Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from subsection 4.1(1) of National Instrument 81-102 Investment Funds for dealer-managed investment funds to invest in distributions of 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 National Instrument 81-102 Investment Funds limited supply of new debt offerings have designated ratings, and trend is expected to continue -- dominant position of related underwriters in debt underwriting limits funds' ability to acquire debt securities for the funds -- all purchases must be consistent with fund investment objectives and subject to approval of independent review committee -- debt offerings must have at least one underwriter in addition to related underwriter, at least one arm's length purchaser purchasing at least 5% of the offerings -- related funds can collectively purchase no more than 20% of offering and must pay no more than lowest price paid by arm's-length purchasers -- funds must not be money market funds and cannot purchase asset backed commercial paper pursuant to relief.

Relief from subsection 4.2(1) of National Instrument 81-102 Investment Funds 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, debt securities of an issuer other than the federal or a provincial government or debt securities issued or fully and unconditionally guaranteed by the federal or a provincial government in the secondary market -- limited supply of debt securities available to the funds -- all transactions must be consistent with fund investment objectives and subject to approval of independent review committee -- bid and ask prices of debt security must be readily available -- only current related dealer that acts as a principal dealer in the Canadian debt securities market is not a "responsible person" as defined in subsection 13.5(1) of National Instrument 31-103 Registration Requirements, Exemptions or Ongoing Registrant Obligations or an associate of a "responsible person" as contemplated by subparagraph 13.5(2)(b)(ii) of National Instrument 31-103 Registration Requirements, Exemptions or Ongoing Registrant Obligations -- if it or any future related dealer be a "responsible person" or an associate of a "responsible person", filer shall obtain relief from any applicable conflict of interest requirement set forth in National Instrument 31-103 Registration Requirements, Exemptions or Ongoing Registrant Obligations prior to the funds relying on relief.

Applicable Legislative Provisions

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

October 7, 2015

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 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); and

2. Subsection 4.2(1) of Regulation 81-102 to permit the Desjardins Funds to purchase from, or sell to DSI (as defined below), 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, 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 Requested Relief).

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 British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Yukon, Nunavut, Northwest Territories (the Other 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 81-102, Regulation 14-101 respecting Definitions (c. V-1.1, r.3), Regulation 11-102 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 Group" means all of the entities which fall under the "Fédération des Caisses Desjardins du Québec" umbrella;

"Desjardins Funds" means all existing mutual funds and any mutual funds subsequently established in the future for which the Filer acts, or will act, as investment fund manager.

Representations

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

General

1. The Filer is, or will be, the investment fund manager of each Desjardins Fund. The Filer is registered as an investment fund manager in the Provinces of Québec, Ontario and Newfoundland and Labrador. The head office of the Filer is in Montreal, Québec.

2. The Filer is a member of the Desjardins Group.

3. The Filer is currently an affiliate of Desjardins Securities Inc. (DSI) as they are both directly or indirectly held by Desjardins Financial Corporation Inc. (DFC), and 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 (IIROC) and is registered as an investment dealer in all provinces and territories of Canada, as a futures commission merchant in Ontario and as a derivatives dealer in Québec.

5. Desjardins Global Asset Management Inc. (DGAM) is, or will be, the portfolio manager to each of the Desjardins Funds.

6. DGAM is a member of the Desjardins Group.

7. DGAM is duly registered as a portfolio manager and an exempt market dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec and Nova Scotia. DGAM is also duly registered as an investment fund manager in British Columbia, Alberta, Manitoba, Ontario, Québec and Nova Scotia. In addition, DGAM is duly registered as an adviser in Manitoba, commodity trading manager in Ontario and as derivatives portfolio manager in Québec.

8. DGAM and DSI are affiliates as they are both directly or indirectly held by DFC.

9. 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 from time to time, as the portfolio manager of the Desjardins Funds, DGAM, may be a "dealer manager" within the meaning of Regulation 81-102.

10. Each Desjardins Fund is, or will be, a mutual fund created under the laws of the Province of Québec and is, or will be, subject to the provisions of Regulation 81-102.

11. 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 and the Other Jurisdictions. Accordingly, each Desjardins Fund is, or will be, a reporting issuer or the equivalent in each jurisdiction in Canada.

12. Each Desjardins Fund has, or will have, an independent review committee (IRC) established in accordance with Regulation 81-107.

13. Neither the Filer nor the Desjardins Funds are in default of securities legislation in the Jurisdictions or in any of the Other Jurisdictions.

14. The investment strategies of the Desjardins Funds that rely on the Requested Relief 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.

Relating to the Subsection 4.1(1) Relief:

15. DGAM 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.

16. None of the Desjardins Funds who may rely on the Subsection 4.1(1) Relief are, or will be, a "money market" fund as such term is defined in Regulation 81-102.

17. 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 DGAM wishes to purchase for the Desjardins Funds may not have a "designated rating" by a "designated rating organization".

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

19. DGAM 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 Fund(s), 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.

20. DGAM operates, or will operate, independently from the Related Underwriter with regard to their respective investment decisions and this is 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. Further, any purchase of Non-Government Debt Securities by a Desjardins Fund will be consistent with the investment objectives of the Desjardins Fund and represents the business judgment of the Desjardins Fund's portfolio manager uninfluenced by considerations other than the best interests of the Desjardins Fund.

21. Any purchase of Non-Government Debt Securities by a Desjardins Fund during the relevant Prohibition Period will only be made with the prior approval of the IRC in accordance with subsection 5.2(2) of Regulation 81-107.

22. 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 are met, including:

(a) the IRC of the Desjardins Funds has approved the transaction in accordance with subsection 5.2(2) of Regulation 81-107;

(b) for equity securities, a prospectus is filed with one or more securities regulatory authorities or regulators in Canada in connection with the relevant offering, and during the 60-Day Period, the investment is made on an exchange on which the class of equity securities is listed and traded; and

(c) for debt securities, the securities have been given and continue to have a designated rating by a designated rating organization as these terms are defined in Regulation 81-102.

23. DGAM is not able to rely on subsection 4.1(4) of Regulation 81-102 to invest for the Desjardins Funds in debt securities if the securities in the offering do not have a designated rating by a designated rating organization as required by paragraph 4.1(4)(b) of Regulation 81-102.

24. The details of a Distribution and a Related Underwriter's involvement as an underwriter in such Distribution will not be known to DGAM sufficiently long enough in advanced to make an application for relief on a case-by-case basis.

Relating to the Subsection 4.2(1) Relief:

25. The Related Dealers are Principal Dealers in the Canadian debt securities market -- both primary and secondary.

26. DSI is not a "responsible person" as defined in subsection 13.5(1) of Regulation 31-103 respecting Registration, Requirements, Exemptions and Ongoing Registrant Obligations (c. V-1.1, r. 10) (Regulation 31-103) or an associate of a "responsible person" as contemplated by subparagraph 13.5(2)(b)(ii) of Regulation 31-103. Should DSI or any future Related Dealer be a "responsible person" or an associate of a "responsible person", the Filer shall obtain relief from any applicable conflict of interest requirement set forth in Regulation 31-103 prior to the Desjardins Funds relying on the Subsection 4.2(1) Relief.

27. The purchase and sale of debt securities 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.

28. 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 in 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.

29. 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.

30. The Desjardins Funds require the Subsection 4.2(1) Relief in order to pursue their investment objectives and strategies effectively.

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 Requested Relief is granted provided that:

In the case of the Subsection 4.1(1) Relief:

(a) at the time of each purchase, the purchase is consistent with or necessary to meet the investment objective 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;

(b) 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 Fund comply with section 5.4 of Regulation 81-107 for any standing instructions the IRC provides in connection with the investments of securities;

(c) at the time of the purchase, the IRC of the Desjardins Fund has approved the transaction in accordance with subsection 5.2(2) of Regulation 81-107;

(d) 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 Fund(s) 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 DGAM 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;

(e) 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;

(f) 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

(g) no later than the time a Desjardins Fund files its annual financial statements, the Filer, as manager of the Desjardins Fund, will file 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;

In the case of the Subsection 4.2(1) Relief:

(a) at the time of each transaction, the transaction is consistent with or necessary to meet the investment objective 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;

(b) 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 Fund comply with section 5.4 of Regulation 81-107 for any standing instructions the IRC provides in connection with the transactions;

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

(d) 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;

(e) 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;

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

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

"Josée Deslauriers"
Senior Director, Investment Funds and Continuous Disclosure