A recent decision of the Ontario Court of Appeal (COA), Wright v. Horizons ETFS Management (Canada)
Inc. (Horizons), has been the subject of much
discussion in the investment funds and asset management
industry. The COA decision opens the door to potentially
establishing a novel common law duty of care for investment fund
managers. It also held that investors in exchange-traded funds
(ETFs) can launch claims of misrepresentations in a prospectus
using the “primary market” civil liability regime under
Section 130 of the Securities Act (Ontario)
(Securities Act). This is noteworthy because
investors typically do not know whether or not they purchase units
of ETFs in the primary or secondary market when they make purchases
over a stock exchange.
The matters considered in Horizons raise many
complicated issues for debate. This bulletin highlights key
facts of the proceedings thus far and outlines six takeaways for
the industry to consider as we wait for further developments.
A BRIEF OVERVIEW OF THE CASE
The Horizons Fund
Horizons involved a highly complex ETF (the Horizons
Fund), designed to provide inverse exposure to stock market
volatility (as represented by the daily performance of the S&P
500® VIX Short-Term Futures Index). Its investment
strategy involved daily rebalancing and, like many ETFs, was
passively managed. Depending on market volatility, the cost
of rebalancing could erase gains accrued over months or years in
one trading day. The prospectus of the Horizons Fund explicitly
cautioned that investors should monitor their investment on a daily
basis and that a substantial portion of all money invested in the
fund could be lost. On February 5, 2018, the Horizons Fund lost
over 81% of its value overnight and investors who bought units on
that day purchased those units at inflated prices. The
Horizons Fund never recovered and was subsequently terminated. In
the press release announcing the termination, Horizons ETFs
Management (Canada) Inc. (the Manager) stated that it did not want
to offer a product that had the “potential to lose the
majority of an investor’s capital in such a short period of
time” and that the fund “no longer offer[ed] an
acceptable risk/reward trade-off for investors”.
The Claims – Negligence and
A class action was commenced by a representative investor,
Wright, in the Horizons Fund. Wright had sold his units of the
Horizons Fund on February 6, 2018 and lost approximately $210,000
in doing so. Wright claimed common law negligence and
misrepresentations in a prospectus under the “primary
market” civil liability regime under Section 130 of the
Securities Act . It is important to note that neither
the lower court nor the COA decision evaluated the merits of the
allegations, but, rather, both considered certification of the
Wright’s statement of claim outlined:
- A Negligence Claim – alleging
the Manager breached its duty of care in its creation, marketing,
and management of the Horizons Fund.
- A Misrepresentations Claim –
alleging the Manager failed to fully and adequately disclose the
risks of the Horizons Fund’s investment strategy, along with
its valuation methods, including that the intra-day trading value
could be inaccurate and that its value could drop precipitously
after the close of the trading day.
Specifically, the negligence claim alleged that the Manager
breached its duty of care by:
- designing and developing a fund it
knew or ought to have known was excessively complex, risky, and
“doomed to fail”;
- offering and promoting the Horizons
Fund to retail investors knowing it contained structural design
flaws, including exposure to risk of catastrophic losses, and
lacked a coherent investment thesis, offering unreasonable
risk/reward trade-offs to investors;
- failing to adequately explain the
nature and extent of the risks involved in investing in the
Horizons Fund; and
- failing to exercise its powers as
manager to mitigate risks and losses to investors.
Purchases of ETF Securities – The Primary Market
versus the Secondary Market
Units of ETFs can only be purchased by an investor over a stock
exchange through brokers and dealers, and not directly from the
issuer. An investor’s purchase of ETF securities on a
stock exchange are purchases of either:
- treasury securities subscribed for
the first time through a broker or dealer through a continuous
distribution agreement, constituting “primary market”
purchases (termed “creation units” in Horizons);
- ETF securities that have already been
in circulation (either from a broker’s or dealer’s
inventory of units or from other holders through a broker or
dealer), constituting “secondary market”
Both types of ETF securities exist on the relevant stock
exchange and, as the Ontario Superior Court of Justice pointed out,
are comingled. The COA noted that it was not clear, on the evidence
before the court, whether the manager, dealers, or any other person
was able to distinguish between sales of “creation units”
and previously issued units of the Horizons Fund.
The Ontario Superior Court of Justice Decision
In hearing the case, the Honourable Justice Perell of the
Ontario Superior Court of Justice dismissed the motion for
certification of the class action and Wright’s claim.
- On the negligence claim, the lower
court held that no cause of action in negligence could be made as
the Manager had met its undertaking to investors in offering a
financial product that performed in accordance with its disclosure
documents, and, in any event, policy reasons discouraged further
extending the Manager’s duty of care as argued by the
- On the misrepresentations claim, the
lower court held that the action could not proceed using the
“primary market” civil liability regime under Section 130
of the Securities Act because the Horizons Fund was
offered over a stock exchange (the secondary market), and not
directly to investors (the primary market). Instead, the claim
should have been made using the “secondary market” civil
liability regime under Section 138.3 of the Securities
Claims under Section 130 of the Securities Act are
advantageous to claims under Section 138.3 of the Securities
Act, as the latter type of claim requires permission to
proceed, is capped on recoverable damages, and the losing party in
the proceeding will be responsible for the costs of the other
The Court of Appeal Decision
The COA granted the appeal, in part, holding that the lower
court erred in concluding that the claim disclosed no reasonable
cause of action, and remanded the case back to the lower court for
a decision with respect to the remaining certification factors.
In rendering its decision, the COA assumed all allegations of
fact pleaded to be true.
The COA’s legal analysis of the negligence claim is complex.
The negligence claim was for pure economic loss. This is
different from negligence claims involving physical harm or damage
to property. In fact, there is debate in the legal community
on whether or not claims for pure economic loss should be permitted
(for reasons outside the scope of this bulletin).
In brief, there are two parts to the legal analysis for claims
for pure economic loss:
- The court must determine if the claim
fits within or is analogous to a previously recognized duty of
- If the answer to the first inquiry is
no, the court must be convinced to recognize a novel prima
facie duty of care and, if so recognized, the court must then
evaluate whether there are policy reasons that would negate the
imposition of the duty of care (including evaluating other remedies
available or whether unlimited liability would be created for an
The COA found that it was not plain and obvious that the
negligence claim was doomed to fail with respect to both parts of
the analysis as outlined above. The court held that the negligence
claim in Horizons could fit within a recognized duty of
care: negligent performance of a service. It went further to state
that even if it was incorrect, a novel prima facie duty of
care for the negligent performance of a service could be
recognized, and it was not “plain and obvious” that such
duty should be negated by policy considerations.
In finding that a novel prima facie duty of care could
be recognized, the COA focused on the Manager’s statutory duty
to act honestly, in good faith, and in the best interests of the
investment fund and to exercise the degree of care and diligence
that a prudent person would exercise in the circumstances.
The COA pointed to the Manager’s failure to provide full
disclosure of the risks and/or the fact that the Horizons Fund was
doomed to fail, coupled with its failure to develop a viable
strategy for the Horizons Fund, as potential breaches of this duty
On the misrepresentations claim, the COA disagreed with the
lower court that all members of the class should be considered
secondary market purchasers and held that some members could have
purchased “creation units”. However, the statement
of claim did not contain all the necessary pleadings required to
properly bring an action under Section 130 of the Securities
Act and, therefore, the plaintiff was granted leave to amend
the statement of claim accordingly.
1. This Was Not a Consideration of the Merits of the
As mentioned above, the COA did not opine on the merits
of the case, and, therefore, the application of the COA’s
findings to the development of the law is currently unknown.
The test required to be met on a certification proceeding for a
class action has a low threshold. The COA’s decision only
considered whether the claim could be proven, assuming all facts
pleaded were true, and whether it was “plain and obvious”
that the claim could not succeed; in other words, whether there was
a radical defect with the claim.
Accordingly, a prima facie duty of care for investment
fund managers has not been established by the COA decision; rather,
the door is now open for such a duty of care to be
established. Notably, an evaluation of the merits of the case
may find that overriding policy reasons should negate establishing
this prima facie duty of care. Therefore, we must wait for
further jurisprudence on this matter to see if this novel duty of
care is indeed established and the practical effect of
2. Disclosure is Important
Irrespective of what happens with these proceedings, disclosure
always has been, and will remain, important. In addition to
ensuring that a fund’s disclosure documents are detailed,
comprehensive, and avoid boilerplate language, the following points
raised in Horizons can be considered when reviewing
disclosure documents, particularly for complex funds:
- Are the valuation methodologies for
the calculation of the fund’s net asset value atypical and do
they require additional and specific disclosure?
- Does the fund’s design and
trading strategy present unique or unusual risks that may not be
expected or understood by an “average” retail investor
and should be explicitly disclosed?
- Is the fund only appropriate for
certain investors who can understand or appreciate a complicated
trading strategy, and, if so, how can this be clearly communicated
in the fund’s disclosure documents?
- Is there a disparity in the way gains
and losses are experienced by the fund (e.g., incremental gains
versus rapid losses)? Can the fund’s value significantly
drop in a short period of time and are the risks adequately
disclosed? Do investors have a reasonable opportunity to exit
It is interesting to note that the disclosure documents of the
Horizons Fund explicitly referenced unusual, specific risks
applicable to the fund. These risks included a warning to investors
that, historically, the index had experienced significant one day
increases on days when equity markets had large negative returns
which, if repeated, could cause the fund to suffer substantial
losses. The prospectus further contained disclosure that the
use of derivatives could quickly lead to large losses as well as
large gains, which losses could “sharply” reduce the
value of the fund. There was a statement that the fund was
“intended for use in daily or short-term trading strategies by
sophisticated investors”. The statement of claim alleged
the fund’s disclosure was inadequate. As noted above,
until there is a hearing on the merits, it is unknown whether the
courts would agree, but, in the meantime, fund managers may wish to
review and potentially enhance their funds’ disclosure
documents with these allegations in mind.
3. Warning – Disclosure May Not Be
Perhaps the most notable finding of the COA is the suggestion
that an investment fund manager’s duty of care may require
“more” than just creating and managing an investment fund
that operates and performs exactly as described in its disclosure
documents. Creating a fund that is not suitable for
“any” investors because it has a “design flaw”
rendering it “doomed to fail” is described by the COA as
potentially constituting a breach of a fund manager’s duty of
care. It seems unlikely that the majority of investment funds
would be considered to have a “design flaw” rendering
them “doomed to fail”. However, the question
remains: are there other types of “design flaws” that
could constitute a breach of this duty of care?
Even more importantly, the COA’s decision opens the door to
the possibility that “perfect” disclosure is not
enough. Depending on how the jurisprudence on this develops,
fund managers may wish to make an assessment of the
“designs” of their funds,
- How does the fund perform under a
variety of market conditions and what factors impact
- Will only sophisticated investors
understand the fund’s performance variables?
- Does the fund present an
“acceptable risk/reward trade-off for investors”?
- Does the fund have inherent risks
that could render it unsuitable for “all” investors and
open to allegations that it is “doomed to fail”?
- Are the investment strategies of the
fund too complex or do they present risks rendering the fund
unsuitable for passive management?
Unfortunately, how to practically and meaningfully address the
results of any such assessment is difficult, especially until the
jurisprudence further develops.
4. Reconsider what Passive Management Means
The plaintiff alleged in Horizons that the Manager had
a positive duty to take action in response to declining and
volatile markets, despite the fact that the Horizons Fund, like
many ETFs, was passively managed. If this allegation is ultimately
accepted, fund managers and possibly portfolio managers could face
potential liability for failing to take positive action to mitigate
losses in certain conditions. Practically, this may mean a manager
may have to call the stock exchange to halt trading in certain
circumstances or take steps to actively manage the investments of
an ETF. This could fundamentally shift how passive funds are
managed. Consider how such an obligation could impact
management of passive funds during extreme circumstances, such as
the COVID-19 pandemic. Managers of passive funds will likely
want to keep careful watch on how this issue develops.
5. The Primary Market vs. the Secondary
The misrepresentations claim in Horizons focused on
whether the claim could proceed using the “primary
market” civil liability regime under Section 130 of the
Securities Act relating to sales of ETF securities.
As outlined above, the type of claim a potential plaintiff can
pursue hinges on the type of ETF securities purchased, which is
problematic because investors typically do not know what type of
ETF securities they have purchased.
Horizons is significant because the COA found that,
despite this difficulty, Section 130 of the Securities Act
can apply to purchases of ETF securities. It will likely be
challenging to show whether an investor purchased “creation
units” as opposed to units already existing in the secondary
marketplace and to address the fact that not all investors who wish
to participate in the class action may have purchased
“creation units”. The COA noted that these
determinations would be addressed in the course of the litigation,
but not much guidance was given outside of
Aside from the potential of increasing the number and types of
future misrepresentations class actions that may be commenced
against ETFs, the Horizons decision raises practical
considerations that industry participants may wish to consider
further. For example, is there a practical way of identifying
purchases as being on the primary or secondary market? If so,
can or should investors have any control over how purchases are
made? If given the choice, an investor would likely wish to
purchase on the primary market for the reasons noted above.
6. Suitability May be Worth a Thought (Not Just for
Another complex allegation in Horizons was that the
Manager was liable for creating a fund that was not suitable for
“any” investor. If accepted, this could be taken to
mean that fund managers have some type of suitability obligation to
investors. The imposition of such an obligation, if
ultimately affirmed, could have significant implications for the
industry, and could raise a number of difficult questions:
- How would such an obligation be
limited? Would liability only be imposed if a fund manager
created a fund that is not suitable for “any”
- How would such an obligation of the
fund manager complement or supplement other registrants’
- If a fund’s disclosure documents
clearly disclose that the fund is only suitable for a certain type
of investor, who would be responsible if an investor that does not
meet the disclosed qualifications ends up investing in the
fund? What steps could industry participants take to mitigate
these potential risks?
- Would saddling registrants with new
suitability assessments paralyze the creation of innovative
products? Could this result in investors having less choice in
selecting financial products in the future?
These takeaways aim to highlight the potential far-reaching
implications this decision could have on the industry. Not
only could investment fund managers be subject to new duties,
obligations, and potential liabilities, these changes could impact
how investment fund managers create products, interact with other
industry participants, and seek to fulfil investor
expectations. Unfortunately, at this point, Horizons
raises more questions than it answers. However, the Manager
appears to be pursuing an application for leave to appeal this case
to the Supreme Court of Canada, so more clarity may be provided in
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
© McMillan LLP 2020
Iveson says $17.3-million federal housing investment puts Edmonton on the right track to end homelessness – Edmonton Journal
Article content continued
“The goal was to create urgency around accommodation for everybody this winter and urgency around bringing the right kind of units online in a matter of months rather than years and so I think we’ve accomplished that with the federal government’s announcement,” he said. “I think we’ve made considerable progress within the last eight or nine weeks and anyone who wants to come in from the cold will have a place to do it within that 10-week timeframe. So I’m pleased with how it’s come together.”
Now that the funding is secured, Iveson said the city will work with social agencies over the next few weeks to “go shopping” for the right sites.
“We’ve been in discussions with a number of hoteliers and also looking at some of the modular sites that the city had previously approved so the money will move quickly and as soon as we have a decision point on that we’ll bring that forward, but our goal will be to move that within weeks,” he said.
Iveson said the city will also be aggressively pushing for a portion of the other $500 million that will be granted to specific projects. A few projects are already in the works, Iveson said, pointing to four planned supportive housing complexes that will provide 150 units. Projects under this stream must be completed within one year of a signed agreement.
The city is working to open up a 24-7 temporary shelter at the Edmonton Convention Centre by Friday, which will accommodate up to 300 residents overnight. The Mustard Seed and Hope Mission are also looking to expand their overnight shelters in order to serve more people at larger spaces while maintaining appropriate physical distancing amid the COVID-19 pandemic.
Investment approaches to continued uncertainty – Investment Executive
“The average client portfolio is riskier today than it has been historically because you’re not getting the natural diversification” that bonds provide, said panellist Luke Ellis, CEO with London, U.K.–based Man Group plc, a global investment management firm with offerings that include quantitative portfolios. As a result, asset allocation must be reconsidered, he said.
Ellis also warned of the challenge of identifying winners and losers in a world of massive government spending. The market is not efficient when fiscal policy helps support weak companies, he said.
Neil Cunningham, president and CEO with Ottawa-based PSP Investments, one of Canada’s largest pension investment managers, said PSP is reducing government bonds in portfolios in favour of emerging market debt, private credit and high inflation–linked infrastructure projects with little operating or credit risk. Adding in these assets increases risk, so the firm reduces equities to stay within risk limits, he said.
More generally, as a long-term investor, Cunningham aims to distinguish between noise and longer-term trends. The U.S. election, he said, is noise: “We’re much more concerned with the trends that get accelerated by Covid,” such as de-globalization, greater e-commerce adoption and working from home.
Cunningham also suggested investors follow the long-term trends of ESG and diversity and inclusion because governments, employees and customers will consider these factors as they legislate, work and shop.
Mohammed Alardhi, executive chairman with Manama, Bahrain–based Investcorp, a global manager of alternatives, highlighted the need to diversify within sectors and geographies, noting that investors in oil-producing regions were particularly hard hit by the pandemic.
Cunningham described investing in a U.K. pub business just months before the economic shutdown. No one expected a business that stayed open during the Blitz to close, he said. The lesson: “Unless you diversify both geographically and by sector, you’re bound to get hit by something you didn’t expect.” Unexpected downturns also require investors to ensure they have sufficient liquidity, he said.
Panellists also considered trends arising from geopolitics.
The outcome of U.S.-China tensions will be key for many portfolios over the next decade, depending on the position investors take, Ellis said.
For example, should China be a small part of a portfolio because of the country’s restrictions on foreign businesses, or should it be a large part as the eventual largest economy in the world?
As U.S.-China tensions put pressure on other governments to pick a side, investors will face an increasingly challenging environment, Ellis said.
Cunningham said his firm was increasing allocations to Australasia and emerging markets based on long-term geopolitical trends that will see those economies benefit.
The outlook for investment in Canada
Ian McKay, CEO with Ottawa-based Invest in Canada, also spoke at the session and provided a positive outlook for foreign investment in this country despite an overall negative forecast for foreign investment flows.
Global foreign direct investment (FDI) is expected to decrease by up to 40% this year and by a further 5–10% in 2021, according to the World Investment Report 2020 from the United Nations Conference on Trade and Development.
This would bring FDI flows to “the lowest levels we’ve seen in over 20 years,” McKay said, which will motivate governments, investment funds and agencies to reassess their strategic plans and investing criteria.
As they do so, Canada is proving attractive.
Since the pandemic, Invest in Canada has experienced a spike in interest from global investors in three sectors in Canada: life sciences, associated with a vaccine for Covid-19; the digital economy, in which Canada is a leader in artificial intelligence; and clean technology, such as hydrogen or electric cars and renewable energy.
“In Canada, we have the right ingredients for that — the raw materials, highly skilled workforce, innovative ecosystems and global market access,” McKay said.
Fundamental factors also favour Canada when it comes to attracting investment, such as political and economic stability, an open mindset to free and rules-based trade, and a global supply of workforce talent, McKay said.
Despite the forecast for foreign investment flows, “we are certain that the future is bright for those investors who continue to build and expand their operations in Canada,” McKay said.
Foreign Investment Plummets During Pandemic, Except in China – The Wall Street Journal
Foreign direct investment in China largely held steady during the first half of this year, even as investment inflows into the U.S. and European Union plummeted, in a fresh sign that the world’s second-largest economy has suffered less damage from the pandemic.
Globally, the monthly average for new investments for the first half of the year was down almost half on the monthly average for the whole of 2019, the largest decline on record, the United Nations’s Conference on Trade and Development said Tuesday. But while foreign investment in the U.S. and European Union fell by 61% and 29% respectively, inflows to China were down by just 4%. China attracted foreign investment totaling $76 billion during the period, while the U.S. attracted $51 billion.
The U.S. has long been the top global destination for businesses investing overseas, while China has long ranked second.
Unctad said the modest nature of the decline in foreign investment to China was surprising. Back in March, when China was the epicenter of the pandemic with significant parts of its economy in lockdown, Unctad forecast that it would be the big loser, and expected global flows of investment to fall by 15% across 2020.
However, China’s economy reopened in April just as the U.S. and Europe were in lockdown, and the country has since contained the virus with only localized and short-lived restrictions. By contrast, the U.S. and Europe have seen resurgences in infections that have slowed their recoveries. In the three months through September, China’s economy had already exceeded the levels of output recorded in the last quarter of 2019, according to data out last week.
The resilience of foreign investment in China appears to confound earlier expectations that businesses would seek to reduce their reliance on the country as a key part of their supply chains. But James Zhan, Unctad’s director of investment and enterprise, said it was too early to reach that conclusion.
“One of the main reasons for reconfiguration of global supply chains is to increase resilience, which requires backup plans and redundant capacities,” he said. “A more practical approach companies can take would be building additional production bases outside of China, which means new investment to other countries instead of divestment from China or moving production out of China.”
Across all developed economies, inflows of foreign investment were down 75% in the first half from the 2019 monthly average to total just $98 billion, a level last seen in 1994. In some cases—such as the Netherlands and the U.K.—that decline took the form of a reduction in loans from the parent company to its overseas subsidiaries, which are counted as foreign investment.
With tensions running high, Washington and Beijing have pushed to decouple technology and trade. But American financial firms including JPMorgan and Goldman Sachs are doubling down on investing in China and expanding headcount. Photo Composite: Crystal Tai[object Object]
“In times of crisis, some multinational enterprises would like to keep funds close to home,” said Mr. Zhan. “Fear that Covid-19 and the quest for funds could lead to tax increase may also accelerate the intra-firm capital movements.”
Foreign investment in developing economies proved more resilient, falling by just 16% to $296 billion.
Unctad said there were signs of a pickup in investment during the three months through September, and it repeated its forecast that flows for 2020 as a whole would likely be 40% down on 2019. But it warned that the second wave of rising infections hitting a number of developed economies could see flows down 50% for the year.
While foreign investment in most countries fell during the first six months, a small number saw an increase. One was Germany, which saw inflows rise 15% to $21 billion, largely due to a small number of foreign acquisitions of existing businesses.
Write to Paul Hannon at email@example.com
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