Securities Law & Instruments

Headnote

Relief granted from the Dealer Registration Requirement to permit trades in units of prospectus-qualified funds managed by affiliate entities to clients under a discretionary managed account agreement.

Subsection 74(1) of the Securities Act (Ontario) (the Act) -- relief from the requirement to register as a dealer in the category of mutual fund dealer -- granted to a firm registered as an exempt market dealer, portfolio manager and investment manager -- exemption is limited to the sale of prospectus-qualified mutual funds managed by specified affiliates to clients' managed accounts where registration in category of exempt market dealer under subsection 26(2) of the Act insufficient to satisfy dealer registration requirement under subsection 25() of the Act.

Applicable Legislative Provisions

Securities Act (Ontario), ss. 25(1), 26(2), 74(1).

IN THE MATTER OF
THE SECURITIES ACT, ONTARIO
(the Act)

AND

IN THE MATTER OF
BMO HARRIS INVESTMENT MANAGEMENT INC.
(the Filer)

RULING

Background

The Ontario Securities Commission (the Commission) has received an application from the Filer for a ruling under subsection 74(1) of the Act that the Filer be exempted from the requirements in sections 25(1) and 26(2) of the Act that would otherwise require the Filer to be registered as a dealer in the category of mutual fund dealer in order to trade in securities of investment funds that are

(a) qualified for sale by a prospectus, and

(b) managed and/or advised by Affiliates of the Filer (as defined below),

on behalf of fully managed accounts that it manages where its clients are not accredited investors (the Requested Relief).

Interpretation

Terms defined in National Instrument 14-101 Definitions have the same meanings if used in this decision unless they are defined in this decision.

Representations

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

1. The Filer is incorporated under the laws of Canada and is an indirect, wholly owned subsidiary of Bank of Montreal with its head office in Toronto, Ontario.

2. The Filer is not in default of the securities legislation in Ontario.

3. In its capacity as a registered portfolio manager, the Filer provides discretionary portfolio management services in all provinces and territories of Canada. In addition, the Filer is registered as an exempt market dealer in all provinces and territories of Canada, as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as a derivatives portfolio manager and financial planner in Québec, as a commodity trading manager and commodity trading counsel in Ontario, and as an investment adviser in the United States.

4. The Filer provides its services to individuals and related non-personal entities for which a managed account is appropriate (Clients) pursuant to investment management agreements (Managed Account Agreements) which authorize the Filer to, in accordance with each Client's investment objectives, make investment decisions for each Client's account (Managed Account).

5. Although most Clients are high net worth individuals who are accredited investors, from time to time, the Filer may accept certain Clients for Managed Accounts who are not accredited investors due to their relationship with Clients who are accredited investors.

6. Each Managed Account Agreement provides the Filer with full discretionary authority to trade securities for such Managed Account without obtaining the specific consent of the relevant Client. Each Managed Account Agreement is completed by the Client working with the Filer's registered representative (Investment Counsellor). The Managed Account Agreement sets out how the Managed Account operates and informs the Client of the various terms and conditions applicable to the Managed Account and discloses all fees charged to the Managed Account for the discretionary portfolio management services.

7. At the initial meeting between a new Client and an Investment Counsellor, an Investment Policy Statement (IPS) is established for the Client. The IPS provides the general investment goals and objectives of a Client and describes the strategies that the Filer shall employ to meet these objectives and assist the Filer in ensuring that the Managed Account is operated in a manner that is consistent with the Filer's suitability obligations to the Client. By signing the IPS, the Client agrees to the specific information on matters such as asset allocation, risk tolerance, income requirements and liquidity requirements.

8. Clients are provided with a quarterly portfolio statement showing all transactions carried out in their account during the quarter, all assets held and provides certain performance reporting. The Investment Counsellor is available to review and discuss with a Client any quarterly portfolio statement as well as any subsequent portfolio statement or reporting specifically requested, as applicable, that is prepared for that Client. The Filer's Investment Counsellors meet at least annually with their Clients to review the performance of their Managed Account and their investment goals. The Investment Counsellors may meet more frequently with Clients or provide monthly or other supplementary portfolio statements at a Client's request.

9. Portfolio management fees paid by each Client in connection with the Filer's provision of discretionary portfolio management services are based upon the assets under management within the Managed Account.

10. The Filer is also the manager and portfolio manager of certain mutual funds (the BMO Harris Private Portfolios) and the Filer may cause its Clients' Managed Accounts to invest in units of the BMO Harris Private Portfolios,

11. Filer believes it is in the best interests of its Clients to expand and diversify the investment opportunities available to them by enabling the Managed Accounts to achieve their investment objectives through the purchase of securities of investment funds that are managed and/or advised by one or more of BMO Investments Inc., BMO Asset Management Inc., BMO Asset Management Corp., Pyrford International Limited, Monegy, Inc., Taplin Canida Habacht, LLC, Lloyd George Investment Company PLC, Lloyd George Managmenet (Europe) Ltd. or LGM (Bermuda) Limited (the Filer's Affiliates) (the Funds).

12. Each of the Funds is or will be an investment fund established under the laws of the Province of Ontario or of another jurisdiction, and is or will be qualified for sale under a prospectus.

13. The Funds will be used as tools to provide certain asset allocation and diversification benefits to Clients in a cost effective manner as part of the investment management services offered by the Filer.

14. When the Filer invests the Managed Accounts in securities of the Funds, none of the Clients will pay, directly or indirectly, a management fee or incentive fee that, to a reasonable person, would duplicate a fee payable by the Filer's Clients under the Managed Account Agreements. Where the Filer invests on behalf of a Managed Account in Funds that would otherwise pay a management fee and/or incentive fee, the necessary steps will be taken to ensure that there will be no duplication of fees between a Managed Account and the Funds, including by investing the Managed Account in an institutional series of such Funds. Terms of the fee arrangements with a Client are fully disclosed in the Managed Account Agreement.

15. None of the Clients will pay, directly or indirectly, a sales commission or redemption fee in respect of trades in securities of the Funds that, to a reasonable person, would duplicate a fee payable by a Client under the Managed Account Agreements.

16. The Filer discloses, in writing, to each Client that the Filer may purchase securities of related or connected issuers for the Managed Accounts and the Filer complies with all applicable conflict of interest provisions in such regard.

17. The Filer is able to rely upon the dealer registration exemption in section 8.6 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in order to trade in securities of the BMO Harris Private Portfolios in the circumstances described above on behalf of Managed Accounts of all of its clients.

18. The Filer is able to rely on its registration as an exempt market dealer in order to trade in securities of the Funds in the circumstances described above on behalf of Managed Accounts of Clients who are accredited investors or invest a minimum of $150,000 in a Fund.

19. However, unless the Requested Relief is granted, the Filer will be prohibited from trading in securities of the Funds in the circumstances described above on behalf of Managed Accounts of Clients in Ontario that are not accredited investors and do not invest a minimum of $150,000 in a Fund because:

(a) paragraph (q) of the definition of "accredited investor" in section 1.1 of National Instrument 45-106 Prospectus and Registration Exemptions, which otherwise extends to trades on behalf of fully managed accounts, excludes purchases of securities of investment funds in Ontario; and

(b) the dealer registration exemption in section 8.6 of NI 31-103 is available only in respect of a trade in a security of an investment fund where the adviser to a managed account is also the adviser and investment fund manager of the investment fund.

20. Without the Requested Relief, the Filer will be required to register as a mutual fund dealer solely for the purpose of trading in the Funds on behalf of Clients that are not accredited investors in Ontario. Registration as a mutual fund dealer would also require the Filer to join the Mutual Fund Dealer's Association ("MFDA"), which is not desirable or feasible since the Filer's business is the management of accounts on a discretionary basis, which is prohibited by the MFDA under Rule 2.3.1 (a).

21. The Filer is not seeking broader relief from the requirement to register as a dealer in respect of its trades in Funds to Managed Accounts because it wishes to retain its exempt market dealer registration for other business purposes.

Ruling

The Commission is satisfied that granting the Requested Relief would not be prejudicial to the public interest.

The decision of the Commission is that the Requested Relief is granted.

Dated: January 31, 2014

"Deborah Leckman"
Commissioner
Ontario Securities Commission
 
"Judith Robertson"
Commissionner
Ontario Securities Commission