Desjardins Investments Inc. and the Desjardins Floating Rate Income Fund
Headnote
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 high-yield 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.
May 1, 2014
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 FLOATING RATE INCOME FUND (the Fund)
DECISION
Background
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 Mutual 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 more than 10% of their asset net value, immediately after a transaction, in Foreign Government Securities (as defined below) (theExemption 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 British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador, Yukon Territory, Nunavut and, Northwest Territories, 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 (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.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under theBusiness Corporation Act (CQLR, c. S 31.1) of Québec.
2. The Filer's head office is located at 1 Complexe Desjardins, CP 7, 36th South Tower, Montréal, Québec, Canada, H5B 1B2.
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 trust established under the laws of Québec pursuant to an amended and restated declaration of trust dated January 5, 2009, as amended. Desjardins Trust will act as trustee.
7. On February 25, 2014, the Fund filed with each jurisdiction of Canada a preliminary prospectus governed by Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (c. V-1.1, r. 38) in order to proceed with an initial public offering of the Fund's units. It is expected that the Fund will become a reporting issuer in all jurisdictions of Canada upon the issuance of a receipt for its final prospectus (the Final Prospectus).
8. The Fund is a mutual fund and upon issuance of a receipt for its Final Prospectus, it will be subject to Regulation 81-102.
9. 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 the 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 theDerivatives Act (RSQ, c. I-14.01) (the Derivatives Act) and in Ontario as a commodity trading manager pursuant to the Commodity Futures Act (RSO 1990, c. C.20) (the Commodity Futures Act).
10. The Fund's investment objective will be to provide a high income while minimizing the effects of interest rates fluctuations. The Fund will invest primarily in floating-rate and fixed-rate debt securities of issuers throughout the world and enter into derivatives instruments transactions to generate a floating rate income.
11. PIMCO Canada Corp. (PIMCO) will act as sub-adviser for the Fund. PIMCO is duly registered as adviser in the category of portfolio manager in Alberta, British-Columbia, Manitoba, Saskatchewan, Nova Scotia, Québec and Ontario. PIMCO is also duly registered in Québec as derivatives portfolio manager pursuant to the Derivatives Act and in Ontario as commodity trading manager pursuant to the Commodity Act.
Reasons for the Exemption Sought
12. The Filer would like the Fund to have the flexibility to invest up to:
(a) 20% of its net asset value, immediately after a transaction, 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 Standard & Poor's Rating Services (Canada) or its DRO affiliate, or have an equivalent rating by one or more designated rating organizations or their DRO affiliates; and
(b) 35% of its net asset value, immediately the transaction, in evidences of indebtedness of any one issuer, if those securities are issued by issuers described in subparagraph (a) above and are rated "AAA" by Standard & Poor's Rating Services (Canada) or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates.
(such evidences of indebtedness are collectively referred to as Foreign Government Securities).
13. 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 (theConcentration Restriction).
14. 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 or the government of the United States of America.
15. Foreign Government Securities do not meet the definition of government security, as defined in Regulation 81-102.
16. 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.
17. Standard & Poor's uses two general categories to derive a credit rating for government debt, namely economic risk and political risk. The first category is a quantitative assessment of a government's ability to meet its debt obligations. The second is the government's preparedness to meet its obligations, for a government may be able to pay, but be unwilling to do so for policy reasons. Standard & Poor's rates issuers on a scale from the highest credit rating of AAA to a lowest rating of D. The Exemption Sought contemplates only investing in the two highest rating levels of investment grade debt. Other designated rating organizations have similar practices.
18. 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 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. As such, 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 of the credit risk and the concentration risk of the Fund.
20. The Filer believes 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 Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:
1. the Fund may only invest up to:
(a) 20% of its net asset value, immediately after a transaction, 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 Standard & Poor's Rating Services (Canada) or its DRO affiliate, or have an equivalent rating by one or more designated rating organizations or their DRO affiliates;
(b) 35% of its net asset value, immediately after a transaction, in evidences of indebtedness of any one issuer, if those securities are issued by issuers described in subparagraph (a) above and are rated "AAA" by Standard & Poor's Rating Services (Canada) or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates;
2. subparagraphs (a) and (b) above cannot be combined for any one issuer;
3. the securities that are purchased pursuant to the Exemption Sought are traded on a mature and liquid market;
4. the acquisition of the evidences of indebtedness pursuant to the Exemption Sought is consistent with the fundamental investment objective of the Fund;
5. the prospectus of the Fund 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
6. the 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.