BMO Nesbitt Burns Inc. and BMO InvestorLine Inc.

January 15, 2019

Decision

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions. Under paragraph 4.1(1)(b) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations a registered firm must not permit an individual to act as a dealing, advising or associate advising representative of the registered firm if the individual is registered as a dealing, advising or associate advising representative of another registered firm. The Filers are affiliated entities and have valid business reasons for their representatives, within a designated class, to be registered with both firms. The Filers have policies in place to handle potential conflicts of interest. The Filers are exempted from the prohibition. Due to the broader scope of this relief, the decision subject to a sunset clause to permit evaluation of the implementation of the dual registration of individuals.

Applicable Legislative Provisions

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

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 4.1, 15.1.

January 15, 2019

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 INC.

(BMO NB)

AND

BMO INVESTORLINE INC.

(BMO IL, and together with BMO NB, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from the restriction under paragraph 4.1(1)(b) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), pursuant to section 15.1 of NI 31-103, to permit, for a period of seven years from the date of this decision, the Online Program Representatives (defined below) to each be registered as both a dealing representative of BMO NB and a dealing representative of BMO IL in order to allow those Online Program Representatives to service clients of either Filer who set up, or are considering setting up, an account with one or both of the online programs known as BMO SmartFolio™ and BMO InvestorLine adviceDirect™ (referred to collectively as the Programs) (the Relief Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

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

b) the Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon by the Filers in each jurisdiction of Canada outside of Ontario (inclusive of Ontario, the 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 Filers:

1. Each of the Filers is a corporation incorporated under the laws of Canada and has its head office located in Toronto, Ontario.

2. Each of the Filers is registered as an investment dealer in each of the Jurisdictions and is a member of the Investment Industry Regulatory Organization of Canada (IIROC).

3. The Filers are affiliates, as Bank of Montreal is the current indirect and ultimate beneficial owner of all of the outstanding voting securities of each Filer.

4. The Filers are not in default of any requirement of securities legislation in any Jurisdiction.

BMO Nesbitt Burns Inc. and BMO SmartFolio™

5. BMO NB is a full service investment dealer that is divided into two lines of business:

a. Capital markets

b. Retail

6. Within its retail business, BMO NB operates managed account programs pursuant to IIROC Rule 1300. Its most recent managed account program is known as BMO SmartFolio™, which was launched in early 2016 after BMO NB submitted the necessary business model change notice to IIROC. BMO SmartFolio™ is an online managed account program, sub-advised by BMO Asset Management Inc. (a registered investment fund manager and portfolio manager, and an affiliate of BMO NB) (BMO AM).

7. BMO SmartFolio™:

(a) Offers five risk-based model portfolios, which are each actively managed by BMO AM: capital preservation, income, balanced, long term growth and equity growth.

(b) Uses a computer-based analysis engine to determine, based on an applicant’s New Account Application Form (the NAAF) which includes the online investor risk questionnaire, whether and which model portfolio is suitable.

(c) Based on the discretion of BMO AM, and subject to BMO AM’s standard of care as a portfolio manager, invests in exchange traded funds or mutual funds. Presently, BMO AM causes accounts of BMO SmartFolio™ to be invested in exchange traded funds that are managed by an affiliate of BMO NB – the BMO ETFs.

(d) Allows applicants and clients to set up accounts entirely online, with certain dedicated BMO NB registered representatives available from 8:00 a.m. EST to 8:00 p.m. EST, Monday – Friday, by way of either online live-chat, telephone or email to review the clients’ portfolio and answer questions during onboarding and thereafter for ongoing client service.

8. Presently certain BMO NB registered representatives, registered as dealing representatives, assist with onboarding and ongoing client service for BMO SmartFolio™, most of these representatives are located at a dedicated BMO NB branch and the others, who are designated as “Supervisors” (an approval category and not a category of registration) for the purposes of the account reviews required by IIROC rules (the Program Supervisors), are located at the BMO IL dedicated branch as set out in paragraph 15 (the BMO NB Call Centre Representatives). The Program Supervisors are also designated as “Supervisors” with IIROC for BMO IL accounts as described below.

9. The account opening process and supervision processes for BMO SmartFolio™ leverages off the existing processes of BMO NB. These processes will continue to be followed by BMO NB once the Relief Sought is granted, and will be unaffected by this decision, except that the BMO NB Call Centre Representatives, including the Program Supervisors, will also be registered, as applicable, with BMO IL (the Program Supervisors will continue to be designated as “Supervisors" with IIROC in respect of both Programs).

10. BMO NB has specific compliance policies and procedures that apply to BMO SmartFolio™.

BMO InvestorLine Inc. and BMO InvestorLine adviceDirect™

11. BMO IL is an investment dealer that operates two online client services:

(a) BMO InvestorLine, which is an online self-directed investing platform that operates as a discount broker (order execution only) pursuant to applicable IIROC rules (BMO IL Self-Directed).

(b) BMO InvestorLine adviceDirect™, which is a fee-based full service brokerage service that offers “advisory” (trading) accounts for clients and provides suitability recommendations through an online platform with the involvement of certain registered representatives of BMO IL. BMO InvestorLine adviceDirect™ is not a managed account program.

12. BMO InvestorLine adviceDirect™ was launched in 2012 by BMO IL after obtaining required technical exemptions from IIROC and from the OSC (as principal regulator). The decisions granting the relief to BMO IL to allow BMO InvestorLine adviceDirect™ to operate are:

(a) In the matter of BMO InvestorLine Inc. Application concerning the proposed offering of adviceDirect – Exemption Order and Decision of the IIROC Board dated August 7, 2012; and

(b) In the matter of BMO InvestorLine Inc. Decision of the OSC (as principal regulator) dated August 1, 2012.

Based on BMO IL’s self-assessment, BMO IL is in full compliance with the conditions to these decisions in respect of the operation of BMO InvestorLine adviceDirect™.

13. BMO InvestorLine adviceDirect™:

(a) Offers four investor profiles: income profile, balanced profile, growth profile and an aggressive profile, each of which is described to an applicant during the application process. Each description includes a statement about time horizon and risk tolerance.

(b) Uses a computer-based analysis engine of BMO InvestorLine adviceDirect™ to evaluate a client’s portfolio holdings against his or her recommended investor profile and then provides securities recommendations (e.g. buy, hold or sell) directly to the client. A client’s portfolio is analysed on four elements – ratings, asset allocation, risk and diversification.

(c) Allows applicants and clients to set up accounts entirely online, with dedicated BMO IL registered representatives available from 8:00 a.m. EST to 8:00 p.m. EST, Monday – Friday, by way of either online live-chat or telephone to review the clients’ portfolio and answer questions during onboarding and thereafter for ongoing client service.

14. BMO IL continues to follow the onboarding process and compliance procedures in respect of BMO InvestorLine adviceDirect™ as set out in the above-noted 2012 decisions.

15. Presently BMO IL registered representatives, registered as dealing representatives with BMO IL, are located in a dedicated BMO IL branch to assist with onboarding and ongoing client service for BMO InvestorLine adviceDirect™ (the BMO IL Call Centre Representatives). In addition, the Program Supervisors referred to in paragraph 8 are located at this branch and are designated as “Supervisors” with IIROC (an approval category and not a category of registration) for the purposes of the BMO InvestorLine adviceDirect™ account reviews required by IIROC rules.

16. There are other individuals who are also registered representatives (dealing representatives) with BMO IL, whose duties include general education and marketing of BMO IL services, as well as, with respect to BMO InvestorLine adviceDirect™ only, assisting with client inquiries, assisting with client onboarding and other registrable activities (the BMO IL Marketing Representatives). Certain of the BMO IL Marketing Representatives are designated as “Supervisors” with IIROC for BMO IL for the purposes of compliance with IIROC rules.

17. The Filers seek to have:

(a) the BMO IL Call Centre Representatives also be registered as registered representatives (dealing representatives) of BMO NB for the purpose of acting as BMO NB Call Centre Representatives;

(b) the BMO IL Marketing Representatives, including the “Supervisors” referred to in paragraph 16, also be registered as registered representatives (dealing representatives) of BMO NB for the purpose of carrying out similar registrable services in respect of BMO SmartFolio™, as they do for BMO InvestorLine adviceDirect™; and

(c) the Program Supervisors, who are currently registered with BMO NB as registered representatives (dealing representatives), also be registered as registered representatives (dealing representatives) with BMO IL for the purpose of acting as BMO IL Call Centre Representatives.

18. The BMO IL dedicated branch is located adjacent to, and at the same address as, the BMO NB dedicated branch which services BMO SmartFolio™. BMO NB and BMO IL operate these branches as separate branches and they are separate business locations for the two entities. There is no public access to these branches and all communications with clients and prospective clients from these branches is exclusively conducted by telephone and electronic communications.

19. The account opening process and supervision for BMO InvestorLine adviceDirect™ (described in the 2012 decisions in paragraph 12 above) will continue to be followed by BMO IL and will be unaffected by the decision granting the Relief Sought.

20. BMO IL has specific compliance policies and procedures that apply to BMO InvestorLine adviceDirect™, which are in compliance with the conditions to the 2012 relief.

The Online Program Representatives

21. The BMO NB Call Centre Representatives and the BMO IL Call Centre Representatives (together the Call Centre Representatives, and individually, a Call Centre Representative) will have the following primary responsibilities, among other related duties, when dually registered with BMO NB and BMO IL (the Call Centre Responsibilities):

(a) provide Program information to clients and prospective clients, upon request;

(b) provide client and prospective client onboarding assistance, upon request;

(c) review know-your-client (KYC) information provided by clients and prospective clients in online NAAFs, including carrying out any required discussions with clients and prospective clients;

(d) conduct suitability assessments of the trading recommendations and suggested investor profiles generated by the Programs’ respective computer-based analysis engines;

(e) approve all of the following: new client accounts based on the NAAF, any client discussions and the above-noted suitability assessments.

22. The BMO IL Marketing Representatives will have the following primary responsibilities, among other related duties, in respect of the Programs when dually registered with BMO NB and BMO IL (the Marketing Responsibilities):

(a) provide educational, non-client specific information about the Programs, primarily through seminars, in-person branch visits, and small group sessions, to ensure clients or prospective clients, and other employees of Bank of Montreal, have appropriate awareness and understanding regarding these Programs and how they can be used to meet investors’ needs; all such educational information about the Programs will be consistent with the public information available on-line about the Programs;

(b) provide Program information and assistance to clients and prospective clients in respect of locating on-line information about, and signing up for the Programs, this will include, upon request, assisting with a client’s online NAAF completion to allow the client to enrol in one of the Programs; and

(c) answer questions from clients or prospective clients, as well as the other employees of Bank of Montreal, about Program services, including information regarding what each Program can do for an investor and specific questions from clients about existing accounts with the Programs.

23. To the extent permitted by IIROC, the BMO IL Marketing Representatives also provide educational, non-client specific information about BMO IL Self-Directed to ensure clients or prospective clients, and other employees of Bank of Montreal, have appropriate awareness and understanding regarding how this service can be used to meet an investor’s needs, so as to provide a complete description of all BMO on-line platforms, which consist of the Programs and BMO IL Self-Directed. No BMO IL Marketing Representative will provide services in respect of BMO IL Self-Directed which would require that representative to be registered as a dealing representative of BMO IL in respect of BMO IL Self-Directed. All such educational information about BMO IL Self-Directed is consistent with the public information available on-line about BMO IL Self-Directed.

24. Pursuant to this decision, the dual registration of any current or future dealing representative of each Filer, which is only being requested for the purpose of providing registrable services in respect of the Programs, will permit any individual to be registered as both a dealing representative of BMO NB and a dealing representative of BMO IL provided that the individual meets all of the criteria set out below for a Call Centre Representative, a Marketing Representative or both (the Online Program Representatives):

(a) Each Call Centre Representative:

(i) is dedicated solely to the Programs, and accordingly has no other responsibilities and does not provide any services in respect of other products or services of BMO NB, BMO IL (including BMO IL Self-Directed) or any other BMO affiliate;

(ii) cannot provide trading recommendations to clients or potential clients outside of any computer-generated recommendations made by a Program;

(iii) cannot suggest alternatives to the output of the computer-generated recommendations made through the Programs;

(iv) only conducts the Call Centre Responsibilities; and

(b) Each Marketing Representative:

(i) is dedicated solely to the Programs, and accordingly has no other responsibilities and does not provide any services in respect of other products or services of BMO NB, BMO IL or any other BMO affiliate, other than as described in paragraph 22 above in respect of BMO IL Self-Directed;

(ii) only conducts the Marketing Responsibilities; and

(iii) will not provide securities recommendations, trading recommendations or any form of suitability analysis tailored to a specific client; and

(c) if applicable, any Call Centre Representative or any Marketing Representative that has terms and conditions on their dealing representative registration with one Filer will also have the same terms and conditions under his or her dealing representative registration with the other Filer.

25. As of the date of this decision, there are approximately 15 individuals that are anticipated to be Call Centre Representatives (currently eight from BMO InvestorLine adviceDirect™ and seven from BMO SmartFolio™), and 27 individuals that are anticipated to be Marketing Representatives (currently from BMO IL only).

Other Representations

26. The Filers have determined that there are sufficient similarities between the Programs that it would be beneficial for clients to be serviced by Online Program Representatives who are familiar with, and knowledgeable about, both Programs and who can assist clients to onboard either Program and to carry out ongoing client service, as required, for both Programs. The Relief Sought will allow Online Program Representatives to discuss both Programs with clients with a view to ensuring that clients have knowledge about, have access to, and sign up for the Program that will best suit their needs. The Relief Sought will also allow for seamless client service for both Programs since, per Program, there will be a larger population of Online Program Representatives available to assist clients with inquiries and client on-boarding.

27. The Filers consider that the Programs have the following similarities that would allow for the Online Program Representatives to be able to efficiently and knowledgeably service clients in both Programs:

(a) Both Programs are available solely through online channels and, generally, would be of interest to a similar client segment; that is, investors who are interested in online investing platforms.

(b) The Filers are aware that certain clients have accounts in both Programs and expect that this will continue to be the case for those and other clients.

(d) Both Programs have non-complex fee structures that are clearly described to clients on the online platforms and associated onboarding documentation.

(e) Both Programs are designed to allow clients to easily navigate through the onboarding process and to continue to monitor and access their accounts.

(f) Both Programs are not permitted to trade in new issues, options or structured products – the investments recommended through both Programs are non-complex.

(g) No Online Program Representative in respect of either Program provides trading recommendations and no Online Program Representative has the ability or authority to suggest alternatives to the recommendations made through the Programs.

(h) The Online Program Representatives for both Programs currently generally have the same duties with respect to client service and are trained on the specific Program, making the additional training that would be required for the other Program, supplementary rather than completely new.

28. The Filers do not expect that the dual registration of the Online Program Representatives will create significant additional work for the Online Program Representatives and each Filer is confident that the Online Program Representatives will have sufficient time and resources to adequately serve each Filer and clients in each Program. The Relief Sought is designed to ensure that each Program will have sufficient human resources to allow for exceptional client service by trained and proficient Online Program Representatives who are knowledgeable about both Programs. For example, per Program, there will be more Online Program Representatives available to clients in the Programs, such that better client service can be provided.

29. The chief compliance officer and ultimate designated person of each Filer will ensure, and the Filers’ respective chief compliance officers will monitor and assess, that the Online Program Representatives each have sufficient time and resources to adequately serve each Filer and the clients and potential clients of the Programs.

30. The relationship between the Filers and the dual registration of each Online Program Representative will be fully disclosed in writing to clients of each Program and the clients will receive clear information about which Filer operates the specific Program they sign up for or are interested in learning about. Each Filer will maintain separate telephone numbers and lines for its specific Program and Online Program Representatives will answer the telephone using the correct name of the respective Filer.

31. There will be no changes to the supervisory and other compliance regimes around each Program – that is, BMO NB compliance personnel (including the BMO NB chief compliance officer and ultimate designated person and the BMO IL compliance personnel (including the BMO IL chief compliance officer and ultimate designated person) will continue to be responsible for their own applicable Program and its operation.

32. In the absence of the Relief Sought, the Filers are prohibited by the restriction in paragraph 4.1(1)(b) of NI 31-103 from permitting the Online Program Representatives to be registered as dealing representatives of both Filers, and accordingly, engage in registrable activities with clients of the Program offered by a Filer with whom they are not so registered, even though the Filers are affiliates and have controls and compliance procedures in place to deal with their specific Programs and each Online Program Representative’s dealing activities. The Filers consider that the concept of the Online Program Representatives being able to provide registrable services to clients and prospective clients of both Filers in respect of the Programs to be in the best interests of those clients and prospective clients.

33. The Filers are affiliates and both are indirectly owned by Bank of Montreal. Accordingly, the dual registration of the Online Program Representatives will not give rise to the conflicts of interest present in a similar arrangement involving unrelated, arm’s length firms. The interests of the Filers are aligned in conjunction with the Programs and therefore the potential for conflicts of interest arising from the dual registration is mitigated. The role of the Online Program Representatives will be to support the business activities and interests of both Filers in connection with the Programs, as well as the clients who participate in the Programs. Further, if the Relief Sought is granted, the risks of potential conflicts of interest arising from the Online Program Representatives’ dual registrations are expected to be mitigated because:

(a) Online Program Representatives’ activities are limited to the terms of the definition of “Online Program Representatives” in this decision;

(b) Compensation of the Online Program Representatives is structured to be Program neutral such that:

(i) Call Centre Representatives are not incented to recommend one Program over another, and

(ii) Marketing Representatives are incented to market the Programs equally to prospective clients so that compensation bias is not a factor in their activities;

(c) Although the office locations for both Programs may be located at the same address, there is no public access to these office locations. All interaction with clients and prospective clients will continue to be handled by telephone or other electronic communication; and

(d) Clients generally self-select the Program they want to use, consequently, the Online Program Representatives’ roles will be limited to confirming Program suitability in those cases.

34. The Filers each have adequate policies and procedures in place to address any potential conflicts of interest that may arise as a result of the dual registration of the Online Program Representatives and will be able to deal appropriately with any such conflicts, should they arise. The Online Program Representatives are subject to, and aware of, these policies and procedures.

35. The Online Program Representatives are subject to supervision by, and the applicable compliance requirements of, each of the Filers.

36. The policies and procedures of the Filers include policies and procedures for the following:

(a) mitigating or eliminating any client confusion that may result from the dual registration of the Online Program Representatives;

(b) ensuring that Online Program Representatives know which Program’s clients or prospective clients they are dealing with, and which Filer they are acting on behalf of, when interacting with each client or prospective client;

(d) ascertaining the responsible Filer in respect of any complaints from current or prospective clients;

(e) handling and tracking Program records for each Filer, including ensuring that the appropriate records are kept for each Filer by the Online Program Representatives; and

(f) ensuring necessary and timely interaction between the compliance personnel of each Filer to resolve any matters in respect of the dual registration of the Online Program Representatives (including having shared supervisors and branch managers, if appropriate).

37. The compliance teams of the Filers are equipped to:

(a) manage and address the complexity and size of the Filers and the Programs;

(b) adequately communicate amongst each other, or share compliance staff, in respect of the Programs;

(d) manage conflicts of interest specific to large affiliated registered firms and organizations;

(e) mitigate any confusion, or potential confusion, that may arise for Online Program Representatives regarding which firms they are servicing and in what capacity;

(f) mitigate client confusion stemming from the dual registration of the Online Program Representatives within a large affiliated organization;

(g) supervise a large number of registered individuals across affiliated registrants; and

(h) provide adequate compliance for distinct business lines.

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 Relief Sought is granted, for a period of seven years from the date of this decision, on the following conditions:

i. Each Online Program Representative is subject to supervision by, and the applicable compliance requirements of, both Filers;

ii. The chief compliance officer and ultimate designated person of each Filer ensures that each Online Program Representative has sufficient time and resources to adequately serve each Filer and the clients in, and the prospective clients of, the Programs;

iii. The Filers each have adequate policies and procedures in place to address any conflicts of interest that may arise as a result of the dual registration of the Online Program Representatives, and to deal appropriately with any such conflicts; and

iv. The relationship between the Filers, and the fact that the Online Program Representatives are dually registered with each Filer, is fully disclosed in writing to clients or potential clients of each Filer that deal with an Online Program Representative.

“Felicia Tedesco”

Deputy Director, Compliance and Registrant Regulation

Ontario Securities Commission