BMO Harris Investment Management Inc. (Re), 2012 CanLII 48999

Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from requirement in section 5.1(c) of NI 81-102 to obtain prior investor approval before changing the investment objectives of a mutual fund – mutual fund permitted to change its investment objective without seeking investor approval – all investors of the fund have entered into discretionary investment management agreements giving full discretionary authority to portfolio manager – relief not to be considered a precedent – relief granted based on specific facts in application for one-time non-recurring change to investment objectives of fund.

Applicable Legislative Provisions National Instrument 81-102 Mutual Fund, clause 5.1(c) and section 19.1.

August 30, 2012

In the Matter of the Securities Legislation of Ontario (the Jurisdiction)

and

In the Matter of

the Process for Exemptive Relief Applications

in Multiple Jurisdictions

and

In the Matter of

BMO Harris Investment Management Inc. (the Filer)

and

BMO Harris International Special Equity Portfolio (the Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting the Fund an exemption from subsection 5.1(c) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit the Fund’s fundamental investment objectives to be changed, as described below, without the prior approval of the unitholders of the Fund (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Newfoundland and Labrador and Prince Edward Island.

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meanings if used in this decision unless they are defined in this decision. The following additional terms shall have the following meaning:

BMO Harris Private Portfolios means collectively the Fund and the other mutual funds managed by the Filer; and

IRC means the independent review committee for the Fund.

Representations

This decision is based on the following facts represented by the Filer:

The Filer and the Fund

1The Filer is a corporation established under the laws of Ontario and is the manager and portfolio manager of the Fund. An affiliate of the Filer, BMO Trust Company, is the trustee of the Fund.

2The Filer is registered as an investment fund manager, commodity trading counsel, commodity trading manager in Ontario and as a portfolio manager and exempt market dealer in each province and territory of Canada. The Filer is also registered as an investment adviser in the United States.

3The Filer offers fully discretionary investment management services to its clients in the Jurisdictions, including all of the investors in the Fund.

4The BMO Harris Private Portfolios, including the Fund, were established by the Filer as an efficient and cost effective means of providing discretionary investment management services to its clients, including all of the investors in the Fund, as an alternative to segregated account management.

5The only investors in the BMO Harris Private Portfolios, including in the Fund, are clients of the Filer who have entered into a discretionary investment management agreement and relationship with the Filer.

6The Fund is an open-end mutual fund trust established under the laws of the Province of Ontario.

7Units of the Fund, and of the other BMO Harris Private Portfolios, are qualified for sale in each of the provinces of Canada (the Jurisdictions) under a simplified prospectus and annual information form, each dated October 24, 2011 as amended.

8The Fund is subject to NI 81-102 and, unless an exemption has been obtained, the Fund follows the standard investment restrictions and practices established by the securities regulatory authorities in each of the Jurisdictions.

9The Fund is a reporting issuer under the applicable securities legislation of each of the Jurisdictions.

10Neither the Filer nor the Fund is in default of applicable securities legislation.

Proposed change to fundamental investment objectives of the Fund

11The current fundamental investment objective of the Fund is as follows:

“The Portfolio’s investment objective is to achieve long-term growth through capital appreciation by primarily investing in small and mid-sized companies internationally.”

12The Filer proposes to change the investment objective of the Fund to the following:

“The Portfolio’s investment objective is to achieve long-term growth through capital appreciation by primarily investing in equity securities of small and mid capitalization U.S. companies.”

13The Filer proposes this change to the Fund’s fundamental investment objective because the Filer has determined that, at this time, there are limited opportunities available for a mandate investing in small and mid-capitalization companies in the international market, but that there are better investment opportunities in such issuers in the U.S. market.

14The Filer is authorized under its discretionary investment management agreement with each client who is an investor in the Fund to make any investment on behalf of the client, including buying and selling securities of the Fund in favour of securities of another investment fund or of any other issuer without obtaining the client’s approval, provided such investment is consistent with the mandate established by the client.

15The Filer will perform a suitability analysis on each existing investor in the Fund to ensure that the Fund with the new investment objective continues to be a suitable investment for each of the Fund’s existing investors. To the extent that the new investment objective is determined not to be suitable for a client, the Filer will cause such client’s investment to be redeemed out of the Fund prior to the change and invested in a more suitable investment.

16The proposed change to the Fund’s investment objectives will be consistent with the mandate established by each client who remains as an investor in the Fund on the effective date of the change.

17Provided the Exemption Sought is obtained, the declaration of trust governing the Fund does not require unitholder approval in order for the Filer to change the fundamental investment objectives of the Fund.

18Under its discretionary investment management agreement with each client, the Filer is authorized to receive all securityholder materials relating to the securities held in the client’s account, and to vote on behalf of the client on any matters relating to the securities held in the client’s account, provided that such vote is in the best interests of the client.

19The Filer’s clients expect and rely upon the Filer to make all of the investment decisions with respect to their accounts. Investment decisions include decisions to change the investment objectives of the Fund. The unitholders of the Fund are relying entirely on the Filer to make investment decisions for them. In these circumstances, the change of a fundamental investment objective of the Fund is analogous to a unitholder changing from one BMO Harris Private Portfolio to another, which change does not require unitholder approval, but which change would, for tax purposes, be a disposition.

20Subsection 5.1(c) of NI 81-102 requires that unitholder approval be obtained for any change to the fundamental investment objectives of a mutual fund. The Filer believes that, in the circumstances, a unitholder meeting convened for the purpose of obtaining unitholder approval to change the fundamental investment objectives of the Fund is not appropriate given the discretion granted to the Filer by its clients and would represent an unnecessary cost and inconvenience to the Filer, the Fund and the unitholders of the Fund.

21The proposed change of the fundamental investment objectives of the Fund is expected to be neutral to the unitholders of the Fund from a total fee and expense perspective.

22If the Exemption Sought is granted and the investment objective of the Fund is changed, it is anticipated that the name of the Fund will change to BMO Harris U.S. Special Equity Portfolio, to better reflect the proposed new fundamental investment objective. In addition, the Filer anticipates that the sub-advisor of the Fund may change to an affiliate of the Filer who has expertise in the U.S. small/mid-cap market and that the investment strategies of the Fund will change to reflect the new sub-advisor’s investment approach.

23The IRC of the Fund will review the proposed change in sub-advisor if the new sub-advisor is an affiliate of the Filer. In such case, the IRC will be asked to make a recommendation regarding whether the proposed sub-advisor change achieves a fair and reasonable result for the Fund.

24The proposal to change the Fund’s investment objective, name, sub-advisor and strategies has been disclosed in a press release issued on July 9, 2012 and filed under SEDAR project #1931076 and in an amendment to the Fund’s simplified prospectus, annual information form and fund facts, as well as in a material change report, which have been filed under SEDAR project #1931269 and #1803795.

25If the Exemption Sought is granted, the Filer proposes to further amend the Fund’s simplified prospectus, annual information form and fund facts, issue a new press release and file another material change report confirming the change will occur and providing further details regarding any new investment strategies and any new sub-advisor of the Fund.

26Prior to, or shortly following, the implementation of the proposed change, the Filer will communicate with each client that holds units of the Fund to explain the changes to his/her account that will occur as a result of the change to the fundamental investment objectives of the Fund, including any tax consequences that will result from switching the client out of the Fund to another investment pursuant to a suitability analysis.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted.