Desjardins Investments Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Temporary relief granted to three-tier structures from multi-layering prohibition in paragraph 2.5(2)(b) of NI 81-102 to permit top mutual funds to invest in funds-of-funds, which are more than 10% of its net asset value invested in underlying funds -- Transparent investment portfolio and accountability for portfolio management.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.5(2)(b), 19.1.
[Translation]
April 5, 2013
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)
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Diapason Funds, as hereinafter defined, from the requirement in paragraph 2.5(2)(b) of Regulation 81-102 respecting Mutual Funds (Regulation 81-102) to permit each Diapason Funds to subscribe securities of the Desjardins Completion Investments Fund (the Completion Fund) notwithstanding the fact that the Completion Fund holds more than 10% of its net asset value in other mutual funds (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 (Regulation 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, the Northwest Territories,Nunavut and Yukon, 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 and Regulation 11-102 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 duly registered as an investment fund manager.
2. The Filer is a corporation governed under the Business Corporations Act (Quebec).
3. The Filer's head office is located in 2, Complexe Desjardins, Montréal (Québec) H5B 1H5.
4. The Filer is not in default of securities legislation in any Jurisdiction.
The Diapason Portfolios
5. For several years, the Filer offers the Diapason Portfolios to investors (each a Participant and collectively, the Participants) wishing to subscribe securities of mutual funds for which the Filer is acting as investment fund manager (each a Desjardins Fund and collectively, the Desjardins Funds) in the context of an asset allocation service, as defined in section 1.1 of Regulation 81-102 (each a Diapason Portfolio and collectively, the Diapason Portfolios).
6. The Diapason Portfolios offer automatic periodic reallocation of the portfolio of the Participants according to a preset targeted allocation. Diapason Portfolios are governed by agreements and applications signed by Participants.
7. Since their creation in 2004, the Diapason Portfolios have grown to be offered to approximately 336 000 Participants that together held securities of Desjardins Funds for an amount of over CAD 8.8 billion in assets as at February 28, 2013.
8. For operational efficiency and costs reasons, the Filer has decided to cease to offer to the majority of the Participants the Diapason Portfolios and create mutual funds (each, a Diapason Fund and collectively, the Diapason Funds) to continue to offer an asset allocation service to Participants.
9. To achieve their investment objectives, the Diapason Funds will use a "fund of funds" strategy. The Diapason Funds will invest substantially all of their assets directly in other mutual funds.
10. The Filer is of the view that the "fund of funds" strategy will be operationally more efficient and provide more flexibility from an investment management point of view than the Diapason Portfolios.
11. It is expected that the securities of the Diapason Funds will be distributed to the public as of May 2013.
12. For each of the Diapason Portfolios a corresponding Diapason Fund was created. The names of the corresponding Diapason Funds are listed in Schedule A.
13. The securities of the Diapason Funds will be distributed on a continuous basis pursuant to a simplified prospectus governed by Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (Regulation 81-101).
The Conversion
14. The securities of the Desjardins Funds held by the majority of the Participants will be redeemed and the proceeds of this redemption will be applied to the subscription of securities of the corresponding Diapason Funds (the Conversion). Participants will be given the opportunity to opt out of the Conversion.
15. At the time of the Conversion, securities of the Desjardins Funds held by the majority of the Participants will be redeemed at their respective net asset values. Simultaneously, the proceeds of the aforementioned redemption will be affected to the subscription of securities of corresponding Diapason Funds. The Diapason Funds will then use the proceeds of the subscriptions to acquire securities of the Desjardins Funds.
16. Following the Conversion, the portfolio of each Diapason Fund will consist of securities of Desjardins Funds, including the Completion Fund, that were held before the Conversion by the Participants through the Diapason Portfolios. From an investment point of view, Participants will be in the same situation after the Conversion than before the Conversion.
17. The Conversion will be carried out at no charge to Participants.
18. The Conversion and Reallocation, as defined hereinbelow, will be spread over a period of 12 months, from May 2013 to April 2014.
19. As at February 28, 2013, approximately 6% of the Participants, which represent approximately 10% of the assets of the Diapason Portfolios, are holding securities of Desjardins Funds in non-registered accounts. These Participants will not be subject to the Conversion due to inherent tax consequences. The Filer expects to continue to provide the asset allocation service to such Participants. However, as at November 2013, the asset allocation service will be closed to new investments.
20. As at February 28, 2013, between 5% and 10% of the assets of the Participants are allocated to the Completion Fund for a total of approximately CAD 737 million. This represents around 78% of the net assets of the Completion Fund;
The Underlying Funds
21. In accordance with its investment objectives and strategies, the Completion Fund invests approximately 20% of its assets into two other mutual funds subject to Regulation 81-102 namely the Desjardins Global Real Estate Fund (the Real Estate Fund) and the NorthWest Specialty Global High Yield Bond Fund (the NorthWest Fund).
22. The securities of the Real Estate Fund and the NorthWest Fund are distributed on a continuous basis pursuant to a simplified prospectus governed by Regulation 81-101.
23. None of the Completion Fund, the Real Estate Fund and the NorthWest Fund are in default of securities legislation in any Jurisdiction.
24. The Filer is acting as the investment fund manager of the Completion Fund and the Real Estate Fund.
25. Desjardins Global Asset Management Inc. (DGAM), an affiliate of the Filer, is acting as the portfolio manager of the Completion Fund and the Real Estate Fund. CBRE Clarion Securities, LLC is acting as portfolio subadvisor of the Real Estate Fund.
26. Northwest & Ethical Investments L.P. is acting as investment fund manager and portfolio manager of the NorthWest Fund and Aviva Investors is acting as the portfolio subadvisor. Northwest & Ethical Investments L.P.'s head office is located in Toronto and is owned 50% by an affiliate of the Filer and 50% by the Provincial Credit Union Centrals.
Reasons of the Exemption Sought
27. In the absence of the Exemption Sought, each Participant holding securities of the Completion Fund trough a Diapason Portfolio will have to redeem its securities before the Conversion in order for the Diapason Funds to comply with subparagraph 2.5(2)(b) of Regulation 81-102. Thus, the Filer would be unable to mirror the current target allocation of the Diapason Portfolios in the Diapason Funds.
28. As at February 28, 2013, the Completion Fund's investments represent approximately 63% of the net assets of the Real Estate Fund and 22% of the net assets of the NorthWest Fund.
29. As at February 28, 2013, approximately 22% of the net assets of the Completion Fund, 37% of the net assets of the Real Estate Fund and 78% of the net assets of the NorthWest Fund are held by securityholders that have not subscribed securities of these funds through a Diapason Portfolio (the Remaining Securityholders).
30. In October 2013, the Filer intends to progressively replace the exposure of the Diapason Funds to the Completion Fund by other mutual funds (the Reallocation).
31. The Exemption Sought is needed to allow the progressive transfer of exposure from the Completion Fund to other mutual funds contemplated in the Reallocation.
32. The Exemption Sought will foster a gradual and orderly transfer of the exposure of the Diapason Funds to the Completion Fund towards other mutual funds. The gradual divestment of the Diapason Funds from the Completion Fund will favor an orderly liquidation of the assets of the Completion Fund, the Real Estate Fund and NorthWest Funds and will mitigate the potential negative impacts on the Remaining Securityholders.
33. In September 2012, the Filer submitted the details of the Conversion to the Independent Review Committee of the Desjardins Funds (the IRC). After due consideration, the IRC agreed that the Conversion would benefit securityholders.
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:
(a) at any time, no more than 10% of the net asset value of any Diapason Fund will be made up of securities of Completion Fund;
(b) no management fees or incentive fees are payable by the Completion Fund that, to a reasonable person, would duplicate a fee payable by the Real Estate Fund and the NorthWest Fund for the same service;
(c) the prospectus of each of the Diapason Funds will disclose that it invests in securities of the Completion Fund and that the Completion Fund invests securities of in the Real Estate Fund and the NorthWest Fund;
(d) the prospectus of each of the Diapason Funds will disclose that there will be no duplication of fees payable by the Diapason Funds as a result of its investments in other mutual funds;
(e) the prospectus of each of the Diapason Funds will disclose that DGAM is responsible for portfolio management of the Diapason Funds which includes, notably, the selection of underlying mutual funds. Should an underlying mutual fund be a Desjardins Fund that subscribes to securities of another mutual fund, DGAM will also responsible for such selection;
(f) the Filer will include the top 25 positions disclosure of the Completion Fund, the Real Estate Fund and the NorthWest Fund in the following continuous disclosure documents of each of the Diapason Funds which holds units of the Completion Fund:
(i) the quarterly portfolio disclosure document dated June 30th 2013;
(ii) the annual management report of fund performance dated September 30th 2013;
(iii) the quarterly portfolio disclosure document dated December 31st 2013;
(iv) the interim management report of fund performance dated March 31st 2014; and
(v) the quarterly portfolio disclosure document dated June 30th 2014;
(g) the investments made by the Diapason Funds will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of Participants of the Diapason Funds;
(h) the Exemption Sought terminates on April 30th, 2014.
SCHEDULE A
LIST OF DIAPASON PORTFOLIOS AND EQUIVALENT DIAPASON FUNDS
|
Name of the Diapason Portfolio to be converted |
Name of the corresponding Diapason Fund to be established |
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Diapason Secure Market Portfolio |
Diapason Conservative Portfolio |
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Diapason Balanced Income Portfolio |
Diapason Balanced Income Portfolio |
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Diapason Balanced Growth Portfolio |
Diapason Balanced Growth Portfolio |
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Diapason Growth Portfolio |
Diapason Growth Portfolio |
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Diapason High Growth Portfolio |
Diapason High Growth Portfolio |
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Diapason Maximum Growth Portfolio |
Diapason Maximum Growth Portfolio |
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Diapason Retirement Portfolio B |
Diapason Retirement Portfolio B -- Conservative |
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Diapason Retirement Portfolio C |
Diapason Retirement Portfolio C -- Income |
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Diapason Retirement Portfolio D |
Diapason Retirement Portfolio D -- Balanced Income |
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Diapason Retirement Portfolio E |
Diapason Retirement Portfolio E -- Balanced Growth |
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Diapason Retirement Portfolio F |
Diapason Retirement Portfolio F -- Growth |
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Diapason Retirement Portfolio G |
Diapason Retirement Portfolio G -- High Growth |