Securities Law & Instruments

Headnote

Policy Statement 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption from subsection 2.1(1) of Regulation 81-102 respecting Mutual Funds to permit global bond mutual funds to invest more than 10 percent of net assets issued by a foreign government or permitted supranational agency, subject to certain conditions.

Applicable Legislative Provisions

Regulation 81-102 respecting Mutual Funds, ss. 2.1(1), 19.1.

[Translation]

September 24, 2013

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 INVESTMENTS INC.
(the Filer)

AND

THE DESJARDINS GLOBAL TACTICAL BOND FUND
(the Global Bond Fund)

AND

THE DESJARDINS EMERGING MARKETS BOND FUND
(the Emerging Markets Bond Fund and,
collectively with the Global Bond Fund, the Funds)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption under section 19.1 of Regulation 81-102 respecting Mutual Funds (c. V-1.1, r. 39) (Regulation 81-102) from the concentration restriction in subsection 2.1(1) of Regulation 81-102 in order to permit the Funds to invest more than 10% of their asset net value, immediately after a transaction, in Foreign Government Securities (as defined below) (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 section 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 British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon Territory, 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 14-101 respecting Definitions (c. V-1.1, r. 3), Regulation 25-101 respecting Designated Rating Organizations (c. V-1.1, r. 8.1), Regulation 11-102 and Regulation 81-102 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 Business Corporation Act (RSQ, c. S-31.1) of Québec.

2. The Filer's head office is located at 1 Complexe Desjardins, CP 7, 36th South Tower, Montréal, Québec, Canada, H5B 1B2.

3. The Filer, or an affiliate of the Filer, will be the investment fund manager, promoter, registrar and transfer agent of the Funds.

4. The Filer is duly registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador.

5. The Filer is not in default of securities legislation in any of the jurisdictions of Canada.

The Funds

6. The Funds are open-ended investment trusts established under the laws of Québec pursuant to an amended and restated declaration of trust dated January 5, 2009, as amended. Desjardins Trust Inc. acts as trustee.

7. On June 27, 2013, each of the Funds filed with each jurisdiction of Canada a preliminary prospectus and a preliminary annual information form governed by Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (c. V-1.1, r.38) in order to proceed with an initial public offering. It is expected that each of the Funds will become reporting issuers in all jurisdictions of Canada upon the issuance of a receipt for their final prospectus (the Final Prospectus).

8. The Funds are mutual funds and upon issuance of a receipt for their Final Prospectus, they will be subject to Regulation 81-102.

9. Desjardins Global Asset Management Inc. (DGAM) acts as portfolio manager of the Funds and is also responsible for retaining portfolio sub-advisers for the Funds. DGAM is duly registered in Alberta, Manitoba, Nova Scotia, Ontario and Québec as an adviser in the category of portfolio manager. DGAM is also duly registered in Québec as a derivatives portfolio manager pursuant to the Derivatives Act (RSQ, c. I-14.01) (the Derivatives Act) and in Ontario as a commodity trading manager pursuant to the Commodity Futures Act (RSO 1990, c. C.20) (the Commodity Futures Act).

10. The Global Bond Fund's investment objectives are to provide a high income return and some long-term capital appreciation by investing primarily in fixed-income securities of issuers throughout the world.

11. PIMCO Canada Corp. (PIMCO) acts as sub-adviser for the Global Bond Fund. PIMCO is duly registered as adviser in the category of portfolio manager in Alberta, British-Columbia, Manitoba, Saskatchewan, Nova Scotia, Québec and Ontario. PIMCO is also duly registered in Québec as derivatives portfolio manager pursuant to the Derivatives Act and in Ontario as commodity trading manager pursuant to the Commodity Act.

12. The Global Bond Fund invests primarily in global credit markets including, without limitation, good quality corporate bonds, high-yield corporate bonds and emerging market bonds. The good quality corporate bonds have a DBRS credit rating of "BBB" or better, or any equivalent credit rating set by another designated rating organization. The high-yield corporate bonds, for their part, have a DBRS credit rating of less than "BBB", or any equivalent credit rating set by another designated rating organization.

13. The Emerging Markets Bond Fund's investment objectives are to provide a high income return and some long-term capital appreciation by investing primarily in fixed-income securities of emerging markets issuers.

14. Aberdeen Asset Management Inc. (Aberdeen) acts as sub-adviser for the Emerging Markets Bond Fund. Aberdeen is a non-resident of Canada and provides advice to the Emerging Markets Bond Fund in reliance on the international adviser statutory exemption from registration provided under subsection 8.26(3) of Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (c. V-1.1, r. 10).

15. The Emerging Markets Bond Fund invests primarily in government bonds in emerging markets denominated in U.S. dollars or local currencies. The Emerging Markets Bond Fund may also invest in emerging markets corporate bonds. Aberdeen's investment process hinges on a detailed analysis of the countries in light of global economic trends. Constantly updated, this analysis is used to create a prospective analysis of the countries' credit profile and evolution of the capital markets. A country's macro-economic profile, the nature of its political institutions and the robustness of its micro-economic stakeholders all play a central role in the analysis of its solvency.

16. Each of the Funds is not in default of securities legislation in any of the jurisdictions of Canada.

Reasons for the Exemption Sought

17. The Filer would like the Funds to have the flexibility to invest up to:

(a) 20% of their net asset value, immediately after a transaction, in evidences of indebtedness of any one issuer if those evidences of indebtedness are (i) issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction or the government of the United States of America and (ii) rated "AA" by Standard & Poor's Rating Services (Canada) or its DRO affiliate, or have an equivalent rating by one or more designated rating organizations or their DRO affiliates; and

(b) 35% of their net asset value, immediately after a transaction, in evidences of indebtedness of any one issuer, if those securities are (i) issued by issuers described in subparagraph (a) above and (ii) rated "AAA" by Standard & Poor's Rating Services (Canada) or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates.

(such evidences of indebtedness are collectively referred to as Foreign Government Securities).

18. Subsection 2.1(1) of Regulation 81-102 prohibits the Funds from purchasing a security of an issuer if, immediately after the transaction, more than 10% of the net asset value of a Fund, taken at market value at the time of the transaction, would be invested in securities of any issuer (the Concentration Restriction).

19. The Concentration Restriction does not apply to a purchase of, among other things, a government security as defined in section of Regulation 81-102, which means an evidence of indebtedness that is issued, or fully and unconditionally guaranteed as to principal and interest, by any of the government of Canada, the government of a jurisdiction or the government of the United States of America.

20. Foreign Government Securities do not meet the definition of government security, as defined in Regulation 81-102.

21. The Exemption Sought, which relaxes the limitations in the Concentration Restriction, will enhance the ability of the Funds to pursue and achieve their investment objectives.

22. Standard & Poor's uses two general categories to derive a credit rating for government debt, namely economic risk and political risk. The first category is a quantitative assessment of a government's ability to meet its debt obligations. The second is the government's preparedness to meet its obligations, for a government may be able to pay, but be unwilling to do so for policy reasons. Standard & Poor's rates issuers on a scale from the highest credit rating of AAA to a lowest rating of D. Other designated rating organizations have similar practices. The Exemption Sought contemplates only investing in the two highest rating levels of investment grade debt.

23. Higher concentration limits may allow the Funds to benefit from investment efficiencies and reduced transaction costs as certain foreign government treasury offerings are more readily available for investment and trades can be completed faster in certain markets that are more readily accessible to foreign investment.

24. The credit risk and liquidity characteristics of the Foreign Government Securities are similar to the credit risk and liquidity characteristics of the types of securities that fall within the meaning of government security in Regulation 81-102. As such, a limited increase in the maximum percentage of the net asset value of the Funds that can be invested in the Foreign Government Securities will not result in a material increase of the credit risk and the concentration risk of the Funds.

25. The Filer believes that the Exemption Sought is not contrary to the public interest, is in the best interest of the Funds and represents the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Funds.

Decision

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

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

1. each of the Funds may only invest up to:

(a) 20% of its net asset value, immediately after a transaction, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction or the government of the United States of America and rated "AA" by Standard & Poor's Rating Services (Canada) or its DRO affiliate, or have an equivalent rating by one or more designated rating organizations or their DRO affiliates;

(b) 35% of its net asset value, immediately after a transaction, in evidences of indebtedness of any one issuer, if those securities are issued by issuers described in subparagraph (a) above and rated "AAA" by Standard & Poor's Rating Services (Canada) or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates;

2. subparagraphs (a) and (b) above cannot be combined for any one issuer;

3. the securities that are purchased pursuant to the Exemption Sought are traded on a mature and liquid market;

4. the acquisition of the evidences of indebtedness pursuant to the Exemption Sought is consistent with the fundamental investment objectives of each of the Funds;

5. the prospectus of the Funds will disclose any additional risks associated with the concentration of net assets of the Funds in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Funds have so invested and the risks, including foreign exchange risks, of investing in the country in which that issuer is located; and

6. the prospectus of the Funds will disclose, in the investment strategies section, the details of the exemption granted along with the conditions imposed and the type of securities covered by the Exemption Sought.

"Josée Deslauriers"
Senior Director,
Investment Funds and Continuous Disclosure
Autorité des marchés financiers