Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- capital trust established by bank to issue capital trust securities as cost-effective means of raising capital for Canadian bank regulatory purposes exempted from eligibility requirements to file a short form prospectus, certain form requirements and permitted to abridge 10-day notice requirement -- relief granted as disclosure regarding the bank is more relevant and bank has been reporting issuer for many years -- relief subject to conditions -- National Instrument 44-101 Short Form Prospectus Distributions -- relief also granted for temporary confidentiality of decision

Applicable Legislative Provisions

National Instrument 44-101 Short Form Prospectus Distributions, ss. 2.3, 2.8.

Form 44-101F1 Short Form Prospectus, items 6 and 11.

September 29, 2008

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 CAPITAL TRUST (THE "TRUST") AND

BANK OF MONTREAL (THE "BANK" AND,

COLLECTIVELY WITH THE TRUST, THE "FILERS")

 

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the "Application") from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for a decision (the "Requested Relief") that:

A. The Trust be exempted from the following requirements of the Legislation in connection with offerings of non-convertible BMO BOaTS (as defined herein):

(i) the qualification requirements (the "Qualification Requirements") of Part 2 of National Instrument 44-101 Short Form Prospectus Distributions ("NI 44-101"), such that the Trust is qualified to file a prospectus in the form of a short form prospectus; and

(ii) the disclosure requirements (the "Disclosure Requirements") in Item 6 (Earnings Coverage Ratios) and Item 11 (Documents Incorporated by Reference), with the exception of Item 11.1 (1) 5, of Form 44-101F1 of NI 44-101 ("Form 44-101F1") in respect of the Trust; and

B. The Application and this Decision be held in confidence by the principal regulator, subject to certain conditions.

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 Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Prince Edward Island, Saskatchewan, Quebec, and the Yukon, Northwest Territories and Nunavut.

Interpretation

Defined terms contained in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

The Bank

1. The Bank is a Schedule 1 chartered bank subject to the provisions of the Bank Act (Canada). The principal executive offices are located at Bank of Montreal, 100 King Street West, 1 First Canadian Place, Toronto, Ontario, Canada M5X 1A1. The Bank's head office is located at 129 Rue St. Jacques, Montreal, Québec, Canada H2Y 1L6.

2. The authorized share capital of the Bank consists of an unlimited number of: (i) common shares ("Bank Common Shares"); and (ii) Class A and Class B preferred shares each issuable in series ("Bank Preferred Shares").

3. The Bank Common Shares are listed on the Toronto Stock Exchange and the New York Stock Exchange.

4. The Bank is a reporting issuer, or the equivalent, in each of the jurisdictions of Canada and is not in default of securities legislation in any jurisdiction.

5. The Bank is qualified to use the short form prospectus system provided under NI 44-101.

The Trust

6. The Trust is a trust established under the laws of the Province of Ontario by BNY Trust Company of Canada (the "Trustee"), as trustee, pursuant to a fifth amended and restated declaration of trust dated September 30, 2005, as amended (the "Declaration of Trust").

7. The beneficial interests of the Trust are divided into two classes of units, issuable in series, designated as Trust Capital Securities (the "BMO BOaTS") and Special Trust Securities ("Special Trust Securities" and, collectively with the BMO BOaTS, the "Trust Securities").

8. The Trust was established solely for the purpose of effecting offerings of Trust Securities in order to provide the Bank with a cost-effective means of raising capital for Canadian bank regulatory purposes by means of: (i) creating and selling the Trust Securities; and (ii) acquiring and holding assets which may consist of: (a) undivided co-ownership interests in one or more pools of Canada Mortgage and Housing Corporation ("CMHC") or Genworth Financial Mortgage Insurance Company of Canada ("Genworth") insured first mortgages on residential property situated in Canada; (b) certain mortgage-backed securities; (c) CMHC-insured or Genworth-insured first mortgages on residential property situated in Canada; and (d) to the extent that the assets of the Trust are not invested in the assets referred to above in (a), (b) or (c), money and certain debt obligations that are qualified investments under the Income Tax Act (Canada) for trusts governed by certain deferred income plans (collectively, "Trust Assets"). The Trust does not, and will not, carry on any operating activity other than in connection with such offerings.

9. The Trust is a reporting issuer, or the equivalent, in each of the jurisdictions of Canada and is not in default of securities legislation in any jurisdiction.

10. On May 16, 2001, the Canadian securities regulators granted an MRRS Decision Document to the Bank and the Trust (the "Continuous Disclosure Relief") exempting the Trust from most of the continuous disclosure requirements under the securities legislation of Canada upon certain conditions, including that the Bank provide its financial statements to holders of Trust Securities.

11. The Trust has previously issued five series of BMO BOaTS (being Series A, B, C, D and E).

12. The Trust proposes to undertake a public offering of BMO BOaTS -- Series F (the "Offering").

BMO BOaTS -- Series F

13. The BMO BOaTS -- Series F will pay a fixed non-cumulative indicated yield (the "Indicated Yield") on a date to be described in the prospectus for the Offering (the "Prospectus") in each year. Each semi-annual payment date for the Indicated Yield in respect of the BMO BOaTS -- Series F (a "Distribution Date") will be either a Regular Distribution Date or a Distribution Diversion Date. A Distribution Date will be a "Distribution Diversion Date" (with the result that the Indicated Yield will not be paid in respect of the BMO BOaTS -- Series F but, instead, the Trust will pay the net distributable funds of the Trust to the Bank as holder of the Special Trust Securities) if: (i) the Bank has failed in the period to be described in the Prospectus to declare regular dividends on the Bank Preferred Shares of any series; or (ii) if no Bank Preferred Shares are then outstanding, the Bank has failed in the period described in the Prospectus to declare regular dividends on the Bank Common Shares. In all other cases, a Distribution Date will be a Regular Distribution Date, in which case holders of BMO BOaTS -- Series F will be entitled to receive the Indicated Yield and the Bank, as holder of the Special Trust Securities, will be entitled to receive the net distributable income, if any, of the Trust remaining after payment of the Indicated Yield. The Bank Preferred Shares and the Bank Common Shares are hereinafter collectively referred to as the "Bank Dividend Restricted Shares".

14. Under a share exchange agreement to be entered into among the Bank, the Trust and a party acting as exchange trustee (the "Series F Share Exchange Agreement"), the Bank will agree, for the benefit of the holders of BMO BOaTS -- Series F, that in the event that the Trust fails on any Regular Distribution Date to pay the Indicated Yield on the BMO BOaTS -- Series F in full, the Bank will not pay dividends on the Bank Dividend Restricted Shares until a specified period of time has elapsed, unless the Trust first pays such Indicated Yield (or the unpaid portion thereof) to holders of BMO BOaTS -- Series F (the "Dividend Stopper Undertaking"). Accordingly, it is in the interest of the Bank to ensure, to the extent within its control, that the Trust complies with the obligation to pay the Indicated Yield on each Regular Distribution Date.

15. The BMO BOaTS -- Series F will be automatically exchanged, without the consent of the holder, for a new series of newly issued Non-cumulative Preferred Shares of the Bank (the "New Series of Bank Preferred Shares") upon the occurrence of certain stated events relating to the solvency of the Bank or actions taken by the Office of the Superintendent of Financial Institutions (Canada) (the "Superintendent") in respect of the Bank.

16. The New Series of Bank Preferred Shares will not be convertible into Bank Common Shares.

17. The Trust may, subject to regulatory approval, on a date to be described in the Prospectus not prior to 5 years following the date of issuance of the BMO BOaTS -- Series F, and on each Distribution Date thereafter, redeem the BMO BOaTS -- Series F. The price payable in respect of any such redemption will include an early redemption compensation component (such price being the "Early Redemption Price") in the event of a redemption prior to a date to be described in the Prospectus (the "Early Redemption Date"). The price payable in all other cases will be $1,000 per BMO BOaTS -- Series F together with any unpaid Indicated Yield thereon (the "Redemption Price").

18. The Bank will covenant under the Series F Share Exchange Agreement, that the Bank will maintain direct ownership of 100% of the outstanding Special Trust Securities. Subject to regulatory approval, the BMO BOaTS -- Series F will constitute Tier 1 capital of the Bank.

19. As long as any BMO BOaTS -- Series F are outstanding, the Trust may only be terminated with the approval of the Bank as the holder of the Special Trust Securities and with the approval of the Superintendent: (i) upon the occurrence of a Special Event prior to a date to be described in the Prospectus; or (ii) for any reason on a date to be described in the Prospectus or any Distribution Date thereafter. Holders of each series of outstanding Trust Securities will rank pari passu in the distribution of the property of the Trust in the event of a termination of the Trust after the discharge of any creditor claims, if any. As long as any BMO BOaTS -- Series F are outstanding, the Bank will not approve the termination of the Trust unless the Trust has sufficient funds to pay the Early Redemption Price in the case of a termination prior to the Early Redemption Date, or the Redemption Price in the case of a termination at any other time.

20. The BMO BOaTS -- Series F will be non-voting except in limited circumstances and Special Trust Securities will entitle the holder thereof to vote.

21. Except to the extent that Distributions are payable to holders of BMO BOaTS, and other than in the event of a termination of the Trust (as set forth in the Declaration of Trust), holders of BMO BOaTS will have no claim or entitlement to the income of the Trust or the Trust Assets.

22. Pursuant to an administrative agreement entered into between the Trustee and the Bank, the Trustee has delegated to the Bank certain of its obligations in relation to the administration of the Trust. The Bank, as administrative agent, provides advice and counsel with respect to the administration of the day-to-day operations of the Trust and other matters as may be requested by the Trustee from time to time.

23. The Trust may, from time to time, issue further series of BMO BOaTS, the proceeds of which would be used to acquire additional Trust Assets.

24. It is expected that the BMO BOaTS -- Series F will receive an approved rating from an approved rating organization, as defined in NI 44-101.

25. At the time of the filing of any prospectus in connection with offerings of BMO BOaTS (including the Offering):

(i) the prospectus will be prepared in accordance with the short form prospectus requirements of NI 44-101 other than the Disclosure Requirements, except as varied or permitted by the securities legislation in Canada;

(ii) the Trust will comply with all of the filing requirements and procedures set out in NI 44-101 other than the Qualification Requirements, except as varied or permitted by the securities legislation in Canada;

(iii) the prospectus will incorporate by reference the documents that would be required to be incorporated by reference under Item 11 of Form 44-101F1 if the Bank were the issuer of such securities;

(iv) the Bank will satisfy the criteria in section 2.2 of NI 44-101 if the word "issuer" were replaced with "Bank";

(v) the prospectus disclosure required by Item 11 (other than Item 11.1(1)5) of Form 44-101F1 in respect of the Trust will be addressed by incorporating by reference the Bank's public disclosure documents referred to in paragraph 25(iv) above; and

(vi) the Continuous Disclosure Relief, as amended, supplemented or replaced from time to time, is in effect.

26. The Trust will file a notice declaring its intention to be qualified to file a short form prospectus concurrently with the filing of the preliminary prospectus for the Offering.

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 Requested Relief is granted, provided that:

(i) the Trust and the Bank, as applicable, will comply with paragraph 25 above at the time a prospectus is filed in connection with any offering of BMO BOaTs (including the Offering);

(ii) the Bank remains the direct or indirect beneficial owner of all of the outstanding Special Trust Securities;

(iii) the Bank, as holder of the Special Trust Securities, will not propose changes to the terms and conditions of any outstanding BMO BOaTS offered and sold pursuant to a short form prospectus of the Trust filed under this decision that would result in such BMO BOaTS being exchangeable for securities other than Bank Preferred Shares;

(iv) the Trust is not required to, and does not, file its own AIF and annual financial statements in any jurisdiction;

(v) the Trust has minimal assets, operations, revenues or cash flows other than those related to the offering of its securities to the public and the issuance, administration and repayment of the Trust Securities;

(vi) the Trust issues a news release and files a material change report in accordance with Part 7 of NI 51-102, as amended, supplemented or replaced from time to time, in respect of any material change in the affairs of the Trust that is not also a material change in the affairs of the Bank;

(vii) the Trust is an electronic filer under NI 13-101;

(viii) the Trust is a reporting issuer in at least one jurisdiction of Canada;

(ix) the Trust has filed with the securities regulatory authority in each jurisdiction in which it is a reporting issuer all periodic and timely disclosure documents that it is required to have filed in that jurisdiction: (i) under all applicable securities legislation; (ii) pursuant to an order issued by the securities regulatory authority; or (iii) pursuant to an undertaking to the securities regulatory authority; and

(x) the securities to be distributed: (i) have received an approved rating on a provisional basis; (ii) are not the subject of an announcement by an approved rating organization, which the Trust is or ought reasonably to be aware, that the approved rating given by the organization may be downgraded to a rating category that would not be an approved rating; and (iii) have not received a provisional or final rating lower than an approved rating from any approved rating organization.

The further decision of the principal regulator under the Legislation is that the Application and this decision shall be held in confidence by the principal regulator until the earlier of the date that a preliminary short form prospectus is filed in respect of the offering of BMO BOaTS -- Series F and January 31, 2009.

"Erez Blumberger"
Manager, Corporate Finance
Ontario Securities Commission