Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.

Relief from subsection 4.1(1) of Regulation 81-102 for dealer-managed investment funds to invest in debt securities for which dealer-manager acts as underwriter during distribution period or 60 day period following distribution – debt securities will not have “designated rating” by “designated rating organization” as required by subsection 4.1(4) of Regulation 81-102, subject to conditions.

Relief from subsection 4.1(2) of Regulation 81-102 to permit mutual funds to purchase securities of related entities on primary and secondary market, subject to conditions.

Relief from subsection 4.2(1) of Regulation 81-102 to enable the mutual funds to purchase from, or sell to a current affiliate of the Filer that acts, and any other affiliate of the Filer that may in the future act as a principal dealer in the Canadian debt securities market and/or international debt securities market, subject to conditions.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 4.1(1), 4.1(2), 4.2(1), 19.1.

[TRANSLATION]

November 21, 2017

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUÉBEC AND ONTARIO

(the Jurisdictions)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

DESJARDINS GLOBAL ASSET MANAGEMENT INC.

(the Filer)

AND

THE DESJARDINS FUNDS

(as defined below)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation), pursuant to section 19.1 of Regulation 81-102 respecting Investment Funds (c. V-1.1, r. 39) (Regulation 81-102), exempting the Desjardins Funds (as defined below) from the restrictions contained in:

1.             subsection 4.1(1) of Regulation 81-102 to permit the Desjardins Funds to invest in debt securities of an issuer during the period of the distribution (the Distribution) or during the period of 60 days after the Distribution (the 60-day Period, together with the Distribution, the Prohibition Period), notwithstanding that the dealer manager of the Desjardins Funds, or an associate or affiliate of the dealer manager, acts or has acted as underwriter in the Distribution (each a Related Underwriter), and notwithstanding that the debt securities do not have a designated rating by a designated rating organization as contemplated in paragraph 4.1(4)(b) of Regulation 81-102 (the Subsection 4.1(1) Relief);

2.             subsection 4.1(2) of Regulation 81-102 to permit the Desjardins Funds to invest in non-exchange-traded debt securities of Related Issuers (as defined below) in a Primary Offering (as defined below) and in the secondary market having a designated rating within the meaning of that term in Regulation 44-101 respecting Short Form Prospectus Distributions (V-1.1, r. 16) (Regulation 44-101) (the Subsection 4.1(2) Relief);

3.             subsection 4.2(1) of Regulation 81-102 to permit the Desjardins Funds to purchase from, or sell to Desjardins Securities Inc. (DSI), a current affiliate of the Filer that acts, and any other affiliate of the Filer that may in the future act (each a Related Dealer), as a principal dealer (Principal Dealer) in the Canadian debt securities market and/or an international debt securities market, debt securities of an issuer other than the federal or a provincial government (Non-Government Debt Securities) or debt securities issued or fully and unconditionally guaranteed by the federal or a provincial government (Government Debt Securities) in the secondary market (the Subsection 4.2(1) Relief);

(collectively, the Exemption Sought).

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

(a)           the Autorité des marchés financiers is the principal regulator for this application;

(b)           the Filer has provided notice that subsection 4.7(1) of Regulation 11-102 respecting Passport System (c. V-1.1, r.1) (Regulation 11-102) is intended to be relied upon in the jurisdictions of Canada other than the Jurisdictions; and

(c)           the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in Regulation 11-102, Regulation 14-101 respecting Definitions (c. V-1.1, r.3), Regulation 81-102 and Regulation 81-107 respecting Independent Review Committee for Investment Funds (c. V-1.1, r.43) (Regulation 81-107) have the same meaning if used in this decision, unless otherwise defined. Capitalized terms used in this decision have the following meanings:

Desjardins Funds means all investment funds subject to Regulation 81-102, including mutual funds and exchange traded funds, and any investment funds subject to Regulation 81-102, subsequently established in the future for which the Filer acts, or will act, as investment fund manager;

IRC means the independent review committee established in accordance with Regulation 81‑107;

Primary Offering means a primary distribution or treasury offering of non-exchange-traded debt securities of a Related Issuer;

Related Issuer means an issuer of which a partner, director, officer or employee of the dealer manager of the Desjardins Funds, or of an affiliate or associate of the dealer manager is a partner, director or officer, unless the partner, director, officer or employee (i) does not participate in the formulation of investment decisions made on behalf of the dealer managed investment fund, (ii) does not have access before implementation to information concerning investment decisions made on behalf of the dealer managed investment fund; and (iii) does not influence, other than through research, statistical and other reports generally available to clients, the investment decisions made on behalf of the dealer managed investment fund.

Representations

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

The Filer, DSI and the Desjardins Funds

1.             The Filer is, or will be, the investment fund manager of each Desjardins Fund. The Filer is registered as a portfolio manager in each of the jurisdictions of Canada, as a commodity trading manager in Ontario, derivatives portfolio manager in Québec, exempt-market dealer in Québec, Ontario, Nova Scotia, Alberta, British Columbia, Saskatchewan and Manitoba and as an investment fund manager in Ontario, Alberta, Manitoba, Nova Scotia, Newfoundland and Labrador and Québec. The head office of the Filer is in Montreal, Québec.

2.             The Filer is a member of a group of entities which fall under the Fédération des Caisses Desjardins du Québec umbrella;

3.             The Filer is currently an affiliate of DSI as they are both directly or indirectly held by Fédération des Caisses Desjardins du Québec. The Filer may become an affiliate of additional dealers in the future, any of which may act as underwriter in a Distribution.

4.             DSI is a member of the Investment Industry Regulatory Organization of Canada and is registered as an investment dealer in each of the jurisdictions of Canada, as a futures commission merchant in Ontario and as a derivatives dealer in Québec.

5.             Based on the facts above, some or all of the Desjardins Funds may be dealer managed investment funds within the meaning of Regulation 81-102, as the portfolio manager of the Desjardins Funds, which may include the Filer in its capacity as portfolio manager, may be a dealer manager within the meaning of Regulation 81-102.

6.             The securities of each Desjardins Fund are, or will be, qualified for distribution pursuant to a prospectus that was, or will be, prepared and filed in accordance with the securities legislation of the jurisdictions of Canada. Accordingly, each Desjardins Fund is, or will be, a reporting issuer in each of the jurisdictions of Canada.

7.             The Filer, DSI and the Desjardins Funds are not in default of securities legislation of the jurisdictions of Canada.

Reasons supporting the Subsection 4.1(1) Relief:

8.             The Filer may wish to cause a Desjardins Fund to invest in debt securities that do not have a designated rating by a designated rating organization as such terms are defined in Regulation 81-102 and where a Related Underwriter is underwriting the offering of such debt securities.

9.             The Desjardins Funds would not be subject to the prohibition in subsection 4.1(1) of Regulation 81-102 if, in accordance with subsection 4.1(4) of Regulation 81-102, certain conditions were met. The Filer is however not able to rely on the relief if the debt securities the Desjardins Funds invest in do not have a designated rating by a designated rating organization.

10.          The Desjardins Funds require the Subsection 4.1(1) Relief because:

(a)           there is a limited supply of Non-Government Debt Securities;

(b)           frequently, the only source of new issues of Non-Government Debt Securities will be offerings that are, in whole or in part, underwritten by a Related Underwriter; and

(c)           frequently, Non-Government Debt Securities that the Filer, as portfolio manager, wishes to purchase for the Desjardins Funds may not have a designated rating by a designated rating organization.

11.          The Filer considers that a Desjardins Fund may be prejudiced if it cannot purchase, during a Prohibition Period, Non-Government Debt Securities that do not have a designated rating and that are consistent with a Desjardins Fund’s investment objective. Forgoing participation in these investment opportunities may be a significant opportunity cost for the relevant Desjardins Funds, as they would be denied timely access to these securities purely as a result of the coincidental participation of a Related Underwriter in the transaction and the lack of a designated rating of the securities distributed.

12.          None of the Desjardins Funds will be required or obligated to purchase any debt securities during the Prohibition Period.

13.          The Filer operates, or will operate, independently from the Related Underwriter with regard to their respective investment decisions and this will be reflected in the policies and procedures approved by the IRC of the Desjardins Funds. Information and influence barriers ensure that a Desjardins Fund has no involvement in a Related Underwriter’s function as an underwriter.

Reasons supporting the Subsection 4.1(2) Relief:

14.          A director, officer or employee of the Filer that acts as the portfolio manager of a Desjardins Fund, or a director, officer or employee of an associate or an affiliate of the Filer that acts as the portfolio manager of a Desjardins Fund, may also be a director or officer of a Related Issuer of the Filer.

15.          Section 6.2(2) of Regulation 81-107 provides an exemption from the investment fund conflict of interest investment restrictions for purchases of securities of Related Issuers provided the purchase is made on an exchange. It does not provide an exemption from the requirements in subsection 4.1(2) of Regulation 81-102 for purchases of exchange-traded securities of a Related Issuer in the secondary market, or for purchases of non-exchange-traded securities of a Related Issuer in either a Primary Offering or in the secondary market.

16.          The Subsection 4.1(2) Relief will enable the Desjardins Funds to invest in non-exchange-traded debt securities of Related Issuers in a Primary Offering and in the secondary market having a designated rating within the meaning of that term in Regulation 44-101.

17.          The Related Issuers are or may be significant issuers of investment grade quality fixed income securities in the debt market. The Filer considers that it would be in the best interest of the Desjardins Funds to have access, on the terms and conditions described herein, to non-exchange-traded debt securities of the Related Issuers with a designated rating by a designated rating organization within the meaning of those terms in Regulation 44-101, for the reasons set out below:

(a)           there is a limited supply of Non-Government Debt Securities which have a designated rating by a designated rating organization within the meaning of those terms in Regulation 44-101; and

(b)           diversification is reduced to the extent that a Desjardins Fund is limited with respect to investment opportunities; and

(c)           investing in debt securities of Related Issuers is a fundamentally distinct investment and cannot simply be replicated by investing in other securities of similarly situated issuers that are unrelated to the Desjardins Funds. A Desjardins Fund may be prejudiced if it cannot purchase, in either a Primary Offering or the secondary market, non-exchange-traded debt securities of a Related Issuer that are consistent with the Desjardins Fund’s investment objectives.

18.          The debt securities of Related Issuers that are purchased by a Desjardins Fund in a Primary Offering pursuant to the Subsection 4.1(2) Relief will be non-exchange-traded debt securities, other than asset backed commercial paper securities, with a term to maturity of 365 days or more and will be purchased in a Primary Offering where the terms, such as the size and the pricing, will be a matter of public record as evidenced in a prospectus, offering memorandum, press release or other public document.

Reasons supporting the Subsection 4.2(1) Relief:

19.          The Related Dealers are Principal Dealers in the Canadian debt securities market and/or an international debt securities market – both primary and secondary.

20.          Related Dealers that act as a Principal Dealer in international debt securities markets are growing participants in the US, UK, European, Australian and Asian debt markets in various types of debt securities.

21.          The purchase and sale of debt securities by a Desjardins Fund from and to a Related Dealer that is a Principal Dealer in the secondary market is subject to subsection 4.2(1) of Regulation 81-102 which prohibits such transactions.

22.          Section 4.3 of Regulation 81-102 provides certain relief from subsection 4.2(1) of Regulation 81-102 but does not provide an exemption for transactions involving a purchase or sale to a Related Dealer in the Canadian debt securities market and/or an international debt securities market, of Government Debt Securities or Non-Government Debt Securities that are not the subject of public quotations or not inter-fund trades that comply with subsection 6.1(2) of Regulation 81-107.

23.          The Desjardins Funds require the Subsection 4.2(1) Relief because:

(a)           there is a limited supply of Non-Government Debt Securities and Government Debt Securities available to the Desjardins Funds; and

(b)           frequently, the only source of Non-Government Debt Securities and Government Debt Securities will be a Related Dealer that is a Principal Dealer.

24.          Related Dealers that act as Principal Dealers in the Canadian debt securities market and/or an international debt securities market do not influence the business judgement of the Filer, or its affiliate, in connection with the determination of the suitability of investments and information, and influence barriers are in place. Decisions made by the Filer as to which investments a Desjardins Fund should hold are based on the best interest of such Desjardins Fund, without consideration given to the interest of the party with whom a purchase or sale is transacted. This principle is reflected in the policies and procedures that have been and will be implemented and approved by the IRC for dealing with related parties.

25.          The investment strategies of the Desjardins Funds that rely on the Exemption Sought permit, or will permit, each Desjardins Fund to invest in the securities purchased, either as a principal strategy in achieving its investment objective or as a temporary strategy, pending the purchase of other securities.

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:

1.             At the time of each transaction, the transaction is consistent with or necessary to meet the investment objectives of the Desjardins Fund, and represents the business judgment of the portfolio manager of the Desjardins Fund uninfluenced by considerations other than the best interests of the Desjardins Fund or in fact is in the best interests of the Desjardins Fund.

2.             The Filer, as manager of the Desjardins Funds, complies with section 5.1 of Regulation 81-107 and the Filer and the IRC of the Desjardins Funds comply with section 5.4 of Regulation 81-107 for any standing instructions the IRC provides in connection with the transactions.

3.             The IRC of the Desjardins Fund has approved the transaction in accordance with subsection 5.2(2) of Regulation 81-107.

4.             If the IRC of a Desjardins Fund becomes aware of an instance where the Filer, in its capacity as investment fund manager of the Desjardins Fund, did not comply with the terms of this decision, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Desjardins Fund will, as soon as practicable, notify in writing the Desjardins Fund’s principal regulator.

5.             In the case of the Subsection 4.1(1) Relief, in addition to conditions 1 to 4 above:

(a)           if Non-Government Debt Securities are acquired during the Distribution,

(i)            at least one underwriter acting as underwriter in the Distribution is not a Related Underwriter;

(ii)           at least one purchaser who is independent and arm’s length to the Desjardins Funds and the Related Underwriters must purchase at least 5% of the securities distributed under the Distribution;

(iii)          the price paid for the securities by a Desjardins Fund in the Distribution shall be no higher than the lowest price paid by any of the arm’s length purchasers who participate in the Distribution; and

(iv)          a Desjardins Fund and any related Desjardins Funds for which the Filer acts as portfolio manager can collectively acquire no more than 20% of the securities distributed under the Distribution in which a Related Underwriter acts as underwriter;

(b)           if Non-Government Debt Securities are acquired during the 60-Day Period,

(i)            the ask price of the securities is readily available as provided in Commentary 7 to section 6.1 of Policy Statement to Regulation 81-107;

(ii)           the price paid for the securities by a Desjardins Fund is not higher than the available ask price of the security; and

(iii)          the purchase is subject to market integrity requirements as defined in subsection 6.1(1) of Regulation 81-107;

(c)           the Non-Government Debt Securities acquired by the Desjardins Funds pursuant to the Subsection 4.1(1) Relief cannot be asset backed commercial paper; and

(d)           no later than the time a Desjardins Fund files its annual financial statements, the Filer, as manager of the Desjardins Fund, files the particulars of each investment made by the Desjardins Fund, pursuant to the Subsection 4.1(1) Relief during its most recent completed financial year.

6.             In the case of the Subsection 4.1(2) Relief, in addition to conditions 1 to 4 above:

(a)           if the purchase is made in a Primary Offering:

(i)            the size of the Primary Offering is at least $100 million;

(ii)           at least two purchasers who are independent and at arm's-length, which may include an independent underwriter (within the meaning of Regulation 33-105 respecting Underwriting Conflicts (V-1.1, r. 11)) purchase collectively at least 20% of the Primary Offering;

(iii)          no Desjardins Fund shall participate in the Primary Offering, if following its purchase, the Desjardins Fund would have more than 5% of its net assets invested in non-exchange-traded debt securities of the Related Issuer;

(iv)          no Desjardins Fund shall participate in the Primary Offering, if following its purchase, the Desjardins Fund, together with other Desjardins Funds will hold more than 20% of the securities issued under the Primary Offering;

(v)           the price paid for the non-exchange-traded debt securities by the Desjardins Fund in the Primary Offering shall be no higher than the lowest price paid by any of the arm's-length purchasers who participate in the Primary Offering; and

(vi)          the non-exchange-traded debt security has been given and continues, at the time of the purchase, to have a designated rating by a designated rating organization within the meaning of those terms in Regulation 44-101;

(b)           if the purchase occurs in the secondary market:

(i)            if the security is an exchange-traded security, the purchase is made on an exchange on which the securities of the issuer are listed and traded;

(ii)           if the security is not an exchange-traded security,

A.            the price payable for the security is not more than the ask price of the security;

B.            the ask price of the security is determined as follows:

I.              if the purchase occurs on a marketplace, the price payable is determined in accordance with the requirements of that marketplace; or

II.             if the purchase does not occur on a marketplace:

(1)           the Desjardins Fund may pay the price for the security, at which an independent, arm’s-length seller is willing to sell the security, or

(2)           if the Desjardins Fund does not purchase the security from an independent, arm’s-length seller, the Desjardins Fund must pay the price quoted publicly by an independent marketplace or obtain, immediately before the purchase, at least one quote from an independent, arm’s-length purchaser or seller and not pay more than that quote; and,

(iii)          the security has been given and continues, at the time of the purchase, to have a designated rating by a designated rating organization within the meaning of those terms in Regulation 44-101; and

(iv)          the transaction complies with any applicable market integrity requirements as defined in subsection 6.1(1) of Regulation 81-107; and

(c)           No later than the time a Desjardins Fund files its annual financial statements, the Filer, as manager of the Desjardins Funds, files with the securities regulatory authority the particulars of any such investments.


7.             In the case of the Subsection 4.2(1) Relief, in addition to conditions 1 to 4 above:

(a)           the bid and ask price of the security are readily available, as provided in Commentary 7 of section 6.1 of Policy Statement to Regulation 81-107;

(b)           a purchase is not executed at a price which is higher than the available ask price and a sale is not executed at a price which is lower than the available bid price;

(c)           the transaction is subject to market integrity requirements as defined in subsection 6.1(1) of Regulation 81-107 and any equivalent transparency and trade reporting requirements applicable to the transaction of debt securities in international debt securities markets; and

(d)           the Desjardins Fund keeps the written records required by paragraph 6.1(2)(g) of Regulation 81-107.

“Hugo Lacroix”

Senior Director, Investment Funds

Autorité des marchés financiers