BMO Asset Management INC. (Re), 2020 CanLII 65724

September 11, 2020

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 Asset Management INC. (the Filer)

AND

IN THE MATTER OF THE PRIVATE FUNDS AND MANAGED ACCOUNTS (as defined below)

Decision

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction granting exemptive relief from the self-dealing restriction in clauses 13.5(2)(b)(i) and (ii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) (the Principal Trade Prohibition), which prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security of any issuer from or to the investment portfolio of a responsible person (as defined in section 13.5 of NI 31-103) or an associate (as defined in securities legislation) of a responsible person, in order to permit the Filer, or an affiliate of the Filer, on behalf of:

(i) the existing investment funds and any future investment funds to which National Instrument 81-102 Investment Funds (NI 81-102) does not apply (each, a Private Fund and collectively, the Private Funds) for which the Filer, or an affiliate of the Filer, acts as the portfolio adviser; and

(ii) the discretionary managed accounts of clients (each, a Managed Account and collectively, the Managed Accounts) for which the Filer, or an affiliate of the Filer, acts as the portfolio adviser,

to purchase debt securities issued or fully and unconditionally guaranteed by the federal or a provincial government of Canada (collectively, Government Debt Securities) or of an issuer other than the federal or a provincial government of Canada (collectively, Non-Government Debt Securities and with Government Debt Securities, Debt Securities) from, or sell Debt Securities to, a responsible person or an associate of a responsible person that is a principal dealer (or the equivalent) in the Canadian debt securities market in the secondary market (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 each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon (collectively with Ontario, the Jurisdictions).

Representations

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

1. The Filer and each affiliate of the Filer is an indirect wholly-owned subsidiary of Bank of Montreal (BMO), a Schedule 1 Canadian chartered bank. The head office of the Filer is located in Toronto, Ontario.

2. The Filer is registered as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer in each of the Jurisdictions, as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, and as a commodity trading manager in Ontario.

3. Each of the Private Funds is, or will be, an investment fund established under the laws of the Province of Ontario or another Jurisdiction.

4. Each of the Private Funds distributes, or will distribute, its securities in one or more of the Jurisdictions pursuant to available exemptions from the prospectus requirements under applicable securities legislation. None of the Private Funds is, or will be, a reporting issuer in the Jurisdictions.

5. The Filer and each existing Private Fund is not in default of securities legislation in any of the Jurisdictions (the Legislation).

6. The Filer, or an affiliate of the Filer, provides discretionary investment management services to the Managed Accounts of private clients and institutions such as pension plans, foundations and endowments (each, a Client and collectively, the Clients). Each of these Clients enters into a discretionary investment management agreement (Discretionary Management Agreement) with the Filer, or an affiliate of the Filer, which sets out the investment objectives, strategies and restrictions applicable to the Managed Account.

7. The Filer, or an affiliate of the Filer, is, or will be, the investment fund manager and/or the portfolio manager of each of the Private Funds and the portfolio manager of the Managed Accounts.

8. "Responsible persons" or "associates" of responsible persons of the Filer, or an affiliate of the Filer, are principal dealers (or the equivalent) (Principal Dealers) in the Canadian debt securities market, both primary and secondary.

9. BMO and each Principal Dealer may each be a "responsible person" of the Filer and each affiliate of the Filer that is a registered adviser, as they may have access to the investment decisions of the Filer and each affiliate of the Filer that is a registered adviser before they are implemented (e.g., if the Filer or an affiliate of the Filer that is a registered adviser submits trade orders to a Principal Dealer for execution on behalf of a Private Fund and/or a Managed Account).

10. Since BMO beneficially owns more than 10% of the voting shares of the Principal Dealers (other than itself), the Filer and each affiliate of the Filer that is a registered adviser will be deemed, pursuant to the Legislation, to beneficially own the securities owned by BMO, including the voting securities of the Principal Dealers (other than BMO). As a result, each Principal Dealer (other than BMO) may be considered to be an "associate" of the Filer and of each affiliate of the Filer that is a registered adviser under the Legislation.

11. An independent review committee (IRC) has been, or will be, established for the Private Funds that is composed in accordance with the requirements of section 3.7 of National Instrument 81-107 Independent Review Committee (NI 81-107) and has complied, or will comply, with the standard of care set out in section 3.9 of NI 81-107, as if NI 81-107 applied to the Private Funds. The mandate of the IRC established, or to be established, for the Private Funds will include reviewing and approving purchases and sales of Debt Securities by the Private Funds with responsible persons or associates of responsible persons.

12. The Filer has informed the IRC of the existing Private Funds of the Filer's intention to make this application and the IRC supports the making of this application and the Filer's request for the Exemption Sought.

13. The purchase or sale of Debt Securities by a Private Fund or a Managed Account from or to the account of a responsible person or an associate of a responsible person in the secondary market is subject to the Principal Trade Prohibition.

14. The Filer and affiliates of the Filer that are registered advisers are permitted to purchase Debt Securities from, or sell Debt Securities to, a Principal Dealer in the Canadian debt securities market in the secondary market, on behalf of investment funds to which NI 81-102 applies, pursuant to decisions dated October 31, 2007, November 1, 2007 and April 25, 2008.

15. Absent the Exemption Sought, the Private Funds and the Managed Accounts cannot, in the secondary market, purchase Debt Securities from, or sell Debt Securities to, a responsible person or an associate of a responsible person that is a Principal Dealer in the Canadian debt securities market.

16. There is a limited supply of Debt Securities available to the Private Funds and the Managed Accounts in the Canadian debt securities market, and frequently the only source of Debt Securities for a Private Fund or a Managed Account is a responsible person or an associate of a responsible person.

17. The Private Funds and the Managed Accounts require the Exemption Sought in order to pursue their investment objectives and strategies effectively.

18. The investment strategies of each Private Fund and Managed Account that relies on the Exemption Sought will permit it to invest in Debt Securities purchased from responsible persons or associates of responsible persons, either as a principal strategy in achieving its investment objectives or as a temporary strategy, pending the purchase of other securities.

19. Granting the Exemption Sought is not prejudicial to the public interest, given that the decision to purchase or sell Debt Securities with a responsible person or an associate of a responsible person that is a Principal Dealer in the Canadian debt securities market in the secondary market will be made in the best interests of the Private Funds or the Managed Accounts, and free from the influence of that responsible person or that associate of a responsible person.

20. Limiting the debt supply available to the Private Funds and Managed Accounts by restricting their ability to trade Debt Securities in the secondary market from or to responsible persons or associates of responsible persons that are Principal Dealers in the Canadian debt securities market puts the Private Funds and Managed Accounts at a competitive disadvantage and may increase the cost a Private Fund or a Managed Account pays for available Debt Securities or otherwise negatively affect the terms upon which they may trade in Debt Securities.

21. Responsible persons and/or associates of responsible persons that are Principal Dealers in the Canadian debt securities markets do not influence the business judgement of the Filer, or its affiliate that is a registered adviser, in connection with the determination of the suitability of investments and information, and influence barriers are in place. Decisions made by the Filer or its affiliate as to which investments a Private Fund or Managed Account should hold are based on the best interest of such Private Fund or Managed Account, without consideration given to the interest of the party with whom a purchase or sale is transacted.

22. The IRC of the Private Funds will not approve the Filer or its affiliate proceeding with purchases and sales of Debt Securities from or to a responsible person or associate of a responsible person that is a Principal Dealer in the Canadian debt securities market in the secondary market, unless the IRC has made the determination set out in subsection 5.2(2) of NI 81-107, as if NI 81-107 applied to the Private Funds.

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 provided that:

(a) the purchase or sale is consistent with, or is necessary to meet, the investment objectives of each Private Fund and Managed Account;

(b) if the transaction is by a Private Fund, the IRC of the Private Fund has approved the transaction in accordance with subsection 5.2(2) of NI 81-107 as if NI 81-107 applied to the Private Fund;

(c) if the transaction is by a Private Fund, the manager of the Private Fund complies with the conflict of interest matter requirements of section 5.1 of NI 81-107 as if NI 81-107 applied to the Private Fund;

(d) if the transaction is by a Private Fund, the manager and the IRC of the Private Fund complies with section 5.4 of NI 81-107 as if NI 81-107 applied to the Private Fund for any standing instructions the IRC provides in connection with the transactions;

(e) a purchase is not executed at a price which is higher than the available ask price of the security and a sale is not executed at a price which is lower than the available bid price of the security;

(f) the bid and ask price of the Debt Security is readily available, as provided in Commentary 7 to section 6.1 of NI 81-107;

(g) the purchase or sale is subject to "market integrity requirements" as defined in clause 6.1(1)(b) of NI 81-107;

(h) the Private Funds keep the written records required by clause 6.1(2)(g) of NI 81-107 as if NI 81-107 applied to the Private Funds; and

(i) if the transaction is by a Managed Account, the Discretionary Management Agreement or other documentation in respect of the Managed Account authorizes the transaction.

"Darren McKall"

Darren McKall

Manager, Investment Funds & Structured Products Branch

Ontario Securities Commission

Application # 2020/0384