BMO Asset Management Inc. (Re), 2023 CanLII 124928

November 29, 2023

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

BMO Gold Bullion ETF

(the Fund)

Decision

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) that exempts the Fund from:

(a) subsection 6.1(1) of NI 81-102 to permit the Bank of Montreal (BMO) to act as custodian to hold the Fund’s physical gold bullion (Bullion), and

(b) subsection 9.4(2) of National Instrument 81-102 Investment Funds (NI 81-102), to permit the Fund to accept a combination of cash and Bullion as subscription proceeds for units of the Fund (Units)

(collectively, 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 the Application; and

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

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined. In addition, the following terms have the following meanings:

(a) Basket means Bullion in such amount as determined by the Filer in its discretion from time to time.

(b) Dealer means a dealer (that may or may not be a Designated Broker) that enters into a continuous distribution agreement with the Filer, or an affiliate of the Filer, on behalf of the Fund, pursuant to which the Dealer may subscribe for and purchase Units from the Fund.

(c) Designated Broker means a dealer that enters into an agreement with the Filer, or an affiliate of the Filer, on behalf of the Fund to perform certain duties in relation to the Fund.

(d) Prescribed Number of Units means the number of Units determined from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.

Unless otherwise specified, all references to money amounts are to the lawful currency of Canada.

Representations

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

The Filer

1. The Filer is a corporation incorporated under the laws of the Province of Ontario. The Filer is an indirect, wholly-owned subsidiary of BMO. The head office of the Filer is located in Toronto, Ontario.

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

3. The Filer is not in default of securities legislation in any of the Jurisdictions.

4. The Filer will be the investment fund manager and portfolio manager of the Fund.

The Fund

5. The Fund will be an investment fund that is an exchange-traded fund organized and governed by the laws of Ontario.

6. The Fund will be governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.

7. The Fund will be a reporting issuer under the laws of all of the Jurisdictions.

8. The Fund will file a preliminary prospectus and a final prospectus pursuant to National Instrument 41-101 General Prospectus Requirements with the securities regulatory authorities in each of the Jurisdictions to qualify the distribution of its Units in each of the Jurisdictions on a continuous basis.

9. The Fund’s Units will be listed for trading initially on the Toronto Stock Exchange.

10. The Fund’s investment objective will be to seek to provide unitholders, to the extent possible, exposure to the price of gold by holding substantially all of its assets in Bullion.

11. To achieve its investment objective, the Fund will invest in and hold substantially all of its assets in long term holdings of Bullion. The Fund will primarily invest in and hold pure, refined, and unencumbered Bullion in London Good Delivery Bars.

Necessity for the Exemption Sought

Relief from subsection 6.1(1) of NI 81-102

12. State Street Trust Company Canada (State Street) will act as custodian of the Fund’s assets, other than Bullion, pursuant to the terms of a custodian agreement between the Filer, as trustee and manager of the Fund, and State Street dated June 1, 2018, as amended from time to time, which complies with all of the requirements in Part 6 of NI 81-102.

13. State Street has advised that it is unable to store the Fund’s Bullion as it does not own a vault facility which could accommodate the Fund’s Bullion.

14. It can be operationally challenging for a custodian to appoint additional custodians not forming part of a custodian’s existing custodial network as sub-custodians.

15. The Fund wishes to appoint BMO as the custodian of the Fund’s Bullion.

16. Subsection 6.1(1) of NI 81-102 provides that all portfolio assets of an investment fund must be held under the custodianship of one custodian that satisfies the requirements of section 6.2 of NI 81-102. The Exemption Sought is therefore required to permit the Fund to appoint BMO as a custodian in addition to State Street.

Relief from Subsection 9.4(2) of NI 81-102

17. Similar to other exchange-traded funds, the Fund will enter into a designated broker agreement with a Designated Broker the terms of which provide that, for each Prescribed Number of Units issued, a Designated Broker or Dealer must deliver payment consisting of, in the Filer’s discretion: (i) one Basket and cash in an amount sufficient so that the value of the Bullion and the cash received is equal to the Net Asset Value (NAV) of the Units next determined following the receipt of the subscription order; or (ii) cash in an amount equal to the NAV of the Units next determined following the receipt of the subscription order in an amount sufficient so that the value of the Bullion and/or cash received is equal to the NAV of the Units next determined following the receipt of the subscription order. Accordingly, but for the Exemption Sought, the Fund would be prohibited from accepting Bullion or a combination of Bullion and cash as payment for its Units as Bullion is not a “security” as defined in the Securities Act (Ontario).

18. Subsection 9.4(2) of NI 81-102 provides that a mutual fund may accept as subscription proceeds for its securities either cash or securities. The Exemption Sought is therefore needed to permit the Fund to accept Bullion or a combination of Bullion and cash as payment for its Units because Bullion is not a “security” as defined in the Securities Act (Ontario).

Appointment of BMO as the Fund’s Custodian for Bullion

19. BMO is a bank listed in Schedule I of the Bank Act (Canada), and therefore, is qualified to act as custodian in compliance with section 6.2 of NI 81-102. BMO is regulated and supervised by the Office of the Superintendent of Financial Institutions. BMO provides custodial services to a number of public investment funds in Canada.

20. The head office of the BMO is located in Toronto, Ontario.

21. BMO is not in default of securities legislation is any of the Jurisdictions.

22. The safekeeping of Bullion is a specialized business in respect of which BMO has particular specialized knowledge, expertise and experience.

23. BMO’s vault can accommodate a certain amount of Bullion. However, due to physical storage capacity constraints and having regard to the amount of Bullion that the Fund may acquire, BMO has separately obtained exemptive relief dated September 26, 2023, in order to appoint each of the Royal Canadian Mint, Brink’s Global Services International Inc. and Loomis International Corporate AG, which are not entities described in section 6.2 or 6.3 of NI 81-102, to act as sub-custodians to BMO in order to store the Bullion held by the Fund subject to the terms and conditions set out in that order.

24. The Filer will negotiate the specific terms and conditions of a precious metals storage and custody agreement (the Metals Custodian Agreement) relating to Bullion with BMO, which provides for the storage of Bullion generally and will not place any limitations on the Fund’s ability to buy or sell Bullion. The Metals Custodian Agreement, including the arrangements between BMO and the Fund in connection with Bullion, will comply with the requirements of Part 6 of NI 81-102.

25. Under the Metals Custodian Agreement, upon the initial notice being delivered, BMO, as custodian of the Fund’s Bullion, will receive Bullion based on a list provided by the Filer in such written notice that specifies the amount, weight, type, assay characteristics and value, and serial number of the London Good Delivery bars. After verification, BMO will issue a “receipt of deposit” that confirms the bar count and total weight in troy ounces of the Bullion. Pursuant to the Metals Custodian Agreement, BMO will reserve the right to refuse delivery in the event of storage capacity limitations at its own vault facilities. In the event of a discrepancy arising during the verification process, BMO will promptly notify the Filer. BMO will keep the Fund’s Bullion fully allocated and specifically identify the Fund’s Bullion as the Fund’s property and will keep it physically segregated at all times. BMO will provide a monthly inventory statement, which the Filer will reconcile with the Fund’s records of its Bullion holdings. The Filer will have the right to physically count and have the Fund’s auditors subject the Fund’s Bullion to audit procedures at the vault facilities at BMO upon request on any business day during BMO’s regular business hours, provided that such physical count or audit procedures do not interrupt the routine operation of the facility and the requisite security procedures have been observed.

26. Upon BMO’s receipt and taking into possession and control of any of the Fund’s Bullion, whether through physical delivery or a transfer of Bullion from a different customer’s account at BMO, BMO’s liability will commence with respect to such Bullion. BMO will bear all risk of physical loss of, or damage to, the Bullion owned by the Fund in BMO’s custody (regardless of the location at which BMO decides to store the Bullion), except in the case of circumstances or causes beyond BMO’s reasonable control, including, without limitation, acts or omissions or the failure to cooperate of the Filer and/or of third parties, fire or other casualty, act of God, strike, lockout or other labour dispute, riot, war or other violence, or any law, order or requirement of any governmental agency or authority, and has contractually agreed to replace or pay for lost, damaged or destroyed Bullion in the Fund’s account while in BMO’s care, custody and control. Under the Metals Custodian Agreement, BMO’s liability will terminate with respect to any Bullion upon termination of the Metals Custodian Agreement, whether or not the Fund’s Bullion remains in BMO’s possession and control, upon transfer of such Bullion to a different customer’s account at BMO or at the time such Bullion is remitted to the armoured transportation service carrier pursuant to delivery instructions provided by the Filer on behalf of a redeeming unitholder.

27. In the event of physical loss, damage or destruction of the Fund’s Bullion in BMO’s custody, care and control, the Filer must give written notice to BMO within one business day after the discovery of any such loss, damage or destruction, but, in the case of loss or destruction of the Fund’s Bullion, in any event no more than thirty days after the delivery by BMO to the Fund of an inventory statement in which the discrepancy first appears. BMO will, at its discretion or at the discretion of any applicable sub-custodian, either (i) replace, or restore to its original state in the event of partial damage, as the case may be, the Fund’s Bullion that was lost, destroyed or damaged as soon as practicable after BMO becomes aware of said loss or destruction, based on the advised weight and assay characteristics provided in the initial notice or (ii) compensate the Fund, through the Filer, for the monetary value of the Fund’s Bullion that was lost or destroyed, within five business days from the date BMO becomes aware of said loss or destruction, based on the advised weight and assay characteristics provided in the initial notice and the market value of such Bullion that was lost or destroyed, using the first available market price of the Bullion from the date BMO becomes aware of said loss or destruction. If such notice is not given in accordance with the terms of the Metals Custodian Agreement, all claims against BMO will be deemed to have been waived. In addition, no action, suit or other proceeding to recover any loss, damage or destruction may be brought against BMO unless notice of such loss, damage or destruction has been given in accordance with the terms of the Metals Custodian Agreement and unless such action, suit or proceeding shall have been commenced within twelve months from the time such notice is sent to BMO. BMO will not be responsible for any special, incidental, consequential, indirect or punitive losses or damages (including lost profits or lost savings), whether or not BMO had knowledge that such losses or damages might be incurred.

28. Pursuant to the Metals Custodian Agreement, BMO will be required to exercise the same degree of care, diligence and skill in safeguarding the Fund’s property that a reasonably prudent person acting as custodian of the Bullion would exercise in the circumstance. BMO will not be entitled to an indemnity from the Fund in the event BMO breaches its standard of care.

29. BMO reserves the right to reject Bullion delivered to it if Bullion contains a hazardous substance or if such Bullion is or becomes unsuitable or undesirable for metallurgical, environmental or other reasons.

30. The Filer will be permitted to terminate the custodial relationship with BMO by giving written notice to BMO of its intent to terminate the Metals Custodian Agreement if: (i) BMO has committed a material breach of its obligations under the Metals Custodian Agreement that is not cured within thirty days following the Filer giving written notice to BMO of such material breach; (ii) BMO is dissolved or adjudged bankrupt, or a trustee, receiver or conservator of BMO or of its property is appointed, or an application for any of the foregoing is filed; or (iii) BMO is in breach of any representation or warranty contained in the Metals Custodian Agreement. The obligations of BMO include, but are not limited to, maintaining an inventory of the Fund’s Bullion stored with BMO, providing a monthly inventory to the Fund, maintaining the Fund’s Bullion physically segregated and specifically identified as the Fund’s property, and taking good care, custody and control of the Fund’s Bullion. The Filer believes that all of these obligations are material and anticipates that it would terminate the Metals Custodian Agreement if BMO breaches any such obligation and does not cure such breach within thirty days of the Filer giving written notice to BMO of such breach. Prior to terminating the custodial relationship with BMO, the Filer will appoint a replacement custodian for Bullion that complies with the requirements under NI 81-102.

31. BMO carries such insurance as it deems appropriate for its businesses and its position as custodian of the Fund’s Bullion and will provide the Fund with at least thirty days’ notice of any cancellation or termination of such coverage. The Fund’s ability to recover from BMO is not contingent upon BMO’s ability to claim on its own insurance. Based on information provided by BMO, the Filer believes that the insurance carried by BMO provides the Fund with such protection in the event of loss or theft of the Fund’s Bullion stored at BMO, that is consistent with the protection afforded under insurance carried by other custodians that store gold commercially.

32. The Filer will ensure that the Bullion will be subject to a physical count by a representative of the Filer periodically on a spot-inspection basis as well as subject to audit procedures by the Fund’s external auditors on at least an annual basis.

33. The Filer will ensure that no director or officer of the Filer, or representative of the Filer will be authorized to enter into the Bullion storage vaults without being accompanied by at least one representative of BMO.

34. The Filer will ensure that no part of the Fund’s stored Bullion may be delivered out of safekeeping by BMO without receipt of an instruction from the Filer in the form specified by BMO indicating the purpose of the delivery and giving direction with respect to the specific amount.

35. The Filer and the Fund believe that the custodial arrangements with BMO in connection with the Fund’s Bullion are consistent with industry practice.

36. The Filer will not be responsible for any losses or damages to the Fund arising out of any action or inaction by the Fund’s custodians or any sub-custodian(s) holding the assets of the Fund, including its sub-custodians holding the assets of the Fund other than Bullion, and BMO holding Bullion owned by the Fund.

37. The Filer will have the authority to change the custodial arrangements described above including, but not limited to, the appointment of a replacement custodian or sub-custodian and/or additional custodians or sub-custodians subject to the requirements under NI 81-102.

38. State Street will only be responsible for the non-Bullion assets of the Fund that are held directly by it, its affiliates or appointed sub-custodians.

Bullion as Payment for Units

39. The Fund will only accept a combination of cash and Bullion as payment for a Prescribed Number of Units from Dealers and/or Designated Brokers.

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) a single entity reconciles all the portfolio assets of the Fund and provides the Fund with valuation services and will complete daily reconciliations amongst the custodians before striking a daily net asset value for the Fund;

(b) the Filer maintains such operational systems and processes, as between State Street and BMO and the single entity referred to in condition (a) above, in order to keep a proper reconciliation of all the portfolio assets that will move amongst the custodians, as appropriate;

(c) Each custodian will act as custodian only for the portion of portfolio assets of the Fund transferred to it; and

(d) with respect to the relief granted from subsection 9.4(2) of NI 81-102, the acceptance of any Bullion as payment for the issue price of Units is made in accordance with the conditions set out in paragraph 9.4(2)(b) of NI 81-102.

“Darren McKall”

Darren McKall

Manager, Investment Funds and Structured Products Branch

ONTARIO SECURITIES COMMISSION

SEDAR Project#6037192

Application# 2023/0511