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 fixed-income mutual fund to invest more than 10% of net asset value in securities 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.
June 3, 2016
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 SOCIETERRA ENVIRONMENTAL BOND FUND (the Fund)
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 Fund for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption under section 19.1 of Regulation 81-102 respecting Investment 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 Fund to invest up to:
(a) 20% of its net asset value, immediately after the 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 of Canada or the government of the United States of America and (ii) rated "AA" by Standard & Poor's Rating Services (Canada) (S&P) or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations; and
(b) 35% of its net asset value, immediately after the 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 S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations.
(such evidences of indebtedness are collectively referred to as Foreign Government Securities) (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 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.
Terms defined in Regulation 14-101 respecting Definitions (c. V-1.1, r. 3), Regulation 11-102, Regulation 25-101 respecting Designated Rating Organizations (c. V-1.1, r. 8.1) and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the Business Corporation Act (CQLR, c. S 31.1) of Québec.
2. The Filer's head office is located at 1 Complexe Desjardins, C.P. 34, Suite 1422, South Tower, Montréal, Québec, Canada, H5B 1E4.
3. The Filer, or an affiliate of the Filer, will be the investment fund manager, promoter, registrar and transfer agent of the Fund.
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.
6. The Fund will be a mutual fund established under the laws of Québec pursuant to an amended and restated declaration of trust dated January 5, 2009, as amended. Desjardins Trust Inc. will act as trustee.
7. On April 7, 2016, the Fund filed a preliminary prospectus governed by Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (c. V-1.1, r. 38) in each of the jurisdictions of Canada in order to proceed with an initial public offering. It is expected that the Fund will become a reporting issuer subject to Regulation 81-102 among others, in all jurisdictions of Canada upon the issuance of a receipt for its final prospectus (the Final Prospectus).
8. Desjardins Global Asset Management Inc. (DGAM) will act as portfolio manager of the Fund and will be also responsible for retaining a portfolio sub-adviser for the Fund. DGAM is duly registered in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Québec and Saskatchewan 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), in Ontario as a commodity trading manager pursuant to the Commodity Futures Act (RSO 1990, c. C.20) and in Manitoba as a commodity adviser pursuant to The Commodity Futures Act (C.C.S.M. c. C152).
9. Mirova SA (Mirova) will act as portfolio sub-adviser to the Fund. Mirova relies on the international adviser registration exemption in Ontario and Québec pursuant to section 8.26 of Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (c.V-1.1, r.10).
10. The Fund's investment objective will be to achieve a total return comprised of income and some long-term capital appreciation by investing primarily in various environmental bond debt securities issued by governments, supranational organizations, development banks, government agencies and corporations throughout the world.
Reasons for the Exemption Sought
11. Subsection 2.1(1) of Regulation 81-102 prohibits the Fund from purchasing a security of an issuer, entering into a specified derivatives transaction or purchasing index participation units if, immediately after the transaction, more than 10% of the net asset value of the Fund would be invested in securities of any issuer (the Concentration Restriction).
12. The Concentration Restriction does not apply to a purchase of, among other things, a government security as defined in section 1.1 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 of Canada or the government of the United States of America.
13. Foreign Government Securities do not meet the definition of government security.
14. In the Policy Statement to Regulation 81-102, the Canadian Securities Administrators state their views on various matters relating to Regulation 81-102. Subsection 3.1(4) of the Companion Policy to Regulation 81-102 indicates that the relief from paragraph 2.04(1)(a) of National Policy Statement No. 39 , which was replaced by section 2.1 of Regulation 81-102, has been provided to mutual funds generally under the following circumstances:
i. The mutual fund has been permitted to invest up to 20% of its net asset value 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 are rated "AA" by S&P, or its DRO affiliate or have an equivalent rating by one or more other approved credit rating organizations or their DRO affiliates;
ii. The mutual fund has been permitted to invest up to 35% of its net asset value in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued by issuers described in paragraph i and are rated "AAA" by S&P or its DRO affiliate, or have an equivalent rating by one or more other approved credit rating organizations or their DRO affiliates.
15. The Exemption Sought, which relaxes the limitations in the Concentration Restriction, will enhance the ability of the Fund to pursue and achieve its investment objective. Higher concentration limits may allow the Fund to benefit from investment efficiencies and reduced transaction costs.
16. The Exemption Sought will allow the Fund to invest more than 10% of the Fund's net asset value in Foreign Government Securities having a AA or AAA rating, as applicable. This rating may from time to time be equivalent to or higher than the rating of a government security as defined in section 1.1 of Regulation 81-102.
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. subparagraphs (a) and (b) of the Exemption Sought cannot be combined for any one issuer;
2. the securities that are purchased pursuant to the Exemption Sought are traded on a mature and liquid market;
3. the acquisition of the evidences of indebtedness pursuant to the Exemption Sought is consistent with the fundamental investment objective of the Fund;
4. the Final prospectus of the Fund will disclose any additional risks associated with the concentration of net asset value of the Fund in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which that issuer is located; and
5. the Final prospectus of the Fund 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.