Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Large investment fund manager and mutual fund dealer with separate investment fund manager and mutual fund dealer operating lines of business exempted from the requirement to designate an individual as a chief compliance officer (CCO) and an individual as ultimate designated person (UDP) – permitted to designate two CCOs and two UDPs, one CCO and one UDP for each line of business.

 

Applicable Legislative Provisions

 

Multilateral Instrument 11-102 Passport System, s. 4.7.

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.2, 11.3, 15.1.

 

July 21, 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 INVESTMENTS INC.

(the Filer)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation), pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), for an exemption from the requirements contained in:

 

(a)           section 11.2 of NI 31-103 to designate an individual to be the ultimate designated person (UDP) so that the Filer may designate two individuals as UDP, and

 

(b)           section 11.3 of NI 31-103 to designate and have registered an individual to be the chief compliance officer (CCO) so that the Filer may designate two individuals as CCO,

 

in respect of its two distinct lines of business (the Exemption Sought).

 

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 Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each jurisdiction of Canada outside of Ontario (together with the Jurisdiction, the Filing Jurisdictions).

 

Interpretation

 

Terms defined 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 Filer:

 

The Filer

 

1.             The Filer is a corporation incorporated under the laws of Canada with its head office in the Jurisdiction.

 

2.             The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador. The Filer is also registered as a mutual fund dealer in each of the Filing Jurisdictions. The Filer is a member of the Mutual Fund Dealers Association of Canada.

 

3.             The Filer is not in default of any requirements of securities legislation in any of the Filing Jurisdictions.

 

The Lines of Business

 

4.             The Filer has two distinct lines of business (each, a Line of Business):

 

(a)           one Line of Business (the IFM Line) currently provides investment fund management services to approximately 95 BMO Mutual Funds, which are subject to National Instrument 81-102 Investment Funds (the BMO Funds); and

 

(b)           one Line of Business (the MFD Line) distributes securities of the BMO Funds, other mutual funds managed by third party fund managers, and other products through the Bank of Montreal branch network.

 

5.             Each of the IFM Line and the MFD Line has separate and distinct regulatory requirements, business activities and operational structures. Each of the IFM Line and the MFD Line has specific compliance professionals designated to each Line of Business.

 

The UDP

 

6.             Currently, the Filer has one UDP responsible for both the IFM Line and the MFD Line. The Filer wishes to designate one individual who is registered under securities legislation in Ontario, Québec and Newfoundland and Labrador in the category of UDP as UDP of the IFM Line and a different individual who is registered under securities legislation in the Filing Jurisdictions in the category of UDP as UDP of the MFD Line.

 

7.             Each of the UDPs will be the most senior manager of the respective Line of Business and will be a senior officer of the Filer.

 

8.             The UDPs of the IFM Line and MFD Line, regardless of their titles from time to time, will each have the role that is the equivalent of chief executive officer in respect of the Line of Business for which he or she is responsible and will be the most senior and final decision maker for his or her Line of Business. This means that each UDP fulfills the following roles for his or her Line of Business:

 

(a)           supervises, oversees and otherwise is responsible for running the Line of Business;

 

(b)           provides clear leadership and promotes a culture of compliance within the Line of Business;

 

(c)           is accountable for the operations and financial performance of the Line of Business;

 

(d)           is the individual that the executive management within the Line of Business report to; and

 

(e)           is accountable for reporting to the Board of Directors of the Filer with respect to the Line of Business.

 

9.             There will be no line of reporting between the two UDPs. Each UDP will have direct access to the Board of Directors of the Filer and no other executive officer of the Filer will have the authority to overrule a decision of either of them.

 


The CCO

 

10.          Currently, the Filer has one CCO responsible for both the IFM Line and the MFD Line. The Filer wishes to designate one individual who is registered under securities legislation in Ontario, Québec and Newfoundland and Labrador in the category of CCO as CCO of the IFM Line and a different individual who is registered under securities legislation in the Filing Jurisdictions in the category of CCO as CCO of the MFD Line.

 

11.          The CCO of each Line of Business will report directly to the respective UDP of the same Line of Business for the purposes of NI 31-103 and will have direct access to the Board of Directors of the Filer.

 

12.          The Filer and certain affiliated parties agreed to a no-contest settlement agreement with the OSC, which was approved on December 15, 2016 in relation to a matter that the parties discovered and self-reported to the OSC (the Settlement Agreement). While having neither admitted nor denied the accuracy of the facts and conclusions of OSC staff, the Filer provided prompt, detailed and candid co-operation to OSC staff, and also implemented additional controls and supervision to prevent a recurrence of this matter.

 

REASONS FOR EXEMPTION SOUGHT

 

The UDP Requirement

 

13.          Under section 11.2 of NI 31-103, a registered firm is required to designate and have registered an individual to be the UDP (the UDP Requirement) and the UDP must be one of the following: (a) the chief executive officer of the registered firm or, if the firm does not have a chief executive officer, an individual acting in a capacity similar to a chief executive officer; (b) the sole proprietor of the registered firm; (c) the officer in charge of a division of the registered firm, if the activity that requires the firm to register occurs only within the division and the firm has significant other business activities.

 

14.          Given the scope and specialized and diversified business operations within each of the MFD Line and the IFM Line, designating only one UDP for purposes of satisfying the UDP Requirement would not be consistent with the policy objectives the securities legislation is intended to achieve. The UDP of each Line of Business requires a different subject matter and business expertise and set of skills, experience and focus to effectively discharge their respective responsibilities. It would be difficult for any one individual to (i) act as the Filer’s UDP; (ii) identify and stay abreast of the different issues and risks applicable to each Line of Business; and (iii) escalate all such issues and risks to the Board of Directors of the Filer in a timely and effective manner.

 

The CCO Requirement

 

15.          Under section 11.3 of NI 31-103, a registered firm is required to designate and have registered an individual to be the CCO (the CCO Requirement).

 

16.          The Companion Policy to NI 31-103, at section 5.2 Responsibilities of the chief compliance officer, states, in part, that:

 

Firms must designate one CCO. However, in large firms, the scale and kind of activities carried out by different opera-ting divisions may warrant the designation of more than one CCO. [The Canadian Securi-ties Administrators] will consi-der applications, on a case-by-case basis, for different individuals to act as the CCO of a firm’s operating divisions.

 

17.          Designating only one CCO for the purposes of satisfying the CCO Requirement would not be consistent with the policy objectives it is intended to achieve because the IFM Line and the MFD Line are separate business operations that are distinct from one another in nature and are conducted on a very large scale.

 

18.          The CCO of each Line of Business will oversee a compliance system that is reasonably designed to ensure that the Line of Business for which he or she is the CCO, and each person acting on its behalf, complies with applicable securities legislation and will manage the risks associated with the respective Line of Business in accordance with prudent business practices.

 

19.          Upon the Exemption Sought being granted, the CCO of each Line of Business will have direct access to the Filer’s UDP for the applicable Line of Business for the purposes of NI 31-103, will report as required to the Board of Directors of the Filer and will comply in all other respects with applicable securities requirements, including the requirements set out in NI 31-103.

 

20.          Allowing the Filer to designate and have registered a separate UDP and CCO for each Line of Business is consistent with:

 

(a)           the policy objectives of the UDP Require-ment and of the CCO Requirement, respectively; and

 

(b)           other Director’s decisions granted in similar circumstances, for example, the Director’s decision dated June 30, 2014 In the Matter of 1832 Asset Management L.P. where 1832 Asset Management L.P. was permitted to designate and register three CCOs and three UDPs.

 

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 Exemption Sought is granted so that the Filer may have a separate UDP and a separate CCO for each of its two Lines of Business, provided that:

 

(i)            each Line of Business shall have its own UDP, who shall be the equivalent of the chief executive officer in respect of the Line of Business for which he or she is the UDP;

 

(ii)           only one individual is the UDP of each Line of Business;

 

(iii)          each UDP fulfills the responsibilities set out in section 5.1 of NI 31-103, or any successor provision thereto, in respect of the Line of Business for which he or she is the designated UDP;

 

(iv)          each Line of Business shall have its own CCO;

 

(v)           only one individual is the CCO of each Line of Business;

 

(vi)          each CCO reports to the UDP of the Line of Business for which he or she is the designated CCO;

 

(vii)         each CCO fulfills the responsibilities set out in section 5.2 of NI 31-103, or any successor provision thereto, in respect of the Line of Business for which he or she is the designated CCO; and

 

(viii)        each UDP and each CCO has direct access to the Board of Directors of the Filer.

 

“Elizabeth King”

Deputy Director

Compliance and Registrant Regulation

Ontario Securities Commission