Desjardins Global Asset Management Inc. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from conflict of interest/self-dealing provisions in section 13.5 of Regulation 31-103, section 4.1 of Regulation 81-102 to facilitate investment by investment funds subject to Regulation 81-102 into related limited partnership that is not a reporting issuer -- Relief from subsections 111(2) and 117(1) of the Securities Act (Ontario) also required in Ontario. Relief subject to certain conditions.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a) and 15.1.
National Instrument 81-102 Investment Funds, ss. 4.1(2) and 19.1.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b) and (c), and 113 and 117.
November 2, 2021
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. AND DESJARDINS INVESTMENTS INC. (the Filers) AND DESJARDINS QUÉBEC BALANCED FUND (the Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the Application) from the Filers on their own behalf and on behalf of the Fund, to apply for a decision under the securities legislation of the Jurisdiction (the Legislation), pursuant to:
1. section 113 of the Securities Act (Ontario) (the OSA) exempting the Fund from the restriction contained in section 111 of the OSA, and the corresponding sections in the securities legislation applicable in the Jurisdictions (as defined below), which prohibit:
a. an investment fund from knowingly making an investment in a person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder; and
b. an investment fund from knowingly making an investment in an issuer in which:
i. any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or
ii. 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; and
c. an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) or (b) above (collectively, the Local Restrictions); and
2. section 117(2) of the OSA, exempting the Filers with respect to the Fund from the requirement contained in subsection 117(1) of the OSA, and the corresponding sections in the securities legislation applicable in the Other Jurisdictions, to prepare a report in accordance with the requirements of the Legislation of every transaction of purchase of securities from or sale of securities to any related person or company (the Local Reporting Requirements);
in order to allow the Fund to make the Proposed Investment (as defined below) (the Exemptions Sought).
Under the process of Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
a) the Ontario Securities Commission (the OSC) is the principal regulator for the Application, and
b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, New Brunswick, Nova Scotia and Newfoundland and Labrador (collectively, the Other Jurisdictions).
Interpretation
Terms defined in the Legislation, MI 11-102 and National Instrument 14-101 -- Definitions, have the same meaning if used in this decision, unless otherwise defined. Capitalized terms used in this decision have the following meanings:
ASPE means Accounting Standards for Private Enterprises;
Canadian GAAP means Canadian Generally Accepted Accounting Principle;
DCSME means Desjardins Capital SME L.P.;
IRC means an independent review committee appointed in a manner consistent with the requirements of National Instrument 81-107 -- Independent Review Committee for Investment Funds (NI 81-107);
LP Units means limited partnership units of DCSME;
Proposed Investment means all the investments made in accordance with the terms further detailed below by the Fund from time to time in LP Units;
Qualified Valuator means a person specializing in business valuation who has either of the following combined experience and training:
(1) he or she holds the professional title of CBV (chartered business valuator) or CFA (chartered financial analyst), is a member in good standing of his or her professional association and has a minimum of 5 years of relevant experience, including at least 3 years in business valuation; or
(2) he or she holds an accounting title as a CPA (chartered professional accountant) or has an M.Sc. or MBA in accounting or finance and is a member in good standing of his or her professional association, if applicable, and has a minimum of 10 years of relevant experience, including at least 5 years in business valuation.
Representations
This decision is based on the following facts represented by the Filers:
The Fund
1. The Fund is an open-ended investment fund trust established under the laws of Québec in 1997.
2. Desjardins Investments Inc. (DII) acts as investment fund manager of the Fund.
3. Desjardins Global Asset Management Inc. (DGAM) acts as portfolio manager of the Fund.
4. The Fund is subject to National Instrument 81-102 -- Investment Funds (NI 81-102), National Instrument 81-106 -- Investment Fund Continuous Disclosure (NI 81-106) and National Instrument 81-107.
5. The Fund is a reporting issuer in each jurisdiction of Canada and its units are qualified for distribution in accordance with applicable securities legislation under a simplified prospectus dated March 31, 2021, as amended.
6. The Fund is a "mutual fund", as such term is defined under the Legislation.
7. The objective of the Fund is to provide unitholders with both a reasonable income return and long-term capital appreciation from a portfolio made up of Québec securities. Consequently, the Fund invests in various equity or debt securities issued by Québec companies, partnerships or cooperatives, in various debt securities issued or guaranteed by the Québec government or municipalities, or by other Québec public or para-public organizations, and in term deposits in Québec financial institutions.
8. The investment objectives and strategies of the Fund permits the Fund to invest in DCSME.
9. The Fund has an IRC appointed in a manner consistent with the requirements of NI 81-107.
10. The Fund is not in default of securities legislation in any jurisdiction of Canada.
DCSME -- General
11. DCSME is a development capital fund structured as a limited partnership under the laws of Québec and established pursuant to an amended and restated limited partnership agreement dated July 1, 2020 as amended from time to time.
12. DCSME is an evergreen fund; as such, it has a perpetual existence and allows for limited redemption and subscription facilities.
13. Desjardins Capital Management Inc. (DCM) acts as general partner and asset manager of DCSME.
14. DCSME currently has three limited partners, Capital Régional et Coopératif Desjardins (CRCD), DIM Private Completion Strategy Fund (the DIM Private Fund) and Desjardins Financial Holding Inc. (DFH):
a. CRCD is an investment fund created pursuant to the Act constituting Capital régional et coopératif Desjardins and managed by DCM.
i. All of CRCD's investors are natural persons residing and paying taxes in Québec.
ii. CRCD is subject to NI 81-102, but only to section 2.6.1; sections 2.7 to 2.17; Part 6; Part 15 (except for paragraph 15.8(2)(b)); Part 19 and Part 20 of NI 81-102.
iii. CRCD's shares are distributed under a short form prospectus pursuant to National Instrument 44-101 -- Short Form Prospectus Distributions in Québec only.
b. The DIM Private Fund is an investment fund constituted as a trust under Québec laws and managed by Desjardins Investment Management Inc. (DIM).
i. All of the DIM Private Fund's investors are managed accounts for which DIM acts as portfolio manager.
ii. The DIM Private Fund is not subject to NI 81-102.
iii. The DIM Private Fund's units are distributed pursuant to prospectus exemptions available under National Instrument 45-106 -- respecting Prospectus Exemptions (NI 45-106).
c. DFH is a corporation governed under the Business Corporations Act (Québec).
i. DFH is a wholly-owned subsidiary of Fédération des caisses Desjardins du Québec (FCDQ).
ii. DFH directly holds 100% of the issued and outstanding shares of DIM.
15. DCSME is not a reporting issuer in any jurisdiction of Canada.
16. The LP Units of DCSME are sold solely to accredited investors pursuant to exemptions from the prospectus requirements in accordance with NI 45-106.
17. The LP Units of DCSME are not listed on any exchange.
18. The investment objective of DCSME is to invest in the growth and development of small and medium-sized businesses throughout Québec, generating income and capital appreciation over the long term.
19. The mission of DCSME is to support and value Québec entrepreneurship by promoting Québec ownership for present and future generations to increase the province's collective wealth.
20. The portfolio of DCSME, which consist of investments in private equity and private loans, is primarily illiquid.
21. DCSME is not considered to be an investment fund pursuant to applicable securities laws for the following reasons :
a. With respect to equity investments, DCM is considered a venture capital management company (in accordance with the guidance in Companion Policy to 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations (CP 31-103). Therefore, the investment portfolio (DCSME) should not be considered and investment fund, as per section 1.3 of CP 31-103.
b. With respect to investments by way of loans, DCM's operating business is to originate, service and manage loans (in accordance with the guidance in CSA Staff Notice 31-323 Guidance Relating to the Registration Obligations of Mortgage Investment Entities and OSC Staff Notice 81-722 Mortgage Investment Entities and Investment Funds).
DCSME -- Valuation
22. The net asset value (NAV) of DCSME and the NAV per unit of DCSME is calculated by DCM on December 31 and on June 30 of each year (respectively, the Annual NAV Calculation and the Semi-Annual NAV Calculation) and at any other date that DCM determines in its discretion (the Extraordinary NAV Calculation and, collectively the NAV Calculations), based on audited financial statements prepared according to ASPE.
23. The subscription and redemption price for DCSME's units is established on the date of each NAV Calculation, by dividing DCSME's NAV by the total number of issued and outstanding units on such date. Once determined, the same subscription and redemption price is used for all transactions until the following NAV is communicated to the limited partners of DCSME.
24. CRCD is an important limited partner of DCSME. CRCD is subject to the requirements of the Regulation respecting Development Capital Investment Fund Continuous Disclosure (the Regulation). The Regulation provides rules in order to determine the fair value of CRCD's development capital investments.
25. Pursuant to the Regulation, the fair value of CRCD's development capital investments must be established through a procedure that complies with the following requirements (the Procedure):
a. valuations are prepared or reviewed by a Qualified Valuator who freely signs each of the valuations for which he or she is responsible;
b. the fair value of the development capital investments held directly by CRCD is established through the application of valuation principles based on guidelines generally used in the venture capital industry in Québec by professional business valuators holding the professional title of CBV, the whole in compliance with Canadian GAAP;
c. the valuation principles have received the prior approval of the board of directors of CRCD;
d. for development capital investments made in a specialized fund, the fair value is determined based on the most recent audited financial statements received from the investment fund, adjusted by the Qualified Valuator to reflect more recent financial information made available to the valuator; and
e. excluding publicly traded issuers, all relevant information regarding valuations is submitted to an independent portfolio valuation committee (the Portfolio Valuation Committee) composed of a majority of members who are Qualified Valuators that are independent of CRCD, which has reviewed the information to be reasonably assured of compliance by CRCD with the Procedure and has submitted a written report of its review to the audit and risk management committee and to the board of directors of CRCD.
26. The Portfolio Valuation Committee has the authority to hire valuation experts it deems necessary for the performance of its functions.
27. CRCD pays the reasonable fees of the experts hired by the Portfolio Valuation Committee.
28. The team that is responsible for assessing the fair value of CRCD's development capital investments at DCM is also responsible for the preparation of the valuation of DCSME's investments; they are Qualified Valuators and to the extent applicable, they apply the Procedure.
29. CRCD and DCSME may invest in the same investments, it is consequently important that the valuation methodology be applied consistently.
30. A professional accountant in independent practice, other than DCSME's independent auditor, will issue a Canadian Standard on Assurance Engagements 3530 report to the limited partners of DCSME following each NAV Calculation to provide a reasonable assurance that DCM is compliant with a provision of the DCSME Limited Partnership Agreement which provides that the investments that make up the majority of DCSME's net assets are valued in accordance with the fair valuation methodology adopted by DCM as amended from time to time and in compliance with the management's explicit written statement of DCM's compliance with specific requirements (the Management Statement) (a 3530 Report).
31. The Management Statement will contain the following:
• The choice of valuation method complies with the methodologies approved and recommended and is based on criteria identified for each methodology. The choice is documented based on said criteria and any deviation from recommended methodology is documented.
• The choice of valuation method is the same from year to year, unless facts and circumstances meet the criteria for a different methodology, in which case the change in methodology is documented.
• The valuation assumptions used are documented and consider, when applicable: the market, the information available, the qualitative evolution and the historical results of the enterprise as of the date of the valuation. The valuation assumptions are determined objectively and with no bias.
32. The 3530 Report will be shared with the auditors of the Fund.
33. The Fund will not actively participate in the business or operations of DCSME.
34. DCSME is not in default of securities legislation in any jurisdiction of Canada.
DGAM
35. DGAM is a corporation incorporated under the Business Corporation Act (Québec) (QBCA).
36. DGAM's head office is located in Montréal, Québec.
37. DGAM currently acts as portfolio manager of the Fund.
38. DGAM is a member of a group of entities which fall under FCDQ's umbrella (the Desjardins Group), a financial services cooperative established under the Act respecting financial services cooperatives (Québec). DGAM's shares are owned by DFH., itself directly wholly-owned by FCDQ.
39. DGAM is not a reporting issuer in any jurisdiction of Canada.
40. DGAM is not in default of securities legislation in any jurisdiction of Canada.
DII
41. DII is a corporation incorporated under the QBCA.
42. DII's head office is located in Montréal, Québec.
43. DII currently acts as investment fund manager of the Fund.
44. DII is not in default of securities legislation in any jurisdiction of Canada.
45. DII is a member of the Desjardins Group and is a wholly-owned indirect subsidiary of FCDQ. As such, DII is an affiliate of DGAM.
DCM
46. DCM is a corporation incorporated under the QBCA.
47. DCM's head office is located in Montréal, Québec.
48. DCM currently acts as general partner and asset manager of DCSME.
49. DCM also acts as investment fund manager and portfolio/ asset manager of CRCD.
50. DCM is a member of the Desjardins Group and is a wholly-owned direct subsidiary of FCDQ. As such, DCM is an affiliate of DGAM.
51. DCM is not in default of securities legislation in any jurisdiction of Canada.
52. The DCM team responsible for assessing the fair value of investments for the preparation of the financial statements is hierarchically independent of the teams that make investment decisions.
The Proposed Investment
53. Investments by the Fund in DCSME would be effected at a price equal to DCSME's NAV per unit.
54. An investment by the Fund in DCSME will be compatible with the investment objective and strategies of the Fund.
55. The Proposed Investment will not contravene any investments restrictions contained in Part 2 of NI 81-102. The Filers will have implemented policies and procedures in order to ensure the Fund's compliance with Part 2 of NI 81-102.
56. The portfolio manager the Fund remains subject to suitability obligations when investing in DCSME.
57. Before proceeding with the investment in DCSME, the portfolio manager of the Fund will ensure on a best effort basis that there is no similar equivalent investment available to the Fund that could avoid the conflict of interest. The remuneration of the portfolio manager of the Fund will not benefit from an investment in DCSME.
58. The Fund will not invest in DCSME if, immediately after the purchase, the Fund would hold securities representing more than 10% of: (i) the votes attaching to the outstanding voting securities of DCSME; or (ii) the outstanding equity securities of DCSME.
59. The Fund will not make the Proposed Investment for the purpose of exercising control over, or management of, DCSME.
60. LP Units will likely be considered an "illiquid asset" within the meaning of NI 81-102. Consequently, the Fund will acquire LP Units of DCSME in compliance with section 2.4 of NI 81-102. As a result, the Fund will not be able to purchase LP Units if, immediately after purchase, more than 10% of the net asset value of the Fund would be made up of "illiquid assets".
61. The IRC of the Fund will review and provide its approval, including by way of standing instructions, prior to the purchase of LP Units of DCSME by the Fund in accordance with section 5.2(2) of NI 81-107.
62. The amount invested from time to time in DCSME by the Fund, may exceed 20% of the outstanding voting securities of DCSME. As a result, the Fund could become a substantial security holder of DCSME.
63. The Proposed Investment may result in the Fund investing in an issuer in which an officer or director of a Filer or an affiliate of a Filer has a significant interest and/or in an issuer in which a person or company who is a substantial security holder of the Fund, a Filer or an affiliate of a Filer has a significant interest.
64. In the absence of the Exemption Sought, the Fund would be precluded from directly or indirectly purchasing and holding securities of DCSME due to the investment restrictions contained in the Local Restrictions.
65. According to the Legislation, every management company shall, in respect of each investment fund to which it provides services or advice, file a report 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.
66. In the absence of the Exemption Sought, a Filer of the Fund would be required to file a report of every purchase and sale of securities of DCSME by the Fund or every purchase or sale effected by the Fund through any related person or company with respect to which the related person or company received a fee either from the Fund 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.
67. It would be costly and time-consuming for the Fund to comply with the Reporting Requirements, the costs of which will ultimately be borne by the investors.
68. NI 81-106 requires the Fund to prepare and file annual and interim management reports of fund performance that include a discussion of transactions involving related parties to the Fund. Such disclosure is similar to that required under the Reporting Requirements and fulfils its objective to inform the general public about the transactions involving related parties to the Fund.
Other Considerations
69. The Fund's investment in DCSME will represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the Fund.
70. The Proposed Investment would comply with all the other conditions of section 2.5 of NI 81-102 : (i) no management fees or incentive fees would be payable by the Fund that, to a reasonable person, would duplicate a fee payable by DCSME for the same service; (ii) no sales fees or redemption fees would be payable by the Fund in relation to its purchases or redemptions of the securities of DCSME; and (iii) the Fund would either not vote the securities of DCSME or would arrange for all of the securities it holds of DCSME to be voted by the beneficial holders of securities of the Fund.
71. If the IRC becomes aware of an instance where DII in its capacity as manager of the Fund, did not comply with the terms of this decision, or a condition imposed by securities legislation or the IRC in its approval, the IRC of the Fund will, as soon as practicable, notify in writing the principal regulator.
72. The Desjardins Group was designated by the Autorité des marchés Financiers (AMF) as a domestic systemically important financial institution in 2013, in order to ensure the stability of the financial system of the province of Quebec. Like the other Canadian financial institutions qualified as D-SIBs by the federal regulator, Desjardins Group must comply with the recommendations of the Financial Stability Board's Enhanced Disclosure Task Force published in their report on Enhancing the Risk Disclosures of Banks.
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 Exemptions Sought are granted provided that:
a. the Proposed Investment will be compatible with the investment objective and strategy of the Fund and included as part of the calculation for the purposes of the illiquid asset restriction in section 2.4 of NI 81-102;
b. in respect of a Proposed Investment, no sales or redemption fees will be paid as part of such Proposed Investment;
c. in respect of a Proposed Investment, no management fees or incentive fees will be payable by the Fund that, to a reasonable person, would duplicate a fee payable by DCSME for the same service;
d. in respect of a Proposed Investment, no incentive or additional remuneration will be provided to the portfolio manager of the Fund;
e. the Funds would either not vote the securities of DCSME or would arrange for all of the securities it holds of DCSME to be voted by the beneficial holders of securities of the Fund;
f. the Proposed Investment will be disclosed to investors in the Fund's quarterly portfolio holding reports, financial statements and/or fund facts documents;
g. prior to the Fund making a Proposed Investment, the prospectus of the Fund will disclose:
i. the fact that the Fund make such Proposed Investment;
ii. the relation between the different parties involved, including that DCM, an affiliate of DGAM and DII, is the general partner and asset manager of DCSME;
iii. the nature of the conflict of interest and how it is mitigated or avoided;
iv. the approximate or maximum percentage of the NAV of the Fund that it is intended be invested in DCSME; and
v. the fees and expenses payable;
h. the IRC of the Fund will review and provide its approval, including by way of standing instructions, prior to making a Proposed Investment, in accordance with section 5.2(2) of NI 81-107;
i. the manager of the Fund comply with Section 5.1 of NI 81-107 and the manager and the IRC of the Fund comply with Section 5.4 of NI 81-107 for any standing instructions the IRC provides in connection with the transactions;
j. where a Proposed Investment is made by the Fund, the annual and interim management reports of fund performance for the Fund disclose the name of the related person in which an investment is made, being DCSME;
k. DGAM will provide upon request to the Canadian securities regulatory authorities concerned the particulars of any investments made in reliance on the Exemptions Sought;
l. where a Proposed Investment is made by the Fund, the records of portfolio transactions maintained by the Fund include, separately for every portfolio transaction effected by the Fund through any affiliate of the Filer, the name of the related person in which an investment is made, being DCSME;
m. DCSME's investment policy will provide that DCSME shall not invest in a portfolio company if such portfolio company is (i) a "related issuer" of DCM or of one of its "affiliates" or (ii) an "associate" of DCM or of one of its "affiliates", as these expressions are defined in applicable securities laws;
n. the NAV Calculations will be based on audited financial statements prepared according to ASPE;
o. the determination of the fair value of DCSME's assets will be established in accordance with the requirements set out in the Regulation;
p. the final content of DCM's Management Statement is subject to the agreement of the principal regulator;
q. a professional accountant in independent practice, other than DCSME's independent auditor, will issue a 3530 Report to the limited partners of DCSME following each NAV Calculation; and
r. the filers will notify the OSC as soon as possible if the 3530 Report express a modified conclusion. The Filers will submit a copy of the 3530 Report and a detailed description of the issues raised.