Application by bank (the Bank) and capital trust subsidiary (the Trust) for an order granting the Trust relief from the requirement in OSC Rule 13-502 Fees (the Fees Rule) to pay participation fees -- Bank has paid, and will continue to pay, participation fees applicable to it under s. 2.2 of the Fees Rule, and Bank includes capitalization of Trust in its fee calculation -- relief analogous to relief for "subsidiary entities" contained in s. 2.9(2) of the Fees Rule -- Trust may not, from a technical accounting perspective, be considered to be a "subsidiary entity" of Bank for Canadian GAAP purposes and may not be entitled to rely on the exemption in s. 2.9(2) of the Fees Rule -- Trust and Bank satisfy conditions of exemption in s. 2.9(2) but for definition of "subsidiary entity" -- Trust exempt from requirement to pay participation fees, subject to conditions.
Applicable Legislative Provisions
OSC Rule 13-502 Fees, s. 2.9(2).
IN THE MATTER OF
ONTARIO SECURITIES COMMISSION
RULE 13-502 FEES
IN THE MATTER OF
BANK OF MONTREAL AND
BMO CAPITAL TRUST II
WHEREAS the Ontario Securities Commission (the "Commission") has received an application from Bank of Montreal ("BMO") and BMO Capital Trust II (the "Trust") for an order, pursuant to Section 6.1 of OSC Rule 13-502 Fees (the "Fees Rule"), that the requirement to pay a participation fee under Section 2.2 of the Fees Rule shall not apply to the Trust, subject to certain terms and conditions;
AND WHEREAS BMO and the Trust have represented to the Commission that:
1. The Trust is a trust established under the laws of Ontario by Montreal Trust Company of Canada (the "Trustee") pursuant to an amended and restated declaration of trust dated as of December 18, 2008, as may be amended, restated and supplemented from time to time. The Trust's principal office is located in Toronto, Ontario.
2. The Trust has a financial year-end of December 31.
3. The Trust was established solely for the purpose of effecting the Offering (as defined below) and other offerings of debt securities in order to provide BMO with a cost-effective means of raising capital for regulatory purposes under the Bank Act (Canada) (the "Bank Act").
4. BMO will be the Administrative Agent of the Trust pursuant to the Amended and Restated Administration Agreement between the Trustee and BMO dated December 18, 2008 (the "Administration Agreement"). Pursuant to the Administration Agreement, the Trustee has delegated to BMO certain of its obligations in relation to the administration of the Trust, including the day-to-day operations of the Trust and such other matters as may be requested from time to time by the Trustee.
5. The Trust completed an initial public offering (the "Offering") of $450,000,000 principal amount of trust subordinated notes (the "Trust Subordinated Notes") in each of the provinces and territories of Canada on December 18, 2008 and may, from time to time, issue further series of Trust Subordinated Notes. The first series of Trust Subordinated Notes were designated as 10.221% BMO Tier 1 Notes -- Series A due December 31, 2107 (the "BMO Tier 1 Notes -- Series A"), representing direct subordinated unsecured debt obligations of the Trust.
6. As a result of the Offering, the capital of the Trust consists of BMO Tier 1 Notes -- Series A and voting trust units (the "Voting Trust Units"). The BMO Tier 1 Notes -- Series A distributed pursuant to the short form prospectus of BMO and the Trust dated December 12, 2008 (the "Prospectus") are held by the public and all outstanding Voting Trust Units are held by BMO.
7. As a result of the Offering, the Trust is now a reporting issuer or its equivalent in each of the provinces and territories of Canada (the "Reporting Jurisdictions") where such concept exists. The Trust is not, to the best of its knowledge, in default of any requirement of the securities legislation in the Reporting Jurisdictions.
8. Subject to certain conditions, the Trust may redeem the outstanding BMO Tier 1 Notes -- Series A. Upon the occurrence of a Loss Absorption Event (as defined in the Prospectus), the BMO Tier 1 Notes -- Series A will be exchanged, without the consent of the holders, into non-cumulative Class B Preferred Shares, Series 20 of BMO, as described in the Prospectus.
9. No securities of the Trust are currently listed on a marketplace as defined in National Instrument 21-101 Marketplace Operation.
10. The Trust will not carry on any operating activity other than in connection with the offering of its securities to the public. The assets of the Trust consist primarily of a senior deposit note issued by BMO which has been acquired with the proceeds of the offerings of BMO Tier 1 Notes -- Series A and the Trust may, from time to time, acquire additional senior deposit notes issued by BMO from the proceeds of the offering of other Trust Subordinated Notes (each, a "Bank Deposit Note"). The Bank Deposit Notes will generate income to provide the Trust with funds to pay the interest payable on the BMO Tier 1 Notes -- Series 1 and other Trust Subordinated Notes (if any) from time to time.
11. Pursuant to a decision document dated February 23, 2009 (the "Continuous Disclosure Exemption Decision") granted to the Trust by the Commission, as principal regulator, on behalf of itself and the securities regulatory authorities of the other provinces and territories of Canada under the passport system contemplated by Multilateral Instrument 11-102 Passport System ("MI 11-102"), the Trust has been granted an exemption from the requirements contained in the securities legislation of the Province of Ontario (the "Legislation") to:
(i) file interim financial statements and audited annual financial statements and deliver same to the security holders of the Trust, pursuant to sections 4.1, 4.3 and 4.6 of National Instrument 51-102 Continuous Disclosure Obligations ("NI 51-102");
(ii) file interim and annual management's discussion and analysis ("MD&A") and deliver same to the security holders of the Trust pursuant to sections 5.1 and 5.6 of NI 51-102;
(iii) file an annual information form pursuant to section 6.1 of NI 51-102; and
(iv) comply with any other provisions of NI 51-102,
(collectively, the "Continuous Disclosure Obligations"); and
(b) file interim and annual certificates (collectively, the "Officers' Certificates") pursuant to Parts 4 and 5 of National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109") (the "Certification Obligations").
12. As a result of the granting of the Continuous Disclosure Exemption Decision, the Trust is exempt from the Continuous Disclosure Obligations and the Certification Obligations, subject to certain terms and conditions, and no continuous disclosure documents concerning only the Trust will be filed with the Commission.
13. OSFI maintains strict guidelines and standards (the "OSFI Guidelines") with respect to the capital adequacy requirements of federally regulated financial institutions, including BMO, and, in particular, specifies minimum required amounts of capital to be maintained by such institutions. Tier 1 capital primarily consists of common shareholders' equity, qualifying non-cumulative perpetual preferred shares, qualifying innovative instruments and qualifying non-controlling interests while Tier 2 Capital primarily consists of subordinated debt, qualifying innovative instruments, and the allowable portion of BMO's general allowance. Innovative instruments, such as the BMO Tier 1 Notes -- Series A, must satisfy the detailed requirements of the OSFI Guidelines to be included in BMO's regulatory capital. Accordingly, BMO Tier 1 Notes -- Series A were issued by a special purpose vehicle (the Trust), whose primary purpose is to raise innovative Tier 1 capital. Utilizing the Trust generated cost-effective capital for BMO. OSFI approved the inclusion of the BMO Tier 1 Notes -- Series A as Tier 1 capital of BMO.
14. The Trust is a "Class 2 reporting issuer" under the Fees Rule and would be required (but for this Order) to pay participation fees under such rule.
15. BMO, as a legal and factual matter, controls the Trust though its ownership of the Voting Trust Units issued by the Trust and its role as administrative agent of the Trust. BMO will pay participation fees applicable to it under section 2.2 of the Fees Rule.
16. The Fees Rule includes an exemption for "subsidiary entities" in subsection 2.9(2) of the Fees Rule. BMO and the Trust meet all of the substantive requirements to rely on the exemption in subsection 2.9(2) of the Fees Rule, but for the definition of "subsidiary entity". The Fees Rule defines "subsidiary entity" by reference to the accounting definition under Canadian GAAP, rather than by reference to a legal definition based on control.
17. On November 1, 2004, the Canadian Institute of Chartered Accountants adopted Guideline 15, Consolidation of Variable Interest Entities. The Trust is a variable interest entity which the Bank is not required to consolidate, and is therefore not a subsidiary of the Bank. Accordingly, the Trust is not, from a technical accounting perspective, considered to be a "subsidiary entity" of BMO for Canadian GAAP purposes and may not be entitled to rely on the exemption in subsection 2.9(2) of the Fees Rule.
THE ORDER of a Director of the Commission under the Fees Rule is that the requirement to pay a participation fee under Section 2.2 of the Fees Rule shall not apply to the Trust, for so long as:
(a) BMO and the Trust continue to satisfy all of the conditions contained in the Continuous Disclosure Exemption Decision; and
(b) the capitalization of the Trust represented by the BMO Tier1 Notes -- Series A and any additional securities of the Trust that may be issued, from time to time, by the Trust is included in the participation fee calculation applicable to BMO and BMO has paid the participation fee calculated on this basis.
DATED this 26th day of March, 2009.