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Desjardins Investments Inc. and the Desjardins SocieTerra Global Bond Fund
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from subsection 2.1(1) of National Instrument 81-102 – Investment Funds to permit a 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
National Instrument 81-102 – Investment Funds, ss. 2.1(1) and 19.1.
June 17, 2019
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 GLOBAL BOND FUND (the “Fund”)
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (“Decision Makers”) has received an application from the Filer on the 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, RSQ, c. V-1.1, r. 39 (“Regulation 81-102”) from the concentration restriction in paragraph 2.1(1) of Regulation 81-102 (the “Concentration Restriction”) 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 evidences of indebtedness 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 of 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, RSQ, c. V-1.1, r. 1 (“Regulation 11-102”) is intended to be relied upon in each of 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 14-101 respecting Definitions, RSQ, c. V-1.1, r. 3, Regulation 25-101 respecting Designated Rating Organizations, RSQ, 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 in Montréal, Québec.
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.
The Fund
6. The Fund will be an open-ended investment fund trust to be established under the laws of Québec pursuant to an amended and restated declaration of trust dated May 6, 2019, as amended (the “DoT”). Desjardins Trust Inc. will act as trustee.
7. On May 8, 2019, the Fund filed a preliminary prospectus dated May 6, 2019 governed by National Instrument 81-101 respecting Mutual Fund Prospectus Disclosure, RSQ, c. V-1.1, r. 38 in each of the jurisdiction of Canada in order to proceed with an initial public offering. It is expected that the Fund will become a reporting issuer subject to both Regulation 81-102 and Regulation 81-107 – Independent Review Committee for Investment Funds, RSQ, c. V-1.1, r. 43 among others, in all jurisdictions of Canada upon the issuance of a receipt for its final simplified prospectus (the “Simplified Prospectus”).
8. Desjardins Global Asset Management Inc. (“DGAM”) will act as portfolio advisor to the Fund and will also be responsible for retaining portfolio sub-managers for the Fund.
9. DGAM is registered in the category of portfolio manager and exempt market dealer in Québec, Alberta, British-Columbia, Prince-Edward-Island, Manitoba, New-Brunswick, Nova Scotia, Ontario, Saskatchewan, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon. DGAM is also registered in the category of investment fund manager in Québec, Alberta, Manitoba, Nova Scotia, Ontario, and Newfoundland and Labrador. In addition, DGAM is registered as derivatives portfolio manager in Québec pursuant to the Derivatives Act, RSQ, c.1-14.01, as an advisor in Manitoba pursuant to the Commodity Futures Act, C.C.S.M. c. C-152 (“CFAM”), and as a commodity trading manager in Ontario pursuant to the Commodity Futures Act, RSO, 1990, c. C.20 (“CFAO”).
10. PIMCO Canada Corp. (the “Sub-manager”) will act as portfolio sub-manager to the Fund. The Sub-manager is registered as portfolio manager and exempt market dealer in the provinces of Québec, Alberta, British-Columbia, Prince Edward Island, Manitoba, New Brunswick, Nova Scotia, Ontario, Saskatchewan and Newfoundland and Labrador. In addition, the Sub-manager is registered as investment fund manager in the provinces of Québec, Ontario and Newfoundland and Labrador. The Sub-manager is also registered as adviser in Manitoba pursuant to the CFAM and in Ontario as commodity trading manager pursuant to the CFAO.
11. DGAM is not in default of securities legislation in any jurisdiction of Canada.
Investment Objective of the Fund
12. The investment objective of the Fund will be to provide a high income return and some long-term capital appreciation by investing primarily in fixed-income securities of issuers throughout the world. The Fund follows an investing approach described in the section on “responsible investing” (“RI”) in the first part of the Simplified Prospectus. RI means integrating the analysis of environmental, social and governance (ESG) factors into investment selection and management over a long-term horizon in order to finance companies that contribute to sustainable development.
13. The Fund invests primarily in global credit markets including, without limitation, investment-grade corporate bonds, high-yield corporate bonds and emerging market bonds.
Reasons for the Exemption Sought
14. The Concentration Restriction prohibits the Fund from purchasing a security of an issuer if, immediately after the transaction, more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction, would be invested in securities of any issuer.
15. The Concentration Restriction does not apply to a purchase of, among other things, a “government security” which, under Regulation 81-102, 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.
16. Foreign Government Securities do not meet the definition of “government security”, as such term is defined in Regulation 81-102.
17. The Filer submits that 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.
18. The Filer submits that higher concentration limits may allow the Fund 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.
19. The Filer submits that 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, and that, consequently, a limited increase in the maximum percentage of the net asset value of the Fund that can be invested in the Foreign Government Securities will not result in a material increase in risks related to the Fund.
20. The Sub-manager will employ fundamental credit analysis in selecting the Fund’s holdings with the flexibility to take advantage of relative value opportunities that exist in the global fixed income space. This flexibility extends across structures, sectors, currencies and countries. In following this style, in conjunction with fundamental investment analysis, the Filer submits that there may be periods where the portfolio managers believe that Foreign Government Securities are better suited to the Fund’s investment objective.
21. The Filer submits that by allowing the Fund to hold Foreign Government Securities, which would be rated AA or AAA by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations, the Fund would be able to preserve capital in foreign markets during adverse market conditions, to have access to assets with minimal credit risk and will enable the Sub-manager to assess its views on interest rates and duration.
22. The Filer submits that the increased flexibility to hold Foreign Government Securities may also yield higher returns than Canadian shorter-term government fixed-income alternatives.
23. The Filer submits that the ability to purchase Foreign Government Securities above the limit in paragraph 2.1(1.1) of Regulation 81-102, and in conformity with the Exemption Sought, will better enable the Fund to achieve its fundamental investment objective, thereby benefitting the Fund’s investors.
24. The Fund will only purchase Foreign Government Securities if the purchase is consistent with the Fund’s fundamental investment objective.
25. The Simplified Prospectus for the Fund will disclose the risks associated with concentration of net assets of the Fund in securities of a limited number of issuers.
26. The Filer submits that the Exemption Sought is not contrary to the public interest, is in the best interest of the Fund and represents the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.
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:
i. paragraphs a) and b) of the Exemption Sought cannot be combined for any one issuer;
ii. the securities that are purchased pursuant to the Exemption Sought are traded on a mature and liquid market;
iii. the acquisition of the evidences of indebtedness pursuant to the Exemption Sought is consistent with the fundamental investment objective of the Fund;
iv. the Simplified Prospectus will disclose any additional risks associated with the concentration of net assets 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
v. the Simplified Prospectus 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.
“Hugo Lacroix”