BMO Nesbitt Burns Securities Ltd.
Headnote
Application for relief from subsections 25(1), 25(2) and section 53 of the Securities Act (Ontario) to allow a registered U.S. dealer and investment adviser, also registered as a portfolio manager in the Jurisdictions, to trade securities to, with and on behalf of U.S. client temporarily in Canada without registration as a dealer. Application for relief, by a registered portfolio manager, from certain record keeping, account statement and client reporting requirements, subject to certain conditions, with respect to the U.S. tax-advantaged retirement accounts of Canadian clients.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1), 25(2), 53 and 74(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 11.5, 14.11.1, 14.14.1, 14.17 14.19 and 15.1(2).
November 3, 2022
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. (NBSL OR THE FILER)
DECISION
Background
Although NBSL is based in Ontario, the principal focus of its business is to provide advisory and brokerage services primarily to clients resident in the United States of America (the U.S.) (each a NBSL U.S. Client). From time to time, NBSL U.S. Clients move from the U.S. to Canada or are temporarily in Canada. For clients who move to Canada, NBSL provides advisory services only in relation to their U.S. tax-advantaged retirement accounts (U.S. Plans). NBSL U.S. Clients that move to Canada are required to close all other advisory accounts and any U.S. brokerage accounts with NBSL. Those clients who are temporarily in Canada are able to maintain their advisory accounts and U.S. brokerage accounts.
NBSL was previously granted relief from adviser and dealer registration requirements in a decision In the Matter of BMO Nesbitt Burns Securities Ltd. and BMO Nesbitt Burns Inc. dated June 2, 2017 (the 2017 Decision) to provide services to clients who move to Canada and to clients who are temporarily in Canada. NBSL has applied to be registered as a portfolio manager to provide advisory services in relation to the U.S. Plans of clients who have moved from the U.S. to Canada. The 2017 Decision was extended for a period of six months on June 2, 2022 (the Extension Decision) in order for NBSL to complete the individual applications related to its registration application. The Extension Decision expired on November 2, 2022 and NBSL is now seeking the Requested Relief.
Requested Relief
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for the following:
Dealer registration, underwriter registration and prospectus relief
a) pursuant to subsection 74(1) of the Securities Act (Ontario) (OSA) for:
(i) an exemption from the dealer registration requirement (the Dealer Registration Relief) for NBSL to trade to, with or on behalf of an individual who is ordinarily resident in the United States, but who is temporarily in Canada and with whom NBSL provided brokerage services prior to the individual became temporarily resident in Canada (each a U.S. Client Temporarily in Canada); and
(ii) an exemption from the prospectus requirement and underwriter registration requirement applicable to a distribution of a foreign security made by NBSL when acting on behalf of a U.S. Client Temporarily in Canada and an NBSL Canadian Client (as defined below) with respect to their U.S. Plans (the Distribution Relief);
Relief related to NBSL's registration as a portfolio manager
a) pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) for an exemption from:
(i) the requirement for NBSL to maintain certain books and records for NBSL Canadian Clients' investment positions and trades pertaining to the U.S. Plans under paragraphs (f), (g), (h), (i) and (j) of subsection 11.5(2) of NI 31-103 (the Books and Records Relief);
(ii) the requirement for NBSL to determine market value under section 14.11.1 of NI 31-103 for purposes of client account statements and client account reporting pertaining to the U.S. Plans (the Market Value Relief);
(iii) the requirement in paragraph 14.14.1(2)(h) of NI 31-103 for NBSL to identify which of the securities in the statement might be subject to a deferred sales charge if they are sold in relation to the U.S. Plans (the DSC Account Statement Relief);
(iv) with respect to each annual investment performance report provided by NBSL to its NBSL Canadian Clients with U.S. Plans, the requirement in paragraph 14.19(1)(j) of NI 31-103 to provide the definition of "total percentage return" and a notification and information related to "total percentage return"; and
(v) the requirement for NBSL to provide NBSL Canadian Clients with U.S. Plans with an annual report on charges and other compensation pursuant to section 14.17 of NI 31-103 ((iv) and (v) together, the Client Reporting Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
a) the Ontario Securities Commission (the Commission) is the principal regulator for this application; and
b) the Filer 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, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon (collectively with 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 Filer:
1. NBSL is incorporated under the federal laws of Canada with its head office in Toronto, Ontario.
2. NBSL is a direct, wholly-owned subsidiary of BMO Nesbitt Burns Inc. (NBI). Both NBSL and NBI are wholly-owned indirect subsidiaries of the Bank of Montreal. Each of NBSL and NBI are affiliates of the other.
3. NBSL is registered with the Securities and Exchange Commission (SEC) as an investment adviser under the U.S. Investment Advisers Act of 1940 (the 1940 Act). NBSL is also registered as a broker-dealer under the U.S. Securities Exchange Act of 1934 (the 1934 Act) and is a member of the Financial Industry Regulatory Authority (FINRA).
4. NBSL provides discretionary advisory and financial planning services, as well as broker-dealer services, to NBSL U.S. Clients that are individuals, trusts, non-profits and corporations.
5. NBSL provides these services to NBSL U.S. Clients from Ontario pursuant to exemptions from the dealer and adviser registration requirements available in OSC Rule 32-505 Conditional Exemption from Registration for United States Broker-Dealers and Advisers Servicing U.S. Clients from Ontario. NBSL provides these services to NBSL U.S. Clients from Jurisdictions other than Ontario pursuant to relief granted by the British Columbia Securities Commission.
6. NBSL provides discretionary advisory services to clients:
a. residing in Canada but who were previously resident in the United States, if such services are in respect of the client's U.S. Plan where:
i. the U.S. Plan is located in the U.S.;
ii. the client is a holder of or contributor to the U.S. Plan; and
iii. the client was previously resident in the U.S.; or
b. residing in Canada, if such services are in respect of a U.S. Plan that such client received as a result of a testamentary disposition from an NBSL client (together with subparagraph (a), theNBSL Canadian Clients).
7. NBSL previously operated the business described in paragraph 6(a) in the Jurisdictions in reliance on exemptions from the adviser and dealer registration requirements, among other relief, granted in the 2017 Decision and the Extension Decision.
8. NBSL will no longer rely on the relief from the adviser registration requirement granted in the 2017 Decision and the Extension Decision. Instead, because the business described in paragraph 6(a) has grown, NBSL has applied for registration as an adviser in the category of portfolio manager in each of Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon in order to continue to provide advisory services to NBSL Canadian Clients.
9. If a NBSL U.S. Client or a U.S. Client Temporarily in Canada intends to become a resident of Canada, such client must close any brokerage accounts and any non-U.S. Plan held at NBSL. NBSL will continue to act as discretionary adviser to the U.S. Plans of such client under its adviser registration in Canada.
10. NBI is registered (i) as an investment dealer in each of the Jurisdictions and is a member of the Investment Industry Regulatory Organization of Canada (IIROC); (ii) as a dealer (futures commission merchant) in Manitoba; (iii) as a futures commission merchant in Ontario; (iv) as a derivatives dealer in Québec; and (v) as an investment fund manager in Newfoundland & Labrador, Ontario and Québec.
11. NBI provides the full range of dealer services that IIROC member firms are authorized to provide to retail and institutional clients across Canada.
12. 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. 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. (other than in respect of Canadian tax-advantaged retirement savings plans held by clients resident in the U.S. who were formerly resident in Canada and who have moved to the U.S. with tax-advantaged retirement savings plans, pursuant to SEC rule 237 under the Securities Act of 1933, rule 7d-2 under the 1940 Act and rule 12g3-2 under the 1934 Act.
13. Wherever NBSL has an office in Canada, NBSL operates out of the same premises as NBI.
14. NBSL is not in default of securities legislation in any of the Jurisdictions. NBSL is in compliance in all material respects with U.S. securities law.
15. NBSL has complied with, and is currently in compliance with, all of the terms and conditions of the Extension Decision.
U.S. Clients Temporarily in Canada
16. As NBSL is not registered as a dealer in Canada, absent the Dealer Registration Relief, NBSL may not trade to, with or on behalf of U.S. Clients Temporarily in Canada. NBSL is not able to rely on the exemptions contained in National Instrument 35-101 Conditional Exemption from Registration for United States Broker-Dealers and Agents (NI 35-101) with respect to such clients. 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. NBSL and its agents are located in Canada. NBSL previously provided these services from the Jurisdictions pursuant to dealer registration relief provided for in the 2017 Decision and the Extension Decision.
17. The Dealer Registration Relief is being sought to permit NBSL to continue to provide services to the existing U.S. brokerage accounts of U.S. Clients Temporarily in Canada.
18. NBSL's brokerage account services with respect to U.S. Clients Temporarily in Canada are discrete and intended as an accommodation to NBSL U.S. Clients, who are the primary and principal focus of the firm's business. Furthermore, NBSL U.S. Clients Temporarily in Canada with brokerage accounts represent a small percentage of NBSL's U.S. business.
19. The Dealer Registration Relief is intended to permit U.S. Clients Temporarily in Canada to continue to access their existing U.S. brokerage accounts while in Canada for a limited time period.
20. NBSL does not advertise or solicit for new brokerage clients in Canada and the firm is not seeking to increase or grow its offering of broker-dealer activities in Canada.
21. Where NBSL trades to, with or on behalf of U.S. Clients Temporarily in Canada, they will comply with all U.S. federal securities law and any other applicable U.S. securities law, including all applicable U.S. federal securities laws and state securities legislation in the U.S. applicable to distributions and trading of securities.
22. All U.S. Clients Temporarily in Canada were located in the United States at the time of opening their brokerage accounts and executing their customer agreements and associated account-opening documentation with NBSL and had a broker-dealer client relationship with NBSL before the individual became temporarily resident in Canada. NBSL remains subject to SEC and FINRA oversight requirements applicable to such accounts.
Distribution Relief
23. NBSL was previously granted an exemption from the prospectus requirement and underwriter registration requirement applicable to the distribution of a foreign securities, when acting on behalf of certain clients, in the 2017 Decision and the Extension Decision.
24. The Distribution Relief is being sought to permit NBSL to continue to distribute foreign securities to U.S. Plans in accordance with all applicable U.S. federal securities laws and state securities legislation in the U.S.
25. NBSL will make sure a prospectus complying with U.S. securities laws is delivered to both U.S. Clients Temporarily in Canada and NBSL Canadian Clients prior to the completion of the sale of securities to that client, as required under US securities laws.
26. U.S. Clients Temporarily in Canada and NBSL Canadian Clients will have the same protections as a U.S. purchaser of the securities.
27. NBSL has the full support of its U.S. legal and compliance team, which also supports other U.S. Bank of Montreal registered entities and affiliates. This team, which has approximately 30 compliance and legal professionals, has expertise in U.S. federal securities laws and state securities legislation. This team is dedicated to compliance and monitoring matters with respect to U.S. federal securities laws and state securities legislation.
28. NBSL has policies and procedures as required by its registration with FINRA and the SEC, which includes policies, procedures and controls to ensure that U.S. federal securities laws and state securities legislation are complied with, for instance that any prospectus that is the subject of a U.S. registration statement is delivered to clients, as required.
NBSL Account Statements, Market Value and Performance Reporting as an Adviser under NI 31-103
29. NBSL is an introducing broker-dealer subject to FINRA regulatory oversight.
30. 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).
31. NFS is registered with the SEC as an investment adviser under the 1940 Act. NFS is also registered as a broker-dealer under the 1934 Act and is a member of FINRA.
32. NFS is not registered in Canada and relies upon the exemption from the dealer registration requirement of the securities laws of each Jurisdiction under Section 8.18 of NI 31-103 (theinternational dealer exemption) in connection with, inter alia, trades in "foreign securities" with a "permitted client" (each as defined in NI 31-103). NFS cannot rely on the international dealer exemption to trade in securities on behalf of the NBSL clients that are not permitted clients. NFS obtained exemptive relief in the Jurisdictions pursuant to a decision document dated March 2, 2012 from, inter alia, the dealer registration requirement, to permit NFS to trade in securities for "Qualified Accounts" as defined in the NFS Relief.
33. In accordance with the provisions of the Clearing Agreement, NFS provides trading, custody, clearing and settlement services for all NBSL clients, including NBSL U.S. Clients (which includes U.S. Clients Temporarily in Canada) and NBSL Canadian Clients.
34. Each of NBSL's clients enter into a custody agreement directly with NFS pursuant to which NFS acts the custodian of the client's account.
35. Pursuant to such custody agreement, each NBSL client receives account statements from NFS.
36. NBSL U.S. Clients, including U.S. Clients Temporarily in Canada, will continue to receive account statements from NFS and other applicable account reporting in accordance with applicable SEC and FINRA rules and requirements.
37. NBSL clients that are NBSL Canadian Clients will receive account statements from NFS that comply with sections 14.14 and 14.14.1 of NI 31-103, with the exception of the information contained in the Market Value Relief and the DSC Account Statement Relief.
38. NBSL clients that are NBSL Canadian Clients will also receive account reporting from NBSL that complies with section 14.18 to 14.20 of NI 31-103, with the exception of the items contemplated in the Client Reporting Relief.
Market Value Relief and DSC Account Statement Relief
39. As a broker-dealer and member of FINRA, NFS has significant experience providing account statement reporting to clients in accordance with applicable requirements of U.S. law and accepted industry practices.
40. NFS provides account statements for the U.S. Plans in accordance with SEC requirements and standard industry practice in the U.S. NBSL U.S. Clients are familiar with the account statements, and the contents of the account statements, that they currently receive from NFS.
41. Requiring NBSL to modify such statements for the U.S. Plans when the client becomes a NBSL Canadian Client, including with respect to the presentation of market value information and deferred sales charge information, which is not required information to be presented under U.S. securities law, may lead to client confusion.
Books and Records Relief
42. With respect to the arrangement between NBSL and NFS:
a. NBSL and NFS have a written agreement, the Clearing Agreement, which includes the key terms and the roles and responsibilities of each firm;
b. NBSL provides written disclosure to its NBSL Canadian Clients with respect to the role of NFS;
c. NBSL does not hold any investments for clients and all of the investments for NBSL Canadian Clients for which NBSL is authorized to trade are held by NFS; and
d. NBSL oversees NFS to ensure that the account statement reporting provided by NFS is complete, accurate and delivered on a timely basis.
43. In accordance with SEC and FINRA requirements, the Clearing Agreement and standard industry practice in the U.S., NBSL relies on NFS to maintain books and records for its clients' investment positions and trades, such as records:
a. with respect to the identification and segregation of client cash, securities, and other property;
b. identifying transactions conducted by NBSL on behalf of each of its clients, including:
i. records of the parties to the transaction and the terms of the purchase or sale;
ii. records of the actions leading to trade execution, settlement and clearance, such as trades on exchanges, alternative trading systems, over the counter markets, debt markets, and distributions and trades in the prospectus exempt market;
iii. trade confirmations, tax information related to investment positions and statements;
iv. summary information about account activity;
c. with respect to transactions resulting from securities a client holds, such as dividends or interest paid, or dividend reinvestment program activity;
d. with respect to the generation of account transaction activity reports for clients; and
e. with respect to securities pricing held in client accounts.
44. NBSL has established, maintains and enforces a supervisory system and written supervisory procedures designed to oversee the recordkeeping activities of NFS. In addition, NBSL periodically reviews and updates its recordkeeping written supervisory procedures and has appropriate written supervisory control procedures in place to test and verify that those recordkeeping supervisory procedures comply with applicable SEC and FINRA requirements.
45. Pursuant to such procedures, NBSL oversees and monitors NFS to ensure that NFS maintains such books and records in accordance with FINRA requirements, the Clearing Agreement and standard industry practice in the U.S. NBSL has access at all times to such books and records and periodically tests and verifies that NFS is maintaining the books and records in a complete, accurate and timely manner. NFS is also required to maintain reports with respect to books and records as requested by NBSL. Such oversight function may also be conducted in a centralized manner through Bank of Montreal's Supplier Management program.
46. Pursuant to FINRA requirements and the Clearing Agreement, NFS is required, upon request of NBSL, to provide the applicable books and records that it maintains for NBSL to any regulatory authority overseeing NBSL. The Commission will have such access to the books and records maintained by NFS.
NBSL Canadian Client -- Client Reporting Relief
47. NBSL provides account reporting for the U.S. Plans in accordance with SEC requirements and standard industry practice in the U.S. Clients of NBSL with U.S. Plans are familiar with the account reporting, and the contents of the account reporting, that they currently receive from NBSL.
48. While the account reporting provided by NBSL to NBSL Canadian Clients does not include a definition of "total percentage return" or a notification and information related to "total percentage return" required pursuant to paragraph 14.19(1)(j) of NI 31-103, such reporting provides clients with a percentage rate of return (both including and net of fees) and includes information describing to clients what "rate of return" means. Further, rate of return is calculated using a money-weighted rate of return calculation method. As a result, NBSL Canadian Clients will receive substantially similar information and reporting as they would receive if "total percentage return" information was included.
49. U.S. securities laws and SEC rules do not require NBSL to provide clients with an annual report on charges and other compensation. Absent this relief, NBSL would be required to create two records systems -- one for the NBSL U.S. Clients and one for the NBSL Canadian Clients. Further, the account statements that clients currently receive for their U.S. Plans include information about the taxes, fees and expenses applicable to the account. As a result, clients receive certain of the information that they would receive in a report on charges and other compensation.
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 is granted, provided that:
a. NBSL will only trade securities to, with or on behalf of a U.S. Client Temporarily in Canada;
b. NBSL remains registered as a broker-dealer under the 1934 Act;
c. NBSL remains a FINRA member;
d. each trade identified or recommended by NBSL for a U.S. Client Temporarily in Canada will be conducted by a representative of NBSL who is registered under U.S. federal securities laws;
e. NBSL remains registered under the Legislation as an adviser in the category of portfolio manager;
f. NBSL establishes, applies and maintains reasonable policies and procedures to estimate the approximate proportion of NBSL U.S. Clients who may be or is a U.S. Client Temporarily in Canada; and
g. NBSL, in the course of its dealings with U.S. Clients Temporarily in Canada, acts fairly, honestly and in good faith.
2. the Distribution Relief is granted, provided that the relevant distribution of foreign securities:
a. is made by NBSL pursuant to the Dealer Registration Relief, if applicable; 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 Books and Records Relief is granted, provided that NBSL's U.S. service provider maintains such books and records in accordance with applicable SEC and FINRA requirements and provides access to such books and records to NBSL and, upon request, to the Commission;
4. the Market Value Relief and DSC Account Statement Relief is granted, provided that market value is calculated in accordance with applicable SEC requirements and account statements are otherwise prepared in accordance with NI 31-103;
5. the Client Reporting Relief is granted, provided that NBSL provides NBSL Canadian Clients account reporting that complies with applicable SEC requirements; and
6. this decision will terminate on the earlier of:
a. five years after the date of this decision; and
b. 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 activity it provides to an U.S. Client Temporarily in Canada on terms and conditions other than those set out in this decision.