BMO Capital Trust II and Bank of Montreal

Headnote

MI 11-102 and NP 11-203 as applicable -- capital trust established by bank to issue trust subordinated notes 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, 11.

October 1, 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 II (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 trust subordinated notes of the Trust (the "Trust Subordinated Notes"):

(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, Québec, 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 will be a trust established under the laws of the Province of Ontario pursuant to a declaration of trust prior to the filing of a preliminary prospectus by the Trust.

7. The assets of the Trust will consist primarily of senior deposit notes issued by the Bank (each, a "Bank Deposit Note"), which Bank Deposit Notes will be acquired with the proceeds of the offerings of Trust Subordinated Notes. The Bank Deposit Notes will generate income to provide the Trust with funds to pay the interest payable on the Trust Subordinated Notes from time to time. In addition to the Trust Subordinated Notes, the Trust will issue voting trust units (the "Voting Trust Units") at an issue price of $1,000 per unit, which will be the only beneficial units issued by the Trust. The Voting Trust Units will be purchased by the Bank.

8. The Trust will be established solely for the purpose of offering securities to the public in order to provide the Bank with a cost effective means of raising capital for Canadian bank regulatory purposes. The Trust will offer Trust Subordinated Notes to the public from time to time. The initial public offering of Trust Subordinated Notes will be with respect to Trust Subordinated Notes -- Series A. The Trust will not carry on any operating activity other than in connection with the offering of its securities to the public.

9. The Trust proposes to undertake a public offering of Trust Subordinated Notes -- Series A (the "Offering").

10. Subject to approval by the Office of the Superintendent of Financial Institutions (Canada) (the "Superintendent"), the Trust Subordinated Notes will qualify as Tier 1 Capital of the Bank under the Innovative Capital Guidelines issued by the Superintendent.

Trust Subordinated Notes

11. The Trust Subordinated Notes will pay interest semi-annually (each semi-annual interest payment date, an "Interest Payment Date"), at a fixed rate for the first 10 years and, thereafter, at a rate to be reset every five years (each such interest reset date, an "Interest Reset Date"). Interest will be payable in cash, subject to a Deferral Event (as described below).

12. On the maturity date of the Trust Subordinated Notes, the Trust will be required to pay the principal amount of the Trust Subordinated Notes, together with any accrued and unpaid interest, in cash, subject to the deferral provisions described in the following paragraph.

13. During any period (a "Deferral Period") when (i) BMO fails to declare cash dividends on all of its outstanding preferred shares or, failing any preferred shares being outstanding, on all of its outstanding common shares, in accordance with its ordinary dividend practice in effect from time to time, in each case in the last 90 days preceding the commencement of the interest period ending on the day preceding the relevant Interest Payment Date (such a Deferral Period is referred to herein as an "Automatic Deferral Period"), or (ii) the Bank so elects, at its sole option, prior to the commencement of the interest period ending on the day preceding the relevant Interest Payment Date (such a Deferral Period is referred to herein as an "Elected Deferral Period"), holders of the Trust Subordinated Notes will be required to reinvest interest on the Trust Subordinated Notes in a series of non-cumulative perpetual Class B Preferred Shares of the Bank (the "Deferral Period Preferred Shares"). A new series of Deferral Period Preferred Shares will be issued in respect of each Deferral Period. The subscription price of each Deferral Period Preferred Share will be an amount equal to the face amount of the Deferral Period Preferred Share, and the number of Deferral Period Preferred Shares subscribed for on each Deferral Date will be calculated by dividing the amount of the interest payment on the Trust Subordinated Notes on the applicable Interest Payment Date (the "Deferral Date") by the face amount of each Deferral Period Preferred Share. A Deferral Period may not extend beyond the maturity of the Trust Subordinated Notes. There will be no other limit on the number of Deferral Periods or the duration of a Deferral Period.

14. During any Elected Deferral Period: (i) the Bank may not declare or pay dividends (except by way of stock dividend) on, or redeem or repurchase, any of the Bank's preferred shares or common shares; and (ii) no subsidiary of the Bank may make any payment to holders of the Bank's preferred shares or common shares in respect of dividends not declared or paid by the Bank, and no subsidiary of the Bank may purchase any preferred shares or common shares of BMO, provided that any subsidiary of the Bank whose primary business is dealing in securities may purchase shares of the Bank in certain limited circumstances as permitted by relevant governing legislation or the regulations thereunder.

15. If the Trust fails to pay interest on the Trust Subordinated Notes in full, the Bank will not pay dividends on its preferred and common shares until the 12th month following the Trust's failure to pay interest in full on the Trust Subordinated Notes, unless the Trust first pays such interest or any unpaid portion thereof (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 interest on the Trust Subordinated Notes in full when due.

16. The Trust Subordinated Notes will be automatically exchanged, without the consent of the holder, for a new series of newly issued non-cumulative Class B preferred shares of the Bank (the "Automatic Exchange Preferred Shares") upon the occurrence of certain stated events relating to the solvency of the Bank or actions taken by the Superintendent in respect of the Bank (an "Automatic Exchange").

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 Trust Subordinated Notes, and on any date thereafter, redeem the Trust Subordinated Notes. The price payable in respect of any such redemption will include an early redemption compensation component (such price being the "Premium Redemption Price") in the event of a redemption on any date other than an Interest Reset Date (the "Premium Redemption Date"). The price payable in all other cases will be the principal amount of the Trust Subordinated Notes together with any accrued and unpaid interest thereon (the "Redemption Price").

18. Upon the occurrence of certain regulatory or tax events affecting the Bank or the Trust (a "Special Event") in each case on a date described in the Prospectus within 5 years following the date of issuance of the Trust Subordinated Notes, the Trust may, subject to the approval of the Superintendent, redeem at any time all but not less than all of the Trust Subordinated Notes at the Early Redemption Price.

19. The Trust may, after the date that is five years after the date of issuance of the Trust Subordinated Notes, purchase in whole or in part, subject to the approval of the Superintendent, in the open market or by tender or private contract at any price, the Trust Subordinated Notes. Trust Subordinated Notes purchased by the Trust shall be cancelled and not re-issued.

20. The Bank will covenant that it will maintain direct ownership of 100% of the outstanding Voting Trust Units.

21. As long as any Trust Subordinated Notes are outstanding, the Trust may only be terminated in certain limited circumstances with the approval of the Bank as the holder of the Voting Trust Units and with the approval of the Superintendent. The holders of Trust Subordinated Notes will not be entitled to initiate proceedings for the termination of the Trust and will not have any recourse to the Bank Deposit Note in connection with any payments in respect of the Trust Subordinated Notes.

22. The Voting Trust Units will entitle the Bank to vote with respect to certain matters regarding the Trust.

23. Pursuant to an administrative agreement to be entered into between the trustee of the Trust (the "Trustee") and the Bank, the Trustee will delegate to the Bank certain of its obligations in relation to the administration of the Trust. The Bank, as administrative agent, will provide 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.

24. It is expected that the Trust Subordinated Notes -- Series A 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 Trust Subordinated Notes (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"; and

(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 24(iv) above.

25. 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 at the time a prospectus is filed in connection with any offering of Trust Subordinated Notes (including the Offering);

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

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

(iv) 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 Subordinated Notes;

(v) 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;

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

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

(viii) 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

(ix) 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 Trust Subordinated Notes -- Series A and January 31, 2009.