Securities Law & Instruments


Headnote

Application for an order pursuant to section 74 of the Securities Act (Ontario) that a registered U.S. dealer and investment adviser, affiliated with an Ontario registered investment dealer and adviser, be exempted, subject to certain conditions, from requirements of the Legislation in respect of dealing activity and advice provided by its representatives in respect of the U.S. tax-advantaged retirement savings plans of clients formerly resident in the U.S.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., s. 25.

June 2, 2017

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 NESBITT BURNS SECURITIES LTD.

AND

IN THE MATTER OF
BMO NESBITT BURNS INC.

DECISION

Background

The principal regulator in the Jurisdiction has received an application from BMO Nesbitt Burns Securities Ltd. (NBSL ) and BMO Nesbitt Burns Inc. (NBI and together with NBSL, the Filers) for a decision under the securities legislation the Jurisdiction of the Principal Regulator (the Legislation) for the following:

Dealer registration, underwriter registration and prospectus relief for trades to NBSL Clients

(a)           An exemption from the dealer registration requirement (the Dealer Registration Relief) for NBSL and its agents who are also registered under the Legislation as dealing representatives of NBI (the Dealer Dual Representatives), so as to permit NBSL and the Dealer Dual Representatives acting on behalf of NBSL to deal with an individual who satisfies one of the following criteria (the NBSL Client):

(i)            is ordinarily resident in the United States who is temporarily in Canada and with whom NBSL had a relationship with before the individual became temporarily resident in Canada; or

(ii)           is ordinarily resident in Canada but previously resident in the United States, if such dealings are in respect of the NBSL Client’s tax-advantaged retirement savings (a U.S. Plan) where

(A)           The U.S. Plan is located in the United States of America (U.S.)

(B)           The NBSL Client is a holder of or contributor to the U.S. Plan, and

(C)          The NBSL Client was previously resident in the U.S.;

(b)           An exemption from the prospectus requirement and underwriter registration requirement applicable to a distribution of a foreign security made by NBSL and the Dealer Dual Representatives when acting on behalf of an NBSL Client, where the distribution is made in compliance with all applicable U.S. federal securities laws and state securities legislation in the U.S. (the Distribution Relief);

Adviser registration relief for advice provided to NBSL Clients

(c)           An exemption from the adviser registration requirement (the Adviser Registration Relief) for NBSL and its agents who are also registered under the Legislation as dealing representatives of NBI in the category of portfolio manager (the PM Dual Representatives) in respect of advice provided by the PM Dual Representatives, when acting on behalf NBSL, to NBSL Clients;

Repeal of prior decision

(d)           A decision that the 2012 Decision (defined below) be repealed and replaced in its entirety with this decision;

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)           NBSL has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Quebec, Saskatchewan, Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions, and together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102 and National Instrument 35-101 Conditional Exemption from Registration for United States Broker-Dealers and Agents (NI 35-101) have the same meaning if used in this decision, unless otherwise defined.

Dual Representatives means, in respect of services provided under the Dealer Registration Relief and the Distribution Relief, Dealer Dual Representatives and, in respect of services provided under the Adviser Registration Relief, PM Dual Representatives.

Representations

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

Background

1.             NBI is a corporation incorporated under the federal laws of Canada. Its head office is located in Toronto, Ontario.

2.             NBI carries on business in all of the Jurisdictions with offices located in all of the provinces of Canada.

3.             NBI is registered as an investment dealer, futures commission merchant and investment fund manager in each Jurisdiction and is a dealer member of the Investment Industry Association of Canada (IIROC). NBI provides the full range of dealer services that IIROC member firms are authorized to provide to retail and institutional clients across Canada.

4.             NBI does not trade (or provide advice with respect to trading) in securities to, with, or on behalf of clients resident in the U.S. (U.S. Clients) (other than in respect of tax-advantaged retirement savings plans (RSPs) held by U.S. Clients who were formerly resident in Canada and who have moved to the U.S. with RSPs).

5.             NBI is not registered under U.S. federal securities law or any other applicable U.S. securities law to (and does not) carry on the business of a registered broker-dealer or registered investment adviser in the U.S.

6.             NBSL is a direct, wholly-owned subsidiary of NBI. Both NBSL and NBI are wholly-owned indirect subsidiaries of Bank of Montreal.

7.             NBSL is incorporated under the laws of Canada with its head office in Toronto, Ontario.

8.             The Filers operate their businesses out of the same premises in all of the provinces on Canada. Wherever NBSL has an office in Canada, NBSL operates out of the same premises as NBI. NBSL does not currently have an office located in the U.S.

9.             NBSL provides discretionary advisory and financial planning services, as well as broker-dealer services, to individuals, trusts, non-profits and corporations, primarily to clients in the U.S. who were previously resident in Canada.

10.          NBSL is registered as a broker-dealer under the 1934 Act, and is a member of the Financial Industry Regulatory Authority (FINRA). NBSL and the Dual Representatives are subject to the full oversight and compliance requirements of FINRA.

11.          NBSL is registered with the SEC as an investment adviser (RIA) under the U.S. Investment Advisers Act of 1940 (the 1940 Act). The PM Dual Representatives are permitted to provide discretionary investment advisory services on behalf of NBSL. NBSL and such PM Dual Representatives are subject to the full oversight and compliance requirements of the SEC.

12.          NBSL is not registered under the securities laws of any jurisdiction of Canada.

13.          NBI is not in default of securities legislation of any jurisdiction of Canada, U.S. federal securities law or any other applicable U.S. securities law.

14.          Subject to receipt of the Ancillary U.S. Client Relief (defined below) in respect of discretionary investment advisory services provided by Dual Representatives to U.S. Clients from Jurisdictions other than Ontario, NBSL is not in default of securities legislation of any jurisdiction of Canada, U.S. federal securities law or any other applicable U.S. securities law.

15.          The Dealer Dual Representatives are representatives of NBSL who are registered under U.S. federal securities laws in respect of their trading activities and are also registered under the Legislation to trade on behalf of NBI in one or more Jurisdictions.

16.          The PM Dual Representatives are representatives of NBSL who are registered under the Legislation to advise on behalf of NBI in one or more Jurisdictions and are authorized to provide advisory services to U.S. clients of NBSL pursuant to an exemption from registration under the 1940 Act.

17.          Each of the Dual Representatives acts on behalf of both Filers in one of the Filers’ offices located in the Jurisdictions in which the Filers maintain offices. Each Dual Representative is registered as a dealing representative of NBI in one of more of the Jurisdictions.

18.          None of the Dual Representatives is in default of securities legislation of any jurisdiction of Canada, U.S. federal securities law or any other applicable U.S. securities law.

19.          NBSL has, and expects to continue to have, U.S. Clients to which it provides trading services pursuant to its FINRA membership and discretionary investment advisory services pursuant to its RIA registration. NBSL provides these services to U.S. Clients from Ontario pursuant to exemptions from the dealer and adviser registration requirements set out in OSC Rule 32-505 Conditional Exemption from Registration for US BDs and Advisers Servicing US Clients from Ontario (OSC Rule 32-505). NBSL currently provides trading services pursuant to its FINRA membership to U.S. Clients from Jurisdictions other than Ontario pursuant to the Existing Relief. NBSL expects to provide trading services pursuant to its FINRA membership and discretionary investment advisory services pursuant to its RIA registration to U.S. Clients from Jurisdictions other than Ontario pursuant to exemptive relief to be granted to NBSL and the Dual Representatives to permit NBSL to deal with and advise U.S. clients from offices located in those Jurisdictions and shared with NBI (the Ancillary U.S. Client Relief).

20.          NBSL previously obtained exemptive relief in the Jurisdictions pursuant to a decision document dated April 11, 2012 (the 2012 Decision) from the dealer registration requirement, the adviser registration requirement (with respect to purely incidental advice), underwriter registration requirement and the prospectus requirement to permit NBSL and its agents to deal with clients on the same basis as provided by NI 35-101, save and except for that NBSL has no office or principal place of business in any jurisdiction of Canada.

21.          In accordance with the terms of the 2012 Decision, NBSL has completed and filed with the OSC a form of Submission to Jurisdiction.

22.          Other than pursuant to NI 35-101 and the 2012 Decision, NBSL does not conduct any registrable activity with residents of Canada.

Advisory services

23.          In addition to the activities described above, NBSL and the PM Dual Representatives, acting on behalf of NBSL, desire to advise NBSL Clients.

24.          Each PM Dual Representative currently only provides discretionary investment advisory services on behalf of NBSL to U.S. Clients.

25.          Each PM Dual Representative will only provide discretionary advisory services to clients of NBI (when acting on behalf of NBI) and to NBSL Clients (when acting on behalf of NBSL), in each case resident in Jurisdictions where such PM Dual Representative is registered with IIROC as a dealing representative of NBI with the IIROC “portfolio manager” designation.

26.          The advice that NBSL will provide to NBSL Clients will be ancillary to NBSL’s principal business which is advising U.S. Clients.

27.          NBSL expects that the amount of revenue derived from NBSL Clients will represent approximately 8% of its total revenue. If the revenue derived from NBSL Clients exceeds 10% of its total revenue, NBSL will file forthwith a letter to the Principal Regulator advising of the same. The letter will refer to this decision and this requirement, the percentage of the revenue derived from NBSL Clients, and the date on which the revenue exceeded 10% of its total revenue. The letter will also refer to the date on which the exceeded threshold was discovered.

28.          The PM Dual Representatives have the proficiency, education and experience to provide advice to NBSL Clients.

NBSL Compliance

29.          Where NBSL and the Dual Representatives trade to, with or on behalf of, or advise, NBSL Clients, they will comply with all U.S. federal securities law and any other applicable U.S. securities law.

30.          All NBSL Clients will enter into a customer agreement and associated account-opening documentation with NBSL. All communications with NBSL Clients will be through NBSL and the Dual Representatives, and will be clearly identified as communications of NBSL and under NBSL branding.

31.          To avoid client confusion, all NBSL Clients will receive disclosure that explains the relationship between NBSL and NBI.

32.          For the purposes of the Legislation, and as market participants, each Filer is required to: (i) keep such books, records and other documents as are necessary for the proper recording of its business transactions and financial affairs, and the transactions it executes on behalf of others, and (ii) keep such books, records and documents as may otherwise be required by the Legislation.

33.          NBSL confirms that there are currently no regulatory actions of the type contemplated by the Notice of Regulatory Action attached as Appendix “A” hereof in respect of NBSL or any predecessors or specified affiliates of NBSL.

34.          NBI is in compliance with its obligations under applicable securities laws to report regulatory actions relating to NBI and its specified affiliates to securities regulators and/or self-regulatory organizations having jurisdiction over NBI.

FINRA Clearing Broker

35.          NBSL is an introducing broker-dealer subject to FINRA regulatory oversight.

36.          NBSL has engaged National Financial Services LLC (NFS), for trading, custody, clearing and settlement services pursuant to the terms of a clearing agreement dated October 17, 2015, as amended from time to time (the Clearing Agreement).

37.          In accordance with the provisions of the Clearing Agreement, NFS provides trading, custody, clearing and settlement services for NBSL Clients of NBSL (in respect of their U.S. Plans).

38.          NFS is a clearing broker-dealer, a Delaware limited liability company and a member of FINRA and the New York Stock Exchange.

39.          Each of NBSL’s clients, including U.S. Clients and NBSL Clients, enters into a custody agreement directly with NFS pursuant to which NFS acts the custodian of the client’s account.

40.          NFS relies upon the exemption from the dealer registration requirement of the securities laws of each Jurisdiction under Section 8.18 of National Instrument 31-103 (NI 31-103) Registration Requirements, Exemptions and Ongoing Registrant Obligations (the international dealer exemption) in connection with, inter alia, trades in “foreign securities” with a “permitted client” (each as defined in NI 31-103).

41.          NFS cannot rely on the international dealer exemption to trade in securities on behalf of the NBSL Clients because most of such clients are not permitted clients. NFS obtained exemptive relief in the Jurisdictions pursuant to a decision document dated March 8, 2012 (the NFS Relief) from, inter alia, the dealer registration requirement, to permit NFS to trade in securities for “Qualified Accounts” as defined in the NFS Relief.

42.          The NFS Relief permits NFS to trade in securities for Qualified Accounts on conditions similar to those indicated in NI 35-101, with certain variations, including that the NFS Relief does not restrict NFS from trading only in foreign securities. NFS is permitted to trade in any security in the secondary market for Qualified Accounts.

43.          NFS relies on the NFS Relief to provide trading, clearing and settlement services under the Clearing Agreement to the accounts of NBSL’s NBSL Clients, all of which are Qualified Accounts as defined in the NFS Relief.

2012 Decision

44.          NI 35-101 provides exemptions from the dealer/underwriter registration requirement, adviser registration requirement and prospectus requirement for U.S. broker-dealers and their agents trading with or for NBSL Clients, upon satisfying certain conditions.

45.          It is a condition of the exemption for U.S. broker-dealers in paragraph 2.1(a) of NI 35-101, and for their agents in paragraph 3.1(b) of NI 35-101, that the broker-dealer and their agents have no office or other physical presence in any jurisdiction in Canada. It is also a condition that such U.S. broker-dealers only trade in foreign securities with NBSL Clients.

46.          NBSL Clients wish to obtain services from NBSL in respect of both foreign securities and securities other than foreign securities (Canadian securities) as their U.S. Plans or U.S. accounts at NBSL permit investments in both foreign and Canadian securities.

47.          NBSL is unable to rely on the exemptions set out in NI 35-101 as it has an office or other physical presence in Canada as a result of its Toronto, Ontario head office and other Canadian offices and wishes to offer trades in Canadian securities to its NBSL Clients.

48.          NBSL is unable to rely on the 2012 Decision to trade or advise in Canadian securities for NBSL Clients as that decision did not contemplate: (i) trades in Canadian securities with, for or on behalf of NBSL Clients; or (ii) advising in Canadian securities to NBSL Clients.

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:

1.             The Dealer Registration Relief and Adviser Registration Relief are granted, provided that:

(a)           The dealing and/or advising activity is for an individual who satisfies one of the following criteria (the NBSL Client):

(i)            is ordinarily resident in the United States who is temporarily in Canada and with whom NBSL had a relationship with before the individual became temporarily resident in Canada; or

(ii)           is ordinarily resident in Canada but previously resident in the United States, if such dealings are in respect of the NBSL Client’s tax-advantaged retirement savings plan (a U.S. Plan) where

(A)           The U.S. Plan is located in the United States of America (U.S.)

(B)           The NBSL Client is a holder of or contributor to the U.S. Plan, and

(C)          The NBSL Client was previously resident in the U.S.;

(b)           the only physical presence or offices that NBSL has in any jurisdiction of Canada are the premises that it shares with NBI;

(c)           NBSL does not advertise or solicit new clients in the Jurisdictions;

(d)           NBSL remains a FINRA member;

(e)           NBSL remains registered as a RIA under the 1940 Act;

(f)            NBI remains registered under the Legislation as an investment dealer and is a dealer member of IIROC;

(g)           NBSL notifies the Principal Regulator of any regulatory action initiated after the date of this order in respect of NBSL, or any predecessors or specified affiliates of NBSL, by completing and filing with the Principal Regulator Appendix “A” hereto within ten days of the commencement of such action, provided that NBSL may also satisfy this condition by filing with the OSC:

(i)            within ten days of the date of this decision, a notice making reference to and incorporating by reference the disclosure made by NBSL pursuant to federal securities laws in the United States that is identified in the FINRA BrokerCheck system and on the Investment Adviser Public Disclosure website; and

(ii)           promptly, a notification of any Form BD amendment, any Form ADV amendment and/or any other filing with FINRA or the SEC that relates to legal and regulatory actions;

(h)           NBI complies with its obligations under applicable securities laws to report regulatory actions relating to NBI and its specified affiliates to securities regulators and/or self-regulatory organizations having jurisdiction over NBI;

(i)            NBSL discloses to NBSL Clients that NBSL and the Dual Representatives acting on its behalf are not subject to full regulatory requirements otherwise applicable under the Legislation;

(j)            NBSL and the Dual Representatives, in the course of their dealings with NBSL Clients, act fairly, honestly and in good faith;

(k)           NBSL:

(i)            enters into client agreements and associated account-opening documents with all NBSL Clients such that all communications with respect to the accounts of such NBSL Clients will be through NBSL and the Dual Representatives, and will be under NBSL branding; and

(ii)           provides all NBSL Clients with disclosure that explains the relationship between NBSL and NBI;

(l)            NBSL and the each of the Dual Representatives are in compliance with and remain in compliance with any applicable dealer licensing, adviser licensing or registration requirements under applicable securities legislation in the U.S.;

(m)          each PM Dual Representative providing advice on behalf of NBSL is registered under the Legislation as a dealing representative in a category that would permit it to advise NBSL Clients with respect to trading of securities in their U.S. Plans in compliance with the Legislation, if the U.S. Plans were instead tax-advantaged retirement savings plans located in Canada; and

(n)           the execution of each trade identified or recommended by NBSL (and each Dual Representative acting on its behalf) for a NBSL Client will be conducted by a person registered as a dealer under the Legislation in category that would permit them to execute the trade or exempt from the dealer registration requirement of the Legislation for the purposes of the trade;

2.             the Distribution Relief is granted, provided that the relevant distribution of foreign securities to NBSL Clients:

(a)           is made by NBSL or a Dual Representative pursuant to the Dealer Registration Relief; and

(b)           is made in compliance with all applicable

(i)            U.S. federal securities laws, and

(ii)           state securities legislation in the U.S;

3.             The 2012 Decision is repealed and replaced in its entirely by this decision, effective as of the date of this decision;

4.             This decision will terminate on the earlier of:

(i)            five years after the date of this decision; and

(ii)           the coming into force of a change in the Legislation that exempts NBSL from the registration requirement in the Legislation in connection with the trading and/or advising activity it provides to an NBSL Client on terms and conditions other than those set out in this decision.

                DATED this 02 day of June, 2017.

“D. Grant Vingoe”
Vice Chair of the Commission

“Monica Kowal”
Vice Chair of the Commission



APPENDIX A

NOTICE OF REGULATORY ACTION

1.             Has the firm, or any predecessors or specified affiliates of the firm entered into a settlement agreement with any financial services regulator, securities or derivatives exchange, SRO or similar agreement with any financial services regulator, securities or derivatives exchange, SRO or similar organization?

Yes _____ No _____

If yes, provide the following information for each settlement agreement:

Name of entity

Regulator/organization

Date of settlement (yyyy/mm/dd)

Details of settlement

Jurisdiction

2.             Has any financial services regulator, securities or derivatives exchange, SRO or similar organization:

 

Yes

No

a)            Determined that the firm, or any predecessors or specified affiliates of the firm violated any securities regulations or any rules of a securities or derivatives exchange, SRO or similar organization?

___

___

(b)           Determined that the firm, or any predecessors or specified affiliates of the firm made a false statement or omission?

___

___

(c)           Issued a warning or requested an undertaking by the firm, or any predecessors or specified affiliates of the firm?

___

___

(d)           Suspended or terminated any registration, licensing or membership of the firm, or any predecessors or specified affiliates of the firm?

___

___

(e)           Imposed terms or conditions on any registration or membership of the firm, or predecessors or specified affiliates of the firm?

___

___

(f)            Conducted a proceeding or investigation involving the firm, or any predecessors or specified affiliates of the firm?

___

___

(g)           Issued an order (other than an exemption order) or a sanction to the firm, or any predecessors or specified affiliates of the firm for securities or derivatives-related activity (e.g. cease trade order)?

___

___

If yes, provide the following information for each action:

Name of entity

Type of action

Regulator/organization

Date of action (yyyy/mm/dd)

Reason for action

Jurisdiction


3.             Is the firm aware of any ongoing investigation of which the firm or any of its specified affiliates is the subject?

Yes _____ No _____

If yes, provide the following information for each investigation:

Name of entity

Reason or purpose of investigation

Regulator/organization

Date investigation commenced (yyyy/mm/dd)

Jurisdiction

Name of firm:

Name of firm’s authorized signing officer or partner

Title of firm’s authorized signing officer or partner

Signature

Date (yyyy/mm/dd)

Witness

The witness must be a lawyer, notary public or commissioner of oaths.

Name of witness

Title of witness

Signature

Date (yyyy/mm/dd)

This form is to be submitted through the Ontario Securities Commission’s Electronic Filing Portal:

https://www.osc.gov.on.ca/filings


      In this Appendix, the term "specified affiliate" has the meaning ascribed to that term in Form 33-109F6 to National Instrument 33-109 Registration Information.