Headnote National Policy 11-203 Process for Exemption Relief Applications in Multiple Jurisdictions - Relief from section 4.1 of NI 81-102 for dealer-managed mutual funds to invest in distributions of debt securities for which dealer-manager acts as underwriter during distribution period or 60 day period following distribution – debt securities will not have “designated rating” by “designated rating organization” as required by subsection 4.1(4) – limited supply of new debt offerings have designated ratings, and trend is expected to continue – dominant position of related dealers in debt underwriting limits funds’ ability to acquire debt securities for the funds – all purchases must be consistent with fund investment objectives and subject to approval of independent review committee – debt offerings must have at least one underwriter in addition to related dealer, at least one arm’s length purchaser purchasing at least 5% of the offerings – related funds can collectively purchase no more than 20% of offering and must pay no more than lowest price paid by arm’s length purchaser(s) – funds must not be money market fund funds and cannot purchase asset backed commercial paper pursuant to relief – National Instrument 81-102 Mutual Funds.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds sections 4.1 and 19.1.
December 17, 2013
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 INVESTMENTS INC., BMO HARRIS INVESTMENT MANAGEMENT INC. AND BMO ASSET MANAGEMENT INC. (collectively, the Filers)
AND
IN THE MATTER OF THE FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers on behalf of the existing mutual funds subject to National Instrument 81-102 Mutual Funds (NI 81-102) for which the Filers currently act as manager or the portfolio adviser or both, and any future mutual funds that are subject to NI 81-102 and for which a Filer, or an affiliate of a Filer, acts as manager or the portfolio adviser or both (each a Fund, and collectively, the Funds), for a decision under the securities legislation of the Jurisdiction (the Legislation) for relief (the Exemption Sought) from the prohibition in section 4.1(1) of NI 81-102 (the Prohibition) to permit the investment by the Funds in debt securities of an issuer during the period of the distribution (the Distribution) or during the period of 60 days after the Distribution (the 60-Day Period), notwithstanding that any Filer, or an associate or affiliate of a Filer, acts or has acted as an underwriter in the Distribution and notwithstanding that the debt securities do not have a designated rating by a designated rating organization as contemplated by section 4.1(4)(b) of NI 81-102.
Under the Process for Exemptive Relief Applications in Multiple Jurisdiction (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied on in Alberta, British Columbia, Saskatchewan, Manitoba, Québec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, Yukon, the Northwest Territories and Nunavut.
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions, NI 81-102 and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) have the same meaning if used in this decision, unless otherwise defined. For greater certainty, the term “designated rating”, as used in section 4.1(4)(b) of NI 81-102, has the meaning given to such term in National Instrument 44-101 Short Form Prospectus Distributions.
Representations
This decision is based on the following facts represented by the Filers in respect of the Filers and the Funds:
BMO Investments Inc. (BMOII) is the manager of a group of the Funds collectively known as the BMO Mutual Funds. BMO Harris Investment Management Inc. (BHIMI) is the manager of a group of the Funds collectively known as the BMO Harris Private Portfolios. BMO Asset Management Inc. (BMOAM) is the manager of a group of the Funds collectively known as the BMO Exchange Traded Funds.
Each of the Funds is, or will be, an open-ended mutual fund established under the laws of Ontario or another jurisdiction of Canada.
The securities of each Fund are, or will be, qualified for distribution in one or more of the jurisdictions of Canada pursuant to a simplified prospectus.
None of the Funds are, or will be, a “money market fund” as that term is defined in NI 81-102.
Each of the Funds has, or will have, an independent review committee (IRC) appointed in accordance with NI 81-107.
A Filer, or an affiliate of a Filer, is, or will be, the manager of the Funds. A Filer, or any affiliate of a Filer, is, or will be, the portfolio adviser of the Funds.
None of the Filers or the existing Funds are in default of securities legislation in any jurisdiction of Canada.
Each of the Filers is an indirect wholly-owned subsidiary of the Bank of Montreal (BMO).
Each of the Filers is currently an affiliate of BMO Nesbitt Burns Inc. as well as certain other dealers, including BMO Capital Markets Corp. and BMO Capital Markets GKST Inc.. Each Filer, or an affiliate of each Filer, may become an associate or affiliate of additional dealers in the future (each a Related Dealer and collectively, the Related Dealers), any of which may act as underwriter in a Distribution.
Each of BHIMI and BMOAM is, or may be, a “dealer manager” in respect of the Funds within the meaning of NI 81-102 (each a Dealer Manager). An affiliate of a Filer is also, or may also be, a Dealer Manager in respect of the Funds. Accordingly, the Funds are, or will be, “dealer managed funds” within the meaning of NI 81-102.
As portfolio advisers to a Fund, BHIMI and BMOAM, or any affiliate of a Filer that acts as the portfolio adviser to a Fund and is a Dealer Manager, may wish to cause a Fund to invest in debt securities that do not have a “designated rating” by a “designated rating organization” as such terms are defined in NI 81-102, and where a Related Dealer is underwriting the offering of such debt securities.
The Funds require the Exemption Sought from the Prohibition because:
(a) there is a limited supply of debt securities issued by issuers other than the federal or provincial government (Non-Government Debt Securities);
(b) frequently, the only source of new issues of Non-Government Debt Securities will be offerings that are, in whole or in part, underwritten by a Related Dealer; and
(c) frequently, Non-Government Debt Securities that the Filers which to purchase for the Funds may not have a “designated rating” by a “designated rating organization”.
The Filers consider that a Fund may be prejudiced if it cannot purchase, during a Distribution or in the 60-Day Period, Non-Government Debt Securities that are consistent with a Fund’s investment objective. Forgoing participation in these investment opportunities may be a significant opportunity cost for the relevant Fund(s), as they would be denied timely access to these securities purely as a result of the coincidental participation of a Related Dealer in the transaction and the lack of a designated rating of the securities distributed.
The Filers, and any affiliate of a Filer that is a Dealer Manager, operates or will operate, independently from the Related Dealers with regard to their respective investment decisions and this is reflected in the policies and procedures approved by the IRCs of the Funds. Information and influence barriers ensure that a Fund has no involvement in a Related Dealer’s function as an underwriter. Further, any purchase of Non-Government Debt Securities by a Fund will be consistent with the investment objectives of the Fund and represent the business judgment of the Fund’s portfolio adviser uninfluenced by considerations other than the best interests of the Fund.
Any purchase of Non-Government Debt Securities by a Fund during the relevant Prohibition Period will only be made with the prior approval of the IRC in accordance with section 5.2(2) of NI 81-107.
None of the Funds will be required or obligated to purchase any Non-Government Debt Securities during the Prohibition Period.
The Funds would not be restricted by the Prohibition if, in accordance with section 4.1(4) of NI 81-102, certain conditions are met, including: (i) the IRC of the Funds has approved the transaction in accordance with section 5.2(2) of NI 81-107; (ii) for equity securities, a prospectus is filed with one or more securities regulatory authorities or regulators in Canada in connection with the relevant offering, and during the 60-Day Period, the investment is made on an exchange on which the class of equity securities is listed and traded; and (iii) for debt securities, the securities have been given and continue to have a designated rating by a designated rating organization.
The Filers are not able to rely on section 4.1(4) of NI 81-102 to invest the Funds in debt securities if the securities in the offering do not have a designated rating by a designated rating organization as required by section 4.1(4)(b) of NI 81-102.
The details of a Distribution and a Related Dealer’s involvement as an underwriter in such Distribution will not be known to a Filer sufficiently long enough in advance to make an application for relief on a case-by-case basis.
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 from the Prohibition is granted in respect of purchases of Non-Government Debt Securities by each Fund, provided that:
(a) at the time of each purchase, the purchase is consistent with or is necessary to meet the investment objective of the Fund, and represents the business judgment of the portfolio adviser of the Fund uninfluenced by considerations other than the best interests of the Fund or in fact is in the best interests of the Fund;
(b) the manager of the Fund complies with section 5.1 of NI 81-107, and the manager and IRC of the Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the investment in the securities;
(c) at the time of the purchase, the IRC of the Fund has approved the transaction in accordance with section 5.2(2) of NI 81-107;
(d) if the Non-Government Debt Securities are acquired during the Distribution,
(i) at least one underwriter acting as underwriter in the Distribution is not a Related Dealer,
(ii) at least one purchaser who is independent and arm’s length to the Fund(s) and the Related Dealers must purchase at least 5% of the securities distributed under the Distribution,
(iii) the price paid for the securities by a Fund in the Distribution shall be no higher than the lowest price paid by any of the arm’s length purchasers who participate in the Distribution, and
(iv) a Fund and any related Funds for which a Filer or its associate or affiliate acts as manager and/or portfolio adviser can collectively acquire no more than 20% of the securities distributed under the Distribution in which a Related Dealer acts as underwriter;
(e) if the Non-Government Debt Securities are acquired during the 60-Day Period,
(i) the ask price of the securities is readily available as provided in Commentary 7 to section 6.1 of NI 81-107,
(ii) the price paid for the securities by a Fund is not higher than the available ask price of the security, and
(iii) the purchase is subject to market integrity requirements as defined in NI 81-107;
(f) the Non-Government Debt Securities acquired by the Funds pursuant to the Exemption Sought cannot be asset backed commercial paper; and
(g) no later than the time a Fund files its annual financial statements, the manager of the Fund will file the particulars of each investment made by the Fund pursuant to the Exemption Sought during its most recently completed financial year.
“Vera Nunes”
Vera Nunes
Manager, Investment Funds Branch
ONTARIO SECURITIES COMMISSION
SEDAR # 2077476