BMO Nesbitt Burns Inc. - MRRS Decision

Headnote

The relief provides an exemption, pursuant to section 233 of Regulation 1015 made under the Securities Act (Ontario) (the Regulation) from the prohibition in section 227(2)(b)(ii) of the Regulation. The prohibition prevents a registrant, when acting as a portfolio manager with discretionary authority, from providing advice with respect to a client's account to purchase and/or sell the securities of a related issuer or a connected issuer of the registrant, unless the registrant (i) secures the specific and informed written consent of the client once in each twelve month period and (ii) provides the client with its statement of policies.

Statutes Cited

Regulation 1015 made under the Securities Act (Ontario), ss. 227(2)(b)(ii), 233.

January 3, 2008

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO, NEW BRUNSWICK, NOVA SCOTIA

and NEWFOUNDLAND AND LABRADOR

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

BMO NESBITT BURNS INC.

(the Filer)

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) that the requirements of the Legislation that a registrant shall not act as an adviser of securities of the registrant or of a related issuer of the registrant or, in the course of a distribution, in respect of securities of a connected issuer of the registrant (the Related / Connected Issuer Prohibition) unless a statement of policy is provided to the client and the specific and informed written consent of the client to invest in related or connected issuers of the registrant has been obtained once in each twelve month period (the Annual Consent Requirement) does not apply in the case of the Filer acting as a portfolio manager where the Filer purchases or sells, under its discretionary authority, securities of mutual funds or of Bank of Montreal (the Bank) and its affiliates, that are related or connected issuers to the Filer, in connection with its managed account programs, subject to certain conditions.

Under the Mutual Reliance Review System for Exemptive Relief Applications (MRRS):

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) this MRRS decision document (Decision) represents the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this Decision unless they are otherwise defined in this Decision.

Representations

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

(1) The Filer is a corporation incorporated under the laws of Canada and has its head office in the City of Toronto. The Filer is registered as an investment dealer in each province of Canada.

(2) The Filer carries on certain investment management activities on a discretionary basis. The Filer is exempt from registration as an adviser under the Legislation, pursuant to section 3.8 of National Instrument 45-106, as it is an investment dealer.

(3) The Filer offers investment management services to its clients (Clients) under various managed accounts programs, including:

(a) accounts that are fully managed by a portfolio manager of the Filer (the Internal Managed Account Program); and

(b) accounts that are managed by one or more sub-advisors (Sub-Advisors) that have entered into sub-advisory agreements with the Filer, whereby the Filer has given the Sub-Advisors discretionary authority to manage all or a portion of a client's account within the parameters of a specific investment mandate (the External Managed Account Program and with the Internal Managed Account Program, the Managed Account Programs). Each investment mandate is designed to achieve defined investment objectives while only incurring certain levels of risk.

(4) Clients in each type of Managed Account Program enter into an agreement with the Filer (the Managed Account Agreement) that authorizes the Filer to exercise discretion in the Client's account to manage the investments by investing in a variety of securities, which may include mutual or pooled funds. Under the Managed Account Agreement, Clients have the ability to set constraints regarding the securities that may or may not be purchased by the Filer for the Client's account.

(5) The Managed Account Agreement for the External Managed Account Program clients also obligates the Filer to:

(a) identify and retain Sub-Advisors for the mandate(s) of the Client under the External Managed Account Program;

(b) change those Sub-Advisors from time to time in the discretion of the Filer or, in certain instances, upon instructions from the Client; and

(c) monitor and supervise the Sub-Advisors including making changes to the investments where required.

(6) In the External Managed Account Program, the Sub-Advisors are generally parties who are not related to the Filer and its affiliates. However, from time to time, one or more mandates may be granted to a Sub-Advisor who is affiliated to the Filer (an Affiliated Sub-Adviser). In the Internal Managed Account Program, the accounts are managed directly by portfolio managers of the Filer.

(7) The Sub-Advisers in the External Managed Account Program do not have any direct contact with the Clients. Each Sub-Adviser is given a mandate by the Filer and requested to provide a model portfolio for such mandate and to adjust the portfolio on a continuous basis. The Filer does not deviate from the model portfolio unless the portfolio is in breach of the laws or the agreement with the Sub-Adviser or unless the deviation results from the Client's specific instructions; the Filer simply executes the trades in securities constituting the model portfolio for each Client in the particular mandate.

(8) The Filer and its affiliates are the managers of the groups of mutual funds known as the BMO Nesbitt Burns Group of Funds, the GGOF Group of Funds and the BMO Mutual Funds and may be the managers of other mutual funds in the future (collectively, the Funds). The Funds are or will be reporting issuers as they are or will be qualified for distribution under a prospectus in some or all of the provinces and territories of Canada.

(9) The Funds may be purchased on behalf of clients of the Filer, including Clients in certain of the Managed Account Programs. Clients in the Managed Account Programs consent to investments in mutual funds (which may include the Funds) through their investment policy statement in which the investment mandates are set out.

(10) The Related/Connected Issuer Prohibition prohibits a registrant, such as the Filer, from acting as an adviser of securities of the registrant, or of a related issuer of the registrant, or in the course of a distribution in respect of securities of a connected issuer of the registrant.

(11) The Annual Consent Requirement and the Statement of Policies Requirement, to the extent applicable, exempts a registrant from the Related/Connected Issuer Prohibition.

(12) The Funds are generally connected issuers of the Filer within the meaning of the Legislation and may be a related issuer of the Filer. The Filer is not required to list its connected issuers in the statement of policies but, as a result of the fact that the Funds may be related issuers, does list the Funds in its statement of policies.

(13) The Filer and the Affiliated Sub-Advisers are wholly owned subsidiaries of the Bank and so the Bank and its affiliates are related issuers to the Affiliated Sub-Advisers and the Filer.

(14) As a result of these relationships, the Sub-Advisers are prohibited from including securities issued by the Bank, its affiliates or the Funds in their model portfolios under the External Managed Account Program and the portfolio managers of the Filer are prohibited from including securities issued by the Bank, its affiliates or the Funds in their Clients' accounts under the Internal Managed Account Program, unless the Filer complies with the Annual Consent Requirement and the Statement of Policies Requirement. Clients thereby may be prevented from investing in securities issued by the Bank, its affiliates or the Funds, even where the inclusion of these securities would be in the best interests of the Client.

(15) All Clients in the Managed Accounts Programs receive a statement of policies that lists the related issuers of the Filer when the Client opens an account with the Filer. In the event of a significant change in its statement of policies, the Filer will provide to each of its Clients a copy of the revised version of, or amendment to, its statement of policies.

(16) The Filer will secure the specific and informed written consent of each Client in its Managed Accounts Programs to invest the Client in securities issued by the Bank, its affiliates and/or the Funds, prior to permitting the Sub-Advisers and the portfolio managers of the Filer to make such investments.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Makers with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that the Filer is exempt from the Annual Consent Requirement, provided that:

(a) the Filer has secured the specific and informed written consent of the Client in advance of the exercise of discretionary authority in respect of securities of the Funds, the Bank and its affiliates;

(b) the Filer has previously provided the Client with a statement of policies or equivalent document of the Filer, which identified the relationship between the Filer, the Funds, the Bank and its affiliates;

(c) in the case of the External Managed Account Program, the Filer does not participate in, or influence, the investment recommendations of a Sub-Adviser in making its recommendation; and

(d) in the case of the Internal Managed Account Program, all investment decisions to invest in securities of the Funds, the Bank or its affiliates are uninfluenced by considerations other than the best interest of the Client.