[379] The answer to Common Issue No. 1 is “no”.

20. COMMON ISSUE NO. 2

[380] Common Issue No. 2 reads:

Legal Obligations of the Trustee and Manager

Turpin v. TD Asset Management Inc.

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Did the Defendant, as trustee and manager of the Funds, breach the

Standard and Duty of Care? If so, when and how?

[381] With respect to Common Issue No. 2, it is not predicated upon finding that the

Closet Indexing Strategy was used (see for example, the wording of Common Issue

No. 4, which is predicated on an affirmative answer to Common Issue No. 1).

[382] The scope of Common Issue No. 2 is relatively broad. Was there a breach of

the “Standard and Duty to Care? If so, when and how?” That said, a common issue

arises from the pleadings. Accordingly, a common issue should be read in the

context of the pleadings.

[383] As noted, the Certification Order (which included the Common Issues) was by

consent.

[384] In his written submissions, Mr. Turpin states:

TDAM’s breaches of the Standard and Duty of Care encompass its non-

disclosure of material facts, the Excess Management Fees removed from

trust, its failure to appropriately address its conflict of interest; and its inaction

after identifying the CEF’s performance issues in 2015-2016.

[385] I have found that the CEF was actively managed and a Closet Indexing

Strategy not used. Accordingly, there was not non-disclosure on this basis.

[386] If there were Excess Management Fees removed from the CEF, there would

be the non-disclosure of material facts. In short, were there Excess Management

Fees? In answering this question, I will also address the alleged failure to

appropriately address any conflict of interest.

[387] Support in the Second ANOCC for Common Issue No. 2 with respect to

Excess Management Fees is found in the definition of Excess Management Fees

(which is then again used as a defined term for the Common Issues under the

Certification Order). The relevant provisions of the Second ANOCC read:

PART 1: STATEMENT OF FACTS

A. CURRENCY AND DEFINITIONS

[…]

Turpin v. TD Asset Management Inc.

Page 98

2. […]

(m) “Excess Management Fees” means any unreasonable portion of

the management fees that have been paid to the Defendant during

the Class Period:

(i) out of the assets of the Canadian Equity Fund; or

(ii) out of the assets of a Portfolio Fund in respect of the Portfolio

Fund’s holdings of the Canadian Equity Fund; […]

[…]

E. THE TD TRUST INSTRUMENTS

21. Pursuant to section 9.1(d)(ii) of the Current Mutual Funds DOT, section

9.01(d)(i) of the Current Managed Portfolio DOT and section 7.1(c)(ii) of

the Current Trust Indenture (and the equivalent provisions of other TD

Trust Instruments applicable to the Funds at material times), any

remuneration paid by the Defendant, as trustee, for services performed

for the Funds must be “reasonable remuneration”.

[…]

PART 2: RELIEF SOUGHT

47. The Plaintiff on his own behalf and on behalf of the Class seeks the

following relief:

[…]

(b) a declaration that the Defendant committed breaches of trust by the

acts and omissions pleaded herein;

[…]

(h) an order disallowing the payment of the Excess Management Fees

and Excess Trading Costs as expenses and requiring the Defendant

to repay the expenses to the Plaintiff and the other Class Members

or to the Funds;

[…]

PART 3: LEGAL BASIS

A. BREACH OF TRUST

[…]

56. By its acts and omissions, the Defendant, as trustee and manager of the

Funds, breached its duty under the TD Trust Instruments and committed

breaches of trust and is liable for the loss to the Class Members arising

out of that breach. The Defendant’s breaches include (without limitation):

(a) paying and receiving the Excess Management Fees out of the

assets of the Funds;

[…]

(d) paying the Excess Management Fees for no purpose;

[…]

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[388] These pleadings provide the requisite support for Common Issue No. 2 with

respect to Excess Management Fees.

[389] Possible conflicts in trust law are not unusual. For example, a testator may

appoint his or her friend, a seasoned accountant, to be his or her executor under the

testator’s Will and may provide for the friend to charge say, $500 per hour, for the

friend’s accounting services in administering the estate. It may be said that the friend

would have an incentive to bill as many hours as possible and that such an incentive

conflicts with the executor’s trust duties to the beneficiaries of the testator’s estate.

[390] If a question arises as to the appropriateness of the friend’s fees, these may

be addressed as part of the executor’s passing of accounts (part of the Court’s

inherent supervisory jurisdiction).

[391] Mr. Cooper testified that he understood that TDAM’s mutual funds are

organized as trusts for tax purposes. He further testified that TDAM does not “view

that there is a big distinction between what the trustee does and what the manager

does, so it makes sense” for TDAM to be both the trustee and manager of a mutual

fund.

[392] To be clear, whether or not the CEF was organized (settled) as a trust for tax

purposes, it is a trust for all purposes of the law. With such, TDAM is a trustee with

fiduciary obligations.

[393] I also note that section 2.7 of the DOT makes it clear that the CEF was to be

considered a trust for all purposes.

[394] Mr. Cooper views TDAM’s duty to any of the funds (pools of capital) as a duty

to the particular mutual fund’s unitholders as a whole. I agree. A trustee does not

owe a fiduciary duty to a fund any more than a trustee could owe a duty to, say, a

light pole. The fund is just a pool of capital. That said, a trustee such as TDAM, in

discharging its duties and obligations to unitholders as a whole, may be required to

protect the pool of capital.

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[395] A trust is a relationship. It is not a separate legal entity such as a corporation

is by statute.

[396] As a whole, the CEF’s unitholders shared a common interest not to be

overcharged. Regardless of a unitholder’s particular circumstances, what unitholder

would welcome being overcharged fees?

[397] In sum, TDAM had a fiduciary duty to the CEF’s unitholders as a whole.

[398] The non-arm’s length relationship between TDAM, qua trustee, and TDAM,

qua manager, warrants the engagement of the Court’s inherent supervisory

jurisdiction.

[399] Mr. Cooper stated that TDAM qua trustee charges no fees. That said, TDAM

is responsible for itself, TDAM qua manager. TDAM delegated to itself the role of

manager.

[400] In reviewing matters, the Court notes:

a) the CEF is a trust that facilitates a commercial arrangement from which

the unitholder wishes to profit while not taking undue risk with respect to

the capital invested;

b) the complete terms of the DOT are disclosed;

c) the fees to be charged to a unitholder of a particular series are clearly

stated (or for some series negotiated with the unitholder);

d) TDAM’s roles qua trustee and qua manager are disclosed and are

consistent with the DOT;

e) a unitholder may monitor the NAV of the unitholder’s units on a daily

basis;

f) TDAM’s prospectuses provide full, plain, and true disclosure with respect

to the CEF;

g) the MFRPs and Fund Facts provided, among other matters, TDAM’s

discussion of the CEF’s performance, a description of TDAM’s fees and

expenses, and dealer compensation (such as, trailing commissions);

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h) the CEF’s performance (before and net of fees) relative to the Benchmark

could be easily compared; and

i) the CEF’s audited financial statements were prepared and disclosed in a

timely manner.

[401] Mr. Cooper testified that TDAM’s fees are below the average of other funds of

the same class. He testified:

Q

But there’s no situation in which -- I’ll limit my discussion to the CEF to

try to save time. There’s no situation in which someone opposite

TDAM negotiated at arm’s length whether the fees to be taken out of

the CEF were fair and reasonable; correct?

A

No, I guess our perspective is they’re fully disclosed and there’s lots

of choice in the market. Clients don’t need to buy our fund. They can

buy other Canadian equity funds and relative to those competitors,

our fees are actually below average.

Q

A

So for those reasons, I am correct, then, that there were no arm’s

length negotiations with TDAM by someone else as to the fairness

and reasonableness of the fee?

You’re correct.

[402] The plaintiff did not lead any contrary evidence to TDAM’s fees being “below

average” and “there’s lots of choice in the market”.

[403] In his written submissions, Mr. Turpin states:

150. TDAM paid itself Excess Management Fees that were substantially

greater than fees charged by passively managed ETF and index funds (6 –

80 basis points) and TDAM’s hybrid “low volatility” Canadian equity fund

using a combination of passive and active strategies (30 basis points). TDAM

never assessed the fees it was charging based on the CEF’s investment

strategies, as reflected in low level of active risk, and the CEF’s minimal

probability of outperforming the Benchmark after fees. It always paid itself the

maximum fee and never exercised its discretionary power to rebate

previously charged fees in a manner consistent with its fiduciary obligations.

[404] The essence of Mr. Turpin’s submissions is that the CEF had a “minimal

probability of outperforming the Benchmark after fees”. As noted, I have found that

the CEF was actively managed with the goal of outperforming the Benchmark, it had

reasonable prospects of outperforming the Benchmark (after fees, calculated with

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including the trailing commissions paid by TDAM on behalf of the unitholder), and in

many periods the CEF did outperform the Benchmark (after fees).

[405] TDAM did not represent that it would outperform the Benchmark. The CEF’s

fundamental objective was to “achieve long-term capital appreciation through

investments in high-quality equity securities issued principally by Canadian

corporations judged to offer high growth potential”. Such is consistent with

Mr. Turpin’s objective “to increase overall and hopefully also reduce [his] risk”. He

expected the CEF’s portfolio manager to try to spot and avoid “turkeys”, which could

include a turkey in the Benchmark.

[406] TDAM’s strategies engaged constructing a portfolio “encompassing growth,

while at the same time containing investment risk. This is addressed by focusing on

the quality of management of individual companies and the long-term prospects for

individual industries”.

[407] TDAM represented that through active management the CEF would operate

with the goal of selecting high-quality equity securities, while emphasizing growth

and containing investment risk. To achieve such, Mr. O’Brien selected securities

whether they were or were not part of the Benchmark.

[408] The role of the Court in the matter at bar is not to judge particular investment

decisions with the benefit of hindsight where the use of a Closet Indexing Strategy

has not been established.

[409] In sum, in exercising its inherent supervisory jurisdiction, the Court finds the

CEF’s challenged remuneration to be reasonable. No Excess Management Fees

were removed from the CEF. The plaintiff has not tendered “sufficiently clear,

convincing, and cogent” evidence to find otherwise.

[410] As discussed above, TDAM, through Mr. Cooper, Mr. DaCosta, or otherwise,

did not fail to act with respect to the 2015-2016 financial press reports. In particular,

I accept that metrics such as active share and tracking error may trigger the need for

further investigation. In the case at bar, Mr. Cooper and Mr. DaCosta were very

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familiar on an ongoing basis with Mr. O’Brien and his investment management of the

CEF. There was no need for an investigation. I reject the plaintiff’s submission that

TDAM failed to act “after identifying the CEF’s performance issues in 2015–2016”.

[411] As noted, Mr. Turpin also submits that TDAM failed to disclose material facts.

A failure to disclose material facts could fall under either Common Issue No. 2 or

Common Issue No. 3. I will address the submission here.

[412] In his written submission, Mr. Turpin states:

175. The Active Management Misrepresentation: The plaintiff claims that

the Active Management Representation contained in the Public Disclosure

Documents was misleading because:

(a) it omitted material facts in respect of the Closet Indexing Strategy;

(b) TDAM had no reasonable expectation that the CEF would

outperform the Benchmark once its management fees were taken

into account; or

(c) The CEF had no reasonable prospect of outperforming the

Benchmark once TDAM’s fees for managing the CEF were taken

into account. [Second ANOCC paras. 43–44]

176. Omitted material facts: TDAM failed to disclose the following material

facts in respect of the Closet Indexing Strategy:

(a) TDAM’s use of quantitative risk metrics (active share, tracking error,

R-squared, and beta) to measure, monitor, and predict the active risk

of the CEF for purposes of oversight, performance assessment, and

portfolio construction. These metrics were an integral part of TDAM’s

investment process and constitute an investment approach,

philosophy, practices, or techniques for investment decisions, which

must be disclosed under NI 81-101;

(b) TDAM’s figures for these quantitative metrics indicating that it

maintained low active risk-taking in the CEF such that the CEF’s

performance closely correlated with the Benchmark’s performance;

(c) The risk that the CEF’s performance would be substantially linked to

the performance of the Benchmark based on the investment

strategies used by TDAM as reflected in its metrics for active risk.

TDAM included such “tracking risk” disclosure in the CIF’s

prospectus;

(d) Given the CEF’s significant overlap with its Benchmark (reflected in

low active share) and its low tracking error, as well as TDAM’s

recognition that there was only “moderate” active management in the

CEF, TDAM ought to have disclosed that, like TDAM’s Canadian low

volatility ETF, the CEF used “a combination of passive and active

strategies”;

Turpin v. TD Asset Management Inc.

(e) TDAM’s determination in August 2015 that the CEF fell within the

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parameters of closet indexing based on its low active share and

tracking error, as per the academic research of Prof. Cremers;

(f) IPOC’s determinations in October 2015 that the CEF had only

“moderate active management”, had decreasing tracking error since

2013, and that “much of the fund’s securities movements can be

explained by the benchmark”;

(g) In the wake of Canadian regulatory interest in closet indexing,

IPOC’s determination in March 2016 that the CEF fell within the

parameters of closet indexing based on its low active share and

tracking error, as per the academic research of Prof. Cremers;

(h) TDAM’s view that an “excellent manager” would, over the long term,

be expected to create potential added value of only 2% for the CEF

at 4% expected tracking error, which was material given that the

CEF’s tracking error was persistently well below 4% (usually in the

2.0%-3.5% range, sometimes lower) and the Investor series MER

exceeded 2%; and

(i) Contrary to reasonable investor expectations, TDAM’s internal return

objective for the CEF set out in its Investment Guidelines was only

aimed at outperforming the Benchmark before fees, not after fees.

This internal after-fee objective is highly material to investors. It

meant that an investment strategy to closely track the Benchmark

with the aim of outperforming before but not after fees is entirely

consistent with TDAM’s internal expectations of performance.

177. The above material facts would have a significant effect on the value of

the CEF because TDAM could not charge fees for active management that

were many times greater than alternatives like a low-cost passive ETF (<10

basis points), or the TD Canadian Low Volatility ETF (30 basis points) which

expressly used a combination of passive and active strategies.

178. No reasonable expectations of outperformance: TDAM witnesses

confirmed that (i) the goal of active management is to beat the benchmark; (ii)

the Simplified Prospectuses represented an active management strategy;

and (iii) the fund manager must comply with the investment objectives and

strategies disclosed to investors. The Active Management Representation

was misleading because TDAM had no reasonable expectation that the CEF

would outperform the Benchmark once its management fees were taken into

account. The CEF’s active risk, as reflected in tracking error, was persistently

below 4% which regulators and academics have viewed as the appropriate

threshold for detecting closet indexing.

179. Performance tolerance bands: It is noteworthy that TDAM used a 4%

tracking error to rate an “excellent manager’ based on an assumed added

value (outperformance) of only 2% excess return (gross of fees) over the

longer term versus the Benchmark. That potential added value of 2% was

based on TDAM’s “reasonable expectation of outperformance over the long

term.” Under this framework, a good manager would have an expected

tracking error of 6.67% to achieve the same 2% long-term added value. The

CEF’s tracking error was typically 2.0%-3.5% range, sometimes even lower,

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during the Class Period. Nothing was done despite the CEF falling

perpetually below the 4% tolerance band. TDAM had no reasonable basis to

believe based on persistent tracking below the lower band that it could

potentially add value over the long term that exceeded its management fees.

180. No reasonable prospect of outperformance: Regardless of TDAM’s

expectations, the Active Management Representation was misleading

because the CEF had no reasonable prospect of outperforming the

Benchmark once TDAM’s fees for managing the CEF were taken into

account. This is clear from the probability study undertaken by Prof. Simutin,

which found that the CEF had a trivial possibility of outperformance: only

0.56%. This probability analysis was largely unchallenged by Wermers, who

offered no competing analysis.

[413] The Second ANOCC defines “Active Management Representation” at

paragraph 43. For our immediate purposes, the Second ANOCC’s key paragraphs

are 29, 36, 41, 42, 43, and 44. These paragraphs are set forth above at paragraph

23.

[414] As a matter of trial fairness, it is important that matters should not stray from

the grounds raised in the pleadings.

[415] Paragraph 43 of the Second ANOCC states that TDAM’s representations

would “lead investors … to reasonably expect that [TDAM] actively manages the

[CEF] with the aim of achieving Fund performance that exceeds the performance of

the Benchmark. …”.

[416] The second sentence of paragraph 29 of the Second ANOCC reads: “Actively

managed funds are operated with the goal of producing excess risk-adjusted returns

that outperform a particular market benchmark (providing higher returns or lower risk

than the benchmark) by carefully choosing stocks that fit the fund’s investment style

and that the fund manager reasonably expects to collectively outperform the fund’s

benchmark”.

[417] I have found that TDAM actively managed as described and its management

was not in any manner related to a Closet Indexing Strategy.

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[418] The fact is that the CEF had reasonable prospects of outperforming the

Benchmark after accounting for fees. As noted, there are various 12-month and

three-month periods that show such.

[419] In looking at outperformance, I note that this was done also with the strategy

of “containing investment risk”, with a risk-adjusted approach having regard to

valuations and volatility.

[420] I will also add that from Mr. O’Brien’s testimony it was apparent that he

selected investments based on a top-down and bottom-up approach with little regard

to metrics. His focus was on the value of a security (including the quality of its

management) and its associated risks.

[421] There was no evidence that Mr. O’Brien focussed on maintaining a low active

risk or that he tried to correlate the CEF’s performance to the Benchmark.

[422] Finally, metrics were not “an integral part of TDAM’s investment process”.

While I recognize that TDAM was the CEF’s portfolio manager, Mr. O’Brien was left

to construct the CEF portfolio, as he best thought, with few constraints. His “process”

and “style” accorded with the CEF’s disclosed “Investment strategies”.

[423] Each of the pleaded reasons for the Active Management Representation to

be false and misleading (which are set forth in paragraph 44 in the Second ANOCC)

have not been proven.

[424] First, TDAM did not use a Closet Indexing Strategy. Second, TDAM did have

a reasonable expectation that the CEF would outperform the Benchmark after fees.

Finally, there were reasonable prospects that the CEF would outperform the

Benchmark after fees. Further, I will add that TDAM did not seek to have all or a

substantial portion of the CEF’s returns linked to the performance of the Benchmark.

[425] Again, TDAM did not represent that the CEF would outperform the

Benchmark.

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[426] As Mr. Turpin’s testimony reflects, he wished to avoid volatility with “the

relative importance of significant returns upside versus insulating from downside

risk” as “equal”. Capital preservation was “really important” to him.

[427] Not surprisingly, Mr. Turpin wished to have a portfolio manager who was

good at spotting “turkeys” (or at least trying), including turkeys which were part of the

Benchmark.

[428] The portfolio manager of an index fund does not screen for “turkeys”. The

portfolio manager will just buy turkeys (based on the turkey’s benchmark weight).

[429] I find that TDAM’s disclosure to Mr. Turpin as one of the CEF’s unitholders

accorded with and was part of TDAM fulfilling its fiduciary duty to unitholders as a

whole.

[430] With the regular and ongoing disclosure in the prospectus and other security

documents and having regard to the commercial nature of the relationship between

TDAM and unitholders, I find that TDAM discharged its disclosure obligations as a

trustee.

[431] With hindsight, Mr. Turpin’s return on his investment in CEF units was

consistent with his goal “to increase overall” and reduce his risk.

[432] In sum, TDAM actively managed the CEF throughout the Class Period in

accordance with its disclosed investment objective and investment strategies.

[433] The answer to Common Issue No. 2 is “no”.

21. COMMON ISSUE NO. 3

[434] Common Issue No. 3 reads:

Prospectus Misrepresentation

Did any of the Public Disclosure Documents contain a misrepresentation

within the meaning of the BCSA (and, as applicable, the other Canadian

Securities Legislation)?

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[435] The plaintiff’s key assertion was that TDAM had an undisclosed investment

strategy that was designed to closely track or replicate the Benchmark.

[436] I have found that TDAM did not have an undisclosed investment strategy.

I have found that the CEF was actively managed with the objectives and strategies

set forth in the CEF’s prospectus and other disclosure documents.

[437] Neither Mr. O’Brien nor TDAM, as a large institution, used a “Closet Indexing

Strategy”.

[438] With respect to fees charged by TDAM, I have found the fees to have been

reasonable and were disclosed.

[439] I agree with TDAM that the plaintiff’s assertion that TDAM had an obligation to

take “sufficient active risk” was not pleaded. As noted, “cases should not be decided

on grounds not raised …”.

[440] With the foregoing said and without TDAM being in a position to respond fully,

there are nonetheless various examples of active risk (large bets) taken by TDAM in

the investment management of the CEF. These include the CEF’s bets with respect

to Valeant, Shopify, and acquiring U.S. health care stocks (rather than any securities

from the Canadian health care sector). If pleaded, I expect that with such facts

I would have found that TDAM took “sufficient active risk”.

[441] In sum, TDAM, in its Public Disclosure Documents, did not contain a

misrepresentation within the meaning of the BCSA (or similar legislation).

[442] The answer to Common Issue No. 3 is “no”.

22. COMMON ISSUES NOS. 4 TO 10

[443] The other Common Issues, Nos. 4 to 10, each depends on a favourable

answer from Mr. Turpin’s perspective to one or more of Common Issues Nos. 1 to 3.

[444] With the answers to each of Common Issues Nos. 1 to 3 being unfavourable,

Common Issues Nos. 4 to 10 are not engaged.

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23. RULINGS

[445] The Court rules:

a) Common Issue No. 1: In managing the Canadian Equity Fund, TDAM did

not use a Closet Indexing Strategy;

b) Common Issue No. 2: TDAM, as trustee and manager of the Funds, did

not breach the Standard and Duty of Care;

c) Common Issue No. 3: None of the Public Disclosure Documents contained

a misrepresentation within the meaning of the BCSA or other Canadian

Securities Legislation;

d) Common Issues Nos. 4 to 10: With the disposition of Common Issues Nos.

1 to 3, Common Issues Nos. 4 to 10 do not need to be engaged.

24. FURTHER MATTERS

[446] I ask TDAM’s counsel to prepare the form of the order so that it may be

signed by me and entered within the next 30 days.

[447] If there are matters that require a hearing, I ask that counsel, through

Supreme Court Scheduling, arrange for a 9 a.m. 55-minute hearing before me.

“Funt J.”

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Schedule “A”

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Schedule “B”

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