Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions – Relief granted to investment funds subject to NI 81-102 to purchase securities non-exchange traded debt securities of related entities under primary offerings and in the secondary market - relief conditional on IRC approval, compliance with pricing requirements, and limits on the amount of a primary offering of a related entity a fund may purchase; relief also granted from the requirement to file reports with respect to  purchases and sales effected by investment funds subject to NI 81-102 through related persons or companies to the funds – funds are subject to NI 81-102 which requires substantially similar disclosure.

 

Applicable Legislative Provisions

 

Securities Act (Ontario), ss. 111(2)(a), 111(2)(c)(ii), 111(4), 113, 117(1)3, 117(2).

 

August 24, 2018

 

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

DESJARDINS GLOBAL ASSET MANAGEMENT INC.

(the Filer)

 

AND

 

THE DESJARDINS FUNDS

(as defined below)

 

DECISION

 

 

Background

 

The Principal Regulator (as defined below) in the Jurisdiction has received an application from the Filer on behalf of each of the Filer and the Desjardins Funds (as defined below) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer and the Desjardins Funds from:

 

(a)           the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in any person or company who is a substantial security holder of the investment fund, its management company or its distribution company;

 

(b)           the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder,

 

(c)           the restriction in the Legislation that prohibits an investment fund from knowingly making an investment in an issuer in which any person or company who is a substantial security holder of the investment fund, its management company or its distribution company, has a significant interest;

 

(d)           the restriction in the Legislation that prohibits an “investment fund”, its management company or its distribution company from knowingly holding an investment described in (a), (b) or (c) above ((a), (b), (c) and (d) are collectively, the Related Issuer Requirements); and

(e)           the requirement to file a report prepared in accordance with the Legislation of every transaction of purchase of securities from or sale of securities to any related person or company and every purchase or sale effected by the investment fund through any related person or company with respect to which the related person or company received a fee either from the investment fund or from the other party to the transaction or from both (specifically, the Reporting Requirement);

 

in order to allow purchases by the Desjardins Funds of NET Debt Securities (as defined below) of Related Issuers (as those expressions are defined below) (relief from the Related Issuer Requirements and the Reporting Requirement is collectively, the Exemption Sought).

 

Under the process of Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

(a)           the Ontario Securities Commission is the principal regulator for this application (the Principal Regulator), 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 respect of the Requested Relief in all the provinces and territories of Canada (the Applicable Jurisdictions), except in the provinces and territories of Manitoba, Québec, Yukon, Northwest Territories and Nunavut.

 

Interpretation

 

Terms defined in National Instrument 14-101 Definitions, MI 11-102, NI 81-102 Investment Funds (NI 81-102) and National Instrument 81-107 Independent Review Committee for Investment Funds (NI 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 existing investment funds, including mutual funds and exchange traded funds, subject to both NI 81-102 and NI 81-107 and any investment fund, including mutual funds and exchange traded funds, subject to both NI 81-102 and NI 81-107 subsequently established in the future for which the Filer or an affiliate of the Filer acts, or will act, as investment fund manager and/or portfolio manager.

 

IRC means the independent review committee established in accordance with NI 81-107.

 

NET Debt Securities means non-exchanged-trade debt securities of Related Issuers.

 

Related Issuer means (i) any person or company who is a substantial security holder of a Desjardins Fund, its management company (as defined in the Securities Act (Ontario) (OSA)) or its distribution company (as defined in the OSA); (ii) any person or company in which a Desjardins Fund, alone or together with one or more related Desjardins Funds, is a substantial security holder and/or (iii) an issuer in which any person or company who is a substantial security holder of a Desjardins Fund, its management company (as defined in the OSA) or its distribution company (as defined in the OSA) has a significant interest. 

 

Primary Offering means a primary distribution or treasury offering of NET Debt Securities.

 

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 (Québec).

 

2.             The Filer’s head office is located at 1 Complexe Desjardins, 20th Floor, South Tower, Montréal, Québec, Canada, H5B 1B3.

 

3.             The Filer is registered as a portfolio manager in all of the provinces and territories of Canada and as an exempt market dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec and Nova Scotia. The Filer is also registered as an investment fund manager in Alberta, Manitoba, Ontario, Québec, Nova Scotia and Newfoundland and Labrador. In addition, the Filer is registered as an adviser in Manitoba, commodity trading manager in Ontario and as derivatives portfolio manager in Québec.

 

4.             The Filer is not in default of securities legislation in any jurisdiction of Canada.

 


 

FCDQ

 

5.             Fédération des Caisses Desjardins du Québec (FCDQ) is a financial services cooperative established under the Act respecting financial services cooperatives (Québec).

 

6.             Capital Desjardins Inc. (CDI), a wholly-owned subsidiary of FCDQ, is a corporation incorporated under the Business Corporation Act (Québec) whose purpose is to offer its own securities in the financial markets and to invest the proceeds in securities issued by the Desjardins “caisses”. The Desjardins “caisses” may issue capital to raise liquidity. Rather than doing this on an individual basis, the Desjardins “caisses” do business with CDI which acts as a bridge between the Desjardins caisses and institutional investors by consolidating the securities they issue.

 

7.             FCDQ, or an affiliate of FCDQ, including CDI, issued or may issue listed and non-listed debt securities as well as rated and non-rated debt securities.

 

8.             The Filer intends to obtain the approval of the independent review committee (IRC) of each Desjardins Fund in order to, amongst other things, invest in listed securities of FCDQ, the whole in accordance with NI 81-107.

 

9.             FCDQ is not in default of securities legislation in any of the Applicable Jurisdictions.

 

The Desjardins Funds

 

10.          Each of the Desjardins Funds is or will be a mutual fund established under the laws of Québec.

 

11.          The Filer or an affiliate of the Filer currently acts as investment fund manager and/or portfolio manager of the existing Desjardins Funds.

 

12.          The Filer or an affiliate of the Filer will act as the investment fund manager and/or portfolio manager of each future Desjardins Fund.

 

13.          Each Desjardins Fund is, or will be, a reporting issuer under the securities legislation of one or more Canadian provinces and territories whose securities are, or will be, qualified for distribution in accordance with applicable securities legislation.

 

14.          Each Desjardins Fund is, or will be, a reporting issuer in one or more jurisdictions of Canada.  As such, the NI 81-102 Funds are, or will be, mutual funds in Ontario, which, in the OSA, means either a mutual fund that is a reporting issuer or a mutual fund that is organized under the laws of Ontario, but does not include a private mutual fund.

 

15.          A Desjardins Fund’s reliance on the Exemption Sought will be compatible with its investment objectives and strategies.

 

16.          None of the Desjardins Funds are in default of securities legislation in any jurisdiction of Canada.

 

Substantial Security Holders and Significant Interests

 

17.          The Filer and Desjardins Investment Inc. (DII), who currently acts as investment fund manager for certain of the Desjardins Funds, are members of a group of entities which fall under the FCDQ umbrella and are wholly-owned subsidiaries of FCDQ. As such, FCDQ is a substantial security holder of the Filer and DII.

 

18.          FCDQ also has a significant interest in CDI.

 

19.          A Desjardins Fund may, alone or together with one or more other Desjardins Funds, be a substantial security holder of, notably, FCDQ and/or CDI.

 

IRC and Related Exemptive Reliefs

 

20.          Each of the Desjardins Funds has an IRC appointed in a manner consistent with the requirements of NI 81-107.

 

21.          Although it has not reviewed the application, the IRC will review the policies and procedures proposed by the Filer concerning the transactions contemplated by the Exemption Sought to determine whether they satisfy the standards set out in subsection 5.2(2) of NI 81-107, including whether they are appropriate to achieve a fair and reasonable result for the Desjardins Funds.  In addition to the conditions of the Exemption Sought, the IRC may impose additional conditions that the IRC considers to be beneficial to the Desjardins Funds.

 

22.          As of November 21, 2017, the Canadian Securities Authorities (CSA) granted relief from section 4.1(2) of NI 81-102 authorizing the Filer when acting on behalf of all investment funds, including mutual funds and exchange traded funds, and any investment funds subject to NI 81-102 subsequently established in the future for which the Filer acts, or will act, as investment fund manager to  invest in non-exchange-traded debt securities having a designated rating (as such term is defined in NI 81-102) of an issuer of which a partner, director, officer or employee of the dealer manager of the investment fund, or a partner, director, officer or employee of an affiliate or associate of the dealer manager, is a partner, director or officer (the DGAM Subsection 4.1(2) NI 81-102 Relief).

 

23.          As of May 29, 2018, the CSA granted relief from section 4.1(2) of NI 81-102 authorizing DII when acting on behalf of all existing mutual funds (for which the Filer currently acts as portfolio manager) subject to NI 81-102 for which it acts as investment fund manager and any mutual fund subject to NI 81-102, subsequently established in the future for which DII will act as investment fund manager to permit such funds to invest in non-exchange-traded debt securities having a designated rating (as such term is defined in NI-81-102) of an issuer of which a partner, director, officer or employee of the dealer manager of the investment fund, or a partner, director, officer or employee of an affiliate or associate of the dealer manager, is a partner, director or officer (the DII Subsection 4.1(2) NI 81-102 Relief).

 

24.          On July 11, 2018, the Filer obtained relief from section 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to authorize the Filer, or any affiliate of the Filer, to purchase non exchange-traded securities of issuers in which a responsible person (as defined in section 13.5(1) of NI 31-103) or an associate of a responsible person (as defined in section 13.5(1) of NI 31-103) of the Filer is a partner, officer or director on behalf of the Desjardins Funds for which the Filer or an affiliate of the Filer acts, or will act, as investment fund manager and/or portfolio manager (the NI 31-103 Relief, and collectively with the DGAM Subsection 4.1(2) NI 81-102 Relief and the DII Subsection 4.1(2) NI 81-102 Relief, the Related Exemptive Relief).

 

25.          The Filer and DII follow and/or will follow, as applicable, the conditions and procedures contained in the Related Exemptive Relief when they enter into the above transactions on behalf of the applicable funds.

 

Regulatory Restrictions and Requirements to Invest in Securities of Related Issuers

 

26.          According to the Legislation, no investment fund (which, for the purpose of section 111 of the OSA, means a mutual fund in Ontario or a non-redeemable investment fund that is a reporting issuer) shall knowingly make an investment in (i) any person or company who is a substantial security holder of the investment fund, its management company or its distribution company; (ii) in any person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder or (iii) in an issuer in which any person or company who is a substantial security holder of the investment fund, its management company or its distribution company has a significant interest (the Investment Restriction).

 

27.          According to the Legislation, every management company shall, in respect of each investment fund to which it provides services or advice, file a report prepared in accordance with the OSA regulations of every transaction of purchase or sale of securities between the investment fund and any related person or company within 30 days after the end of the month in which it occurs.

 

28.          Section 6.2 of NI 81-107 provides the Desjardins Funds with an exemption from the Investment Restriction in respect of purchasing exchange-traded securities, such as common shares and units of exchange-traded funds, in the secondary market if the purchase is made on an exchange and the Desjardins Fund’s IRC has approved the investment under section 5.2(2) of NI 81-107. It does not permit the Desjardins Funds to purchase NET Debt Securities.

 

29.          Accordingly, in the absence of the Exemption Sought, the Desjardins Funds may not purchase NET Debt Securities.

 

30.          Moreover, in the absence of the Exemption Sought, the Reporting Requirement would require the Filer, or an affiliate of the Filer acting as the management company (as defined in the applicable securities laws) of the Desjardins Funds to file a report of every purchase and sale of NET Debt Securities by the Desjardins Funds or every purchase or sale effected by the Desjardins Funds through any related person or company with respect to which the related person or company received a fee either from the Desjardins Funds or from the other party to the transaction or from both within 30 days after the end of the month in which such purchase or sale occurs.

 

31.          It would be costly and time-consuming for the Desjardins Funds to comply with the Reporting Requirement, the costs of which will ultimately be borne by the investors.

 

32.          NI 81-106 requires the Funds to prepare and file annual and interim management reports of fund performance that include a discussion of transactions involving related parties to the Desjardins Funds. Such disclosure is similar to that required under the Reporting Requirement and fulfills its objective to inform the OSC and the general public about the transactions involving related parties to the Desjardins Funds.

Investments in NET Debt Securities by the Desjardins Funds

 

33.          The Filer has determined that it would be in the best interests of the Desjardins Funds to be granted the Exemption Sought. This determination reflects the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Desjardins Funds.

 

34.          Certain Related Issuers, such as FCDQ or CDI are, or will be, significant issuers of securities and they are, or will be, issuers of debt instruments. The Filer considers that the Desjardins Funds should have access to securities of the Related Issuers for the following reasons:

 

(a)           there is a limited supply of highly rated corporate debt;

 

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

 

(c)           to the extent that a Desjardins Fund seeks to track or outperform a benchmark, it is important for the Desjardins Fund to be able to purchase any securities included in the benchmark. NET Debt Securities of Related Issuers may be included in such Canadian debt indices.

 

35.          Where the NET Debt Security is purchased by a Desjardins Fund in a Primary Offering pursuant to the Exemption Sought the NET Debt Security will be:

 

(a)           a non-exchange traded debt security, other than an asset backed commercial paper security, issued by a Related Issuer, with a term to maturity of 365 days or more, that has been given and continues to have, at the time of purchase, a designated rating by a designated rating organization, as such terms are defined in NI 81-102; and

 

(b)           the terms of the Primary Offering, 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.

 

36.          Where the NET Debt Security is purchased by a Desjardins Fund in the secondary market pursuant to the Exemption Sought, and not in a Primary Offering, such NET Debt Security has been given and continues to have, at the time of purchase, a designated rating by a designated rating organization, as such terms are defined in NI 81-102.

 

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 the Exemption Sought is granted provided that:

 

1.             In the context of the relief from the Related Issuer Requirements:

 

(a)           the investment is made in accordance with, or is necessary to meet, the investment objective of the applicable Desjardins Fund;

 

(b)           at the time of the purchase, the IRC of the applicable Desjardins Fund has approved the transaction in accordance with Section 5.2(2) of NI 81-107;

 

(c)           the Filer or its affiliate, as the investment fund manager of the applicable Desjardins Fund, complies with section 5.1 of NI 81-107 and the Filer or its affiliate, as investment fund manager of the applicable Desjardins Fund and the IRC of the Desjardins Fund comply with section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;

 

(d)           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 NI 81-102;

 

(e)           in the case of NET Debt Securities to be purchased in a Primary Offering:

 

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

 

(ii)           at least two purchasers who are independent, arm's length purchasers, which may include "independent underwriters" within the meaning of National Instrument 33-105 - Underwriting Conflicts collectively purchase at least 20% of the Primary Offering;

 

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

 

(iv)          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 NET Debt Securities of a Related Issuer;

 

(v)           the price paid for the securities by a 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;

 

(f)            in the case of NET Debt Securities to be purchased in the secondary market:

 

(i)            the price payable for the security is not more than the ask price of the security;

 

(ii)           the ask price of the security is determined as follows:

 

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

 

(B)           if the purchase does not occur on a marketplace,

 

(I)            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

 

(II)           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;

 

(iii)           the transaction complies with any applicable "market integrity requirements" as defined in NI 81-107;

 

(g)           no later than the time a Desjardins Fund files its annual financial statements, the Filer files with the securities regulatory authority or regulator the particulars of any investments made in reliance on the Exemption Sought; and

 

(h)           the IRC of the Desjardins Fund complies with section 4.5 of NI 81-107 in connection with any instance of which it becomes aware that the Filer did not comply with any of the conditions of this decision;

 

2.             In the context of the relief from the Reporting Requirements:

 

(a)           the annual and interim management reports of fund performance for the Desjardins Fund disclose all of the following:

 

i)              the name of each related person or company to which fees were paid;

 

ii)             the amount of fees paid to each related person or company; and

 

iii)            the person or company who paid the fees, if they were not paid by the fund; and

 

(b)           the records of portfolio transactions maintained by the Desjardins Fund include, separately for every portfolio transaction effected by a Desjardins Fund through any affiliate of the Filer, all of the following:

 

i)              the name of each related person or company to which fees were paid;

 

ii)             the amount of fees paid to each related person or company;

 

iii)            the person or company who paid the fees.

“Philip Anisman”

Commissioner

 

“Grant Vingoe”

Vice-Chair and Commissioner