Recent developments in pension plans: Reform of federal plans / New Quebec regulation respecting Bill 30

November 1, 2009

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On October 27^th, the Minister of Finance announced an important plan to reform federally regulated pension plans. According to the Minister, the Government is proposing “a balanced package of measures for the benefit of pension plan sponsors, plan members and retirees.”

Other recent news: the Quebec government has finally published its regulation to implement certain measures introduced by Bill 30.

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August 11, 2017

How will the Superior Court of Québec deal with pension laws from Newfoundland and Labrador, Québec and the Parliament?

On January 30, 2017, Justice Stephen W. Hamilton issued an interlocutory decision1 in the context of a motion for directions, the outcome of which will be most interesting. On May 19, 2015, the debtors, Wabush Iron Co. Limited, Wabush Resources Inc., Wabush Mines, Arnaud Railway Company and Wabush Lake Railway Company, Limited (the “Wabush CCAA Parties”) filed a motion for the issuance of an initial order under the Companies’ Creditors Arrangement Act, which was granted the following day by the Superior Court of Québec. The Wabush CCAA Parties had two pension plans for their employees, which included defined benefits. The first one was a hybrid pension plan for salaried employees (the “Salaried Plan”) registered with the Newfoundland and Labrador (“NL”) pension regulatory authority. The second one was for unionized hourly employees(the “Union Plan”) and was registered with both the NL and federal pension regulatory authorities. The Wabush CCAA Parties employed workers in NL as well as in Québec. Moreover, some of the Wabush CCAA Parties’ facilities fell under federal jurisdiction and therefore federal laws applied to the employees of these facilities. As a result, the Salaried Plan was governed by the Newfoundland and Labrador Pension Benefits Act (the “NLPBA”) and the Québec Supplemental Pension Plans Act (the “SPPA”), while the Union Plan was governed by the NLPBA, the SPPA and the federal Pension Benefits Standards Act (the “PBSA”). On December 16, 2015, the NL pension regulator terminated both the Salaried Plan and the Union Plan (the “Plans”) on the basis that: The Plans failed to meet applicable solvency requirements; The Wabush CCAA Parties had discontinued or were in the process of discontinuing all of their business operations; and It was highly unlikely that any potential buyer would accept to assume the Plans. On the same date, the federal pension regulator terminated the Union Plan for similar reasons. In their termination notices, both the NL and federal pension regulators indicated that the Wabush CCAA Parties were required to pay to the pension funds all amounts that would have been required to be paid to meet the prescribed solvency requirements, as well as the amounts necessary to fund the benefits provided for in the Plans. Both pension regulators also took the position that a deemed trust had been created in respect of such amounts. While the Wabush CCAA Parties paid the monthly normal cost payments for both Plans up to the wind-up date(i.e. December 16, 2015), both Plans had unpaid special payments and were underfunded (i.e. had wind-up deficiencies) as of the wind-up date. The Plans administrator filed proof of claim for the following amounts: Salaried PlanUnion Plan Secured claim:$24,000,000 Secured claim: $29,000,000 Restructuring claim:$1,932,940 Restructuring claim:$6,059,238 In that context, the monitor moved for directions to the Superior Court of Québec with respect to the priority of these pension claims, and the applicability and scope of deemed trusts, if any, under the NLPBA, the PBSA and the SPPA. More specifically, the monitor sought an order to determine the priority of the various components of the pension claims to be as follows: That special payments outstanding as of the date of the initial order were subject to a limited deemed trust; That special payments payable after the date of the initial order constituted unsecured claims; That the wind-up deficiencies constituted unsecured claims; and That any deemed trust created pursuant to the NLPBA may only charge property located in Newfoundland and Labrador. The January 30 decision dealt with a preliminary matter. Although all parties agreed that the Superior Court of Québec had jurisdiction to deal with all the issues at bar, the Plans administrator, the NL pension regulator and the representatives of the salaried employees and retirees asked the Superior Court of Québec to seek the assistance of the Supreme Court of Newfoundland and Labrador (the “NL Court”) with respect to several questions, including the following: 1. The Supreme Court of Canada has confirmed in Indalex that provincial laws apply in CCAA proceedings, subject only to the doctrine of paramountcy. Assuming there is no issue of paramountcy, what is the scope of section 32 in the NPBA [NLPBA] deemed trusts in respect of: (…)b) unpaid special payments; and,c) unpaid wind-up liability. 2. The Salaried Plan is registered in Newfoundland and regulated by the NPBA. a) (i) Does the PBSA deemed trust also apply to those members of the Salaried Plan who worked on the railway (i.e., a federal undertaking)? (ii) If yes, is there a conflict with the NPBA and PBSA if so, how is the conflict resolved? b) (i) Does the SPPA also apply to those members of the Salaried Plan who reported for work in Québec? (ii) If yes, is there a conflict with the NPBA and SPPA and if so, how is the conflict resolved? (iii) Do the Québec SPPA deemed trusts also apply to Québec Salaried Plan members? For various legal, factual and practical reasons, Justice Hamilton decided not to exercise the Court’s discretion to seek the assistance of the NL Court. More particularly, Justice Hamilton was of the opinion that the deemed trust provision contained in section 32 of the NLPBA is not particularly unique, considering that there are similar deemed trust provisions in the PBSA and other provincial pension laws. He also noted that there is no jurisprudence interpreting section 32 of the NLPBA. While acknowledging that the NL Court has greater expertise in interpreting the NLPBA as a whole, Justice Hamilton stated that such was not the case with respect to the relevant deemed trust provision, i.e. section 32. He also added that because of the similarities between the NLPBA, the PBSA and other provincial pension laws, the judge interpreting the NLPBA will likely refer to decisions of the courts of other provinces interpreting their legislation or the PBSA. In this context, the Superior Court of Québec is in as good a position as the NL Court. Moreover, since this case also raises issues respecting the PBSA and the SPPA, Justice Hamilton did not see on what basis he should conclude that the NL Court would be in a better position to decide on these issues. He stated the following: The Court will not refer issues of Québec law or federal law to the NL Court, and if those issues are too closely interrelated to the NLPBA issues, or if in the interests of simplicity and expediency they should all be decided by the same court, then the solution is not to refer any issues to the NL Court. Furthermore, although there were significant factual links between the issues and NL, it was equally true that strong factual links existed with Québec. Indeed, one of the Wabush CCAA Parties’ facility and most of the organizations’ railways are in Québec. Also, Justice Hamilton, stated that there were almost as many employees and retirees in Québec as there were in NL. Finally, he was also concerned that requesting the aid of the NL Court could result in additional delay. Comment The Superior Court of Québec will therefore review the pension plans’ deemed trust issues and will likely analyze the deemed trust provisions contained in the NLPBA, the PBSA and the SPPA. For the first time, it appears that such provisions will be compared and interpreted in one case. The hearing on these issues was held on June 28 and 29, 2017. Be on the lookout for the next newsletter to find out how this story unfolds. Arrangement of Bloom Lake, 2017 QCCS 284.

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April 26, 2017

Employers, the VRSP: Ring any Bells?

On July 1, 2014, most of the provisions of the Voluntary Retirement Savings Plans Act1 (the “VRSP Act”) came into effect. At the time, this raised questions in the minds of numerous employers about their obligations under this new law. Since a first group of employers had until December 31, 2016 to comply with certain obligations, we are providing you with a summary of the main obligations of employers under the VRSP Act. But before anything else: what is a VRSP? It is a group retirement savings plan set up and administered by an authorized administrator and governed by the VRSP Act. VRSPs are designed to have a low cost in order to encourage saving for retirement. Which employers are covered by the VRSP Act? Any employer that has an establishment in Québec and five or more “eligible employees”. What is an “eligible employee”? According to the VRSP Act, it is essentially an employee2 who: is 18 or more years of age; has at least one year of uninterrupted service;3 and performs his work: - in Québec; or - partially in Québec and outside Québec for an employer having an establishment in Québec; or - outside Québec but who has his domicile or a residence in Québec and whose employer is located in Québec. If an employer does not have five or more eligible employees, it must ensure, on December 31st of every year, that it still does not have five or more eligible employees. If an employer has five or more eligible employees, it has the obligation to offer a VRSP and to automatically enroll all of its eligible employees therein. But! The employer is not required to enroll any eligible employee in the VRSP if the employee: has the opportunity to contribute, through payroll deductions, (whether or not he/she actually does so) to a designated registered retirement savings plan (“RRSP”) or a designated tax-free savings account (“TFSA”) set up by the employer; OR belongs to a category of employees who benefit from a registered pension plan,4 i.e. a pension plan.5. When must the VRSP be offered? The deadline by which an employer must offer a VRSP and automatically enroll its eligible employees depends on the number of eligible employees on certain given dates. The deadline for employers with 20 or more eligible employees as of June 30, 2016 was December 31, 2016. The deadline for employers with 10 or more eligible employees as of June 30, 2017 is December 31, 2017. Note that the deadline has yet to be determined for employers with 5 to 9 eligible employees, but it will not be before January 1, 2018. Choose a VRSP set up by an authorized administrator and give notice to the employees An employer who is required to offer a VRSP must choose from among those set up by the authorized administrators. A list of authorized administrators who have set up a VRSP is available on the website of Retraite Québec.6 Once it has made its choice, the employer must, no less than 30 days before offering the chosen VRSP, notify its eligible employees7 in writing that: it intends to join that VRSP; the eligible employees will be automatically enrolled in the VRSP, but will be able to opt out; each eligible employee may choose the contribution he/she wishes to make to the VRSP This written notice must also contain all the other information required by the VRSP Act. Once the employer has joined the chosen VRSP, it has 30 days to enroll its employees with the VRSP. The VRSP administrator will then send a written notice to the enrolled employees, by the statutory deadline, containing the prescribed information. Is the employer required to contribute to the VRSP? Under the VRSP Act, the employer has no obligation to contribute to the VRSP on behalf of its enrolled employees. If it chooses to contribute, it may subsequently change its contribution, subject to any contrary clause contained in a collective agreement or individual employment contract. To change its contribution, the employer must give written notice to the employees concerned and to the VRSP administrator. If the amendment has the effect of reducing its contribution, it cannot take effect before the 30th day following the date written notice is given. Other obligations of the employer Employers who must offer a VRSP also have other obligations under the VRSP Act. The following is a non-exhaustive list of those obligations.8 Opting out of or not contributing to the VRSP Employees may opt out of the VRSP offered by their employer by advising in writing of their intention to do so within the time period specified in the VRSP Act. In such a case, the employer must retain this written notice for the entire duration of the employee’s employment. The employer will also be required to verify periodically whether the employee wishes to change his/her mind and enroll in the VRSP. This must be carried out in the month of December, every two years following the employee’s decision to opt out. If an employee has decided to opt out of the VRSP, the employer must also give the VRSP administrator written notice within 30 days of its receipt of the written notice from the employee. Pursuant to the regulation, enrolled employees may set their contribution rate to 0%.9 When an employee does so, the employer must periodically give them the opportunity to start making contributions again. The employer must do so in the month of December, every two years following the date on which the contribution rate was set to 0%. Deduction and payment of contributions The employer must deduct the contributions of each employee who is a member of the VRSP from his/her pay cheque10 and pay it to the VRSP within the time period specified in the statute, i.e. no later than the last day of the month following the deduction thereof (for example, contributions collected in April 2017 must be paid into the VRSP by May 31, 2017).11 Should the employer not pay the contributions to the VRSP within the requisite time period, the employer will be required to pay interest at the rate and according to the method specified in the regulation.12 Access to documents The employer must make the following documents available to employees at their request and free of charge: the contract between the employer and the VRSP administrator and the VRSP’s annual statement and financial report. Submission of documents or information to the VRSP administrator The employer is required to provide the VRSP administrator with any documents or information it requests and which are necessary to comply with the VRSP Act. Termination of employment Where an employee’s employment is terminated, the employer must notify the VRSP administrator thereof within 30 days. Contravention of the VRSP Act Different bodies are responsible for applying the VRSP Act, including Retraite Québec and the Commission des normes, de l’équité, de la santé et de la sécurité du travail (the “CNESST”). Moreover, the CNESST oversees the employer’s compliance with its obligation to offer a VRSP to its eligible employees. In the event of a violation of the VRSP Act, the employer may be subject to penal sanctions, among other things. Indeed, the VRSP Act states that if an employer fails to pay a contribution to the VRSP by the specified deadline or to offer a VRSP within the time period prescribed by law, it commits an offence and may be liable to a fine ranging from $500 to $10,000. Fines are doubled in the event of a subsequent conviction. Where the employer violates any of its other obligations under the VRSP Act, it commits an offence and may be liable to a fine of $600 to $1,200, which, again, is doubled in the event of a subsequent conviction. In closing, we note that, as reported by some recently published articles, it appears the CNESST will only intervene if a complaint is received. If you were supposed to offer a VRSP by no later than December 31, 2016 and you have not yet done so, you should act quickly. However, if a complaint has been filed with the CNESST, you could be subject to prosecution and payment of a fine. R.S.Q., c. R-17.0.1. According to the definition contained in the Act respecting labour standards, R.S.Q., c. N-1.1. As defined in the Act respecting labour standards, R.S.Q., c. N-1.1. Within the meaning of this expression in the Income Tax Act, R.S.C. (1985) c. 1 (5th Supp.). Where an employer offers membership to all its eligible employees in a pension plan, or in an RRSP or TFSA (through source deductions on their salary), and some of them decide not to enroll, the employer is not obligated to offer a VRSP to the employees who have chosen not to enroll. Retraite Québec website (in french only). The employer is not required to give notice to the eligible employees who are excluded from the enrolling requirement, as previously noted. We note that the VRSP Act expressly states that the employer is not liable for any acts or omissions of the VRSP administrator. Regulation respecting voluntary retirement savings plans, R.S.Q., c. R-17.0.1, r. 3. It must begin collecting the contributions as of the first payroll following the 61st day after the requisite notice is given by the VRSP administrator to the enrolled employees once the employer has joined the VRSP. The VRSP administrator must inform the employer without delay of the date on which such notice was given. If the employer has chosen to contribute, it must pay its own contributions within the same time period as that specified for the payment of the employees’ contributions. We note also that until they are paid to the VRSP, the contributions and accrued interest, if any, are deemed to be held in trust by the employer, whether or not it has kept them separate from its own assets.

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March 23, 2017

Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

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October 31, 2016

Pension plans and their investment rules: investing in alternative investment funds in full compliance

Numerous pension plans today are among the largest investors of capital in private equity, venture capital and hedge funds.1 In many cases, such pension plans hold assets valued in the tens or hundreds of millions of dollars (or even more) consisting of various categories and sub-categories of investments. It is therefore not surprising that with the recent lower rates of return of the traditional forms of investments, pension plans are increasingly opting to invest a portion of their assets in alternative investment funds. Pension plans are however subject to many particular legislative and regulatory provisions, including rules governing their investments that they must take into account when making such investments. For example, regarding defined benefit pension plans, Quebec’s Supplemental Pension Plans Act (hereinafter the “SPPA”) stipulates that only the pension committee2 (or a person to whom it has delegated this power) may “decide how the assets of the plan are to be invested.”3 In addition, the pension committee must adopt a written investment policy. This policy must, in particular, take into account the characteristics of the pension plan, its financial obligations and the other requirements prescribed by law.4 The SPPA also provides that the investments must be made in conformity with this investment policy, as well as the rules and limits provided by law.5 The federal statute governing pension plans, i.e. the Pension Benefits Standards Act, 1985 (hereinafter the “PBSA”), as well as the main regulation thereunder, the Pension Benefits Standards Regulations, 1985 (hereinafter the “PBSR”), also impose various obligations on pension plan administrators pertaining to investments.6 Thus, in the case of a defined benefit pension plan that is subject to the PBSA, the plan administrator is required to establish a written statement of investment policies and procedures (i.e. an investment policy)7 and to invest the assets of the pension fund in accordance with the regulations58 and in a manner that a reasonable and prudent person would apply in respect of a portfolio of investments of a pension fund (i.e. the prudent method of portfolio management).9 This article will not describe all the investment obligations of pension plan administrators, but will highlight several significant principles that administrators of defined benefit pension plans must keep in mind before investing in an investment fund. 1. Does the pension plan’s investment policy permit the proposed investment in the investment fund? The SPPA not only requires the pension committee to adopt a written investment policy, it also provides that this written policy must set out specific conditions, such as the permitted categories and sub-categories of investments.10 Similarly, under the PBSR, a pension plan’s written investment policy must, among other things, set out the categories of investments.11 The pension plan administrator must therefore verify whether the language of the investment policy permits investments in the investment fund in which it plans to invest. For example, does the pension plan’s investment policy permit a portion of the pension fund’s assets to be invested in units of a limited partnership whose purpose is to hold equity interests in real estate or infrastructure projects? Another example was considered in the case of Syndicat général des professeurs et professeures de l’Université de Montréal c. Gourdeau et al.12 in which the plaintiff, the University of Montreal’s union of professors, alleged in its court proceedings that the members of the investment committee of the University of Montreal’s pension plan had made investments in a hedge fund, notwithstanding that the applicable investment policy did not specifically allow investments in this category of funds.13 We note also that some investment policies only provide that the plan administrator may assign a portion of the portfolio to a portfolio manager, without any reference to the notion of investment funds. However, because of the characteristics of the funds they administer, many managers of alternative investment funds are not registered managers. Private equity and venture capital funds that invest for the purpose of exercising a certain degree of control in, or to participate actively in the management of, the projects or businesses they invest in, typically do not qualify as “investment funds” within the meaning of the law, and their managers are not normally registered, whether as portfolio managers or investment fund managers.14 The language of the investment policy should therefore be considered carefully, and special attention should be paid to the terminology used and its legal meaning. If a conclusion cannot be made that the proposed investment clearly qualifies as one of the permitted categories or sub-categories of investments under the pension plan investment policy, it would be prudent for the policy to be amended before the proposed investment is approved. The amendment in question could refer specifically to that investment or provide for the addition of a new category or subcategory of investments that clearly includes the proposed investment. The pension plan administrator should also ensure that the amendment to the investment policy is appropriate in the circumstances, particularly in light of the characteristics of the pension plan, its financial obligations and the other provisions of the investment policy. In addition to the foregoing, we believe it would be prudent for the plan administrator to verify whether the categories of investments described in the targeted investment fund’s investment policy are included in the permitted categories or sub-categories of investments under the pension plan’s investment policy. It should be remembered that, in accordance with the standard structure of alternative investment funds, once the plan administrator has committed capital in the targeted investment fund by signing a subscription agreement, the fund manager generally has the right to make calls for payment at its discretion during the fund’s investment period, by requiring investors (including the plan administrator) through drawdowns to pay a part or all of the amount they committed to the fund. The fund manager may then invest the said amounts in any portfolio investment of its choosing that complies with the investment policy of the fund. Furthermore, unlike hedge funds, the majority of private equity and venture capital funds do not usually allow investors to request the redemption of their interests in the fund. Therefore, the pension plan becomes “captive” and will not be able to recover its investment until liquidation of the fund, unless it finds a purchaser in the secondary market. In addition, the plan administrator cannot assume that the fund manager will follow or comply with the terms and conditions of the pension plan’s investment policy, even if it has been disclosed to it. Indeed, the investment fund manager is not acting as agent for the pension plan administrator investing in its fund. Since the amount invested by the pension plan administrator is pooled with the funds of other investors, the investment fund manager (unlike a portfolio manager) cannot undertake to comply with the investment policy of a specific investor. The manager’s investment decisions are collective (for the entire fund) and are therefore only subject to the restrictions imposed on it by the investment fund’s organizational documents, i.e. primarily the restrictions set out in the fund’s investment policy. However, there are ways to circumscribe this power of the manager, as we shall see in greater detail in the sections below. Finally, we note that the plan administrator should also satisfy itself that the other pension plan documents contain no provisions that could prohibit, restrict or otherwise limit the proposed investment. 2. Does the proposed investment comply with the other limits or requirements set out in the investment policy? The permitted categories and sub-categories of investments are not the only conditions that must be set out in the pension plan’s written investment policy. Indeed, the SPPA stipulates that the investment policy must, for instance, also set out the proportion of the assets that can be invested in debt securities and equity securities, as well as measures for ensuring the diversification of the portfolio.15 As for the PBSR, it provides that the investment policy provisions must also deal with the asset allocation and the diversification of the portfolio.16 Investment policies usually contain one or more provisions that set out the maximum percentage of the assets in the pension fund that can be allocated to various permitted categories or sub-categories of investments. When the proposed investment is made, it must therefore comply with any applicable limit in this regard. In addition, the investment policy generally contains other specific requirements relating to certain categories or sub-categories of investments Such requirements may, for example, deal with the quality of the securities that can be held in respect of a category or sub-category of investments (e.g.: a minimum rating of “A” by a recognized credit rating agency) or the minimum market capitalization of a security at the time of purchase. They may also prohibit the purchase of certain securities. Any specific condition, limit or prohibition that may apply in the case of the proposed investment must be respected. Furthermore, one should also review all the types of investments permitted by the investment policy of the targeted investment fund, since, as we noted above, the pension plan administrator will not be entitled to review or approve the investments made by the fund manager in accordance with that policy. If some of the investments that can be made by the investment fund manager may potentially contravene any requirement of the pension plan’s investment policy, the plan administrator should then negotiate a bilateral collateral agreement (commonly known as a “side letter”) with the fund manager to require that it take certain protective measures to prevent any possible contravention of the pension plan’s investment policy. Such measures can, for instance, include the right to be excused from participating in certain investments. In such a case, the side letter may provide that the manager will be required to set up an alternative investment vehicle or parallel fund structured in parallel to the investment fund, to be used for the investments that have been excluded by the plan administrator, and in which the pension plan holds no interests (but in which the other investors have mirror interests to the interests they hold in the investment fund). The organizational documents of private equity and venture capital funds often permit this type of structure to be implemented. If this is not the case, it may be important to provide for it in a side letter, depending on the circumstances. Moreover, even where the investment fund’s organizational documents provide for this type of mechanism, it is standard practice for an investor, such as a pension plan administrator, to require prior notification by the manager of any intention to make any investment identified in the side letter as potentially problematic for the investor. We note that the side letter should be concluded with the fund manager at the time the plan administrator commits to the capital of the fund upon the signature of the subscription agreement, since, once it has been signed, the manager will no longer have any incentive to make any additional undertakings to the plan administrator. 3. Does the proposed investment comply with the rules and limits in the applicable legislation and regulations? The SPPA contains certain rules and limits governing investments. For example: the pension committee must endeavor to constitute a diversified portfolio in order to minimize the risk of major losses;17 the pension plan’s assets cannot be invested, directly or indirectly, in shares carrying more than 30% of the voting rights attached to the shares of a legal person.18 Under the SPPA, any person who makes an investment that is not in compliance with the law is, by that sole fact and without further proof of wrongdoing, liable for any resulting loss.19 In addition, the members of a pension committee who approved such an investment are, by that sole fact and without further proof of wrongdoing, solidarily liable for any resulting loss.20 However, such persons incur no liability if they acted in good faith on the basis of an expert’s opinion.21 According to Retraite Québec, an “expert” is any person who is able to provide a specialist’s opinion on a given subject. In addition to this liability, any person who contravenes any of the rules applicable to investments commits a penal offence and is liable to a fine of $500 to $25,000.22 The PBSA and the PBSR also contain various rules and limits pertaining to investments. Thus, section 8(4.1) of the PBSA states that the plan administrator must comply with the regulations and invest in a manner that a reasonable and prudent person would apply in respect of a portfolio of investments of a pension fund. We note that the administrator will not be found liable under this section if a contravention of the section occurred because the administrator relied in good faith either on the report of a person whose profession lends credibility to the report (including an accountant, lawyer or actuary), or on financial statements prepared by an accountant or a written report prepared by an auditor that have been represented to the administrator as fairly reflecting the financial condition of the plan.23 As for the PBSR, it primarily provides that the investment of the plan assets must be done in accordance with Schedule III of the regulations, entitled “Permitted Investments”.24 That Schedule sets out various rules and limits, including the rule that a plan administrator may not, directly or indirectly, invest moneys of the plan in any one person if 10% or more of the total market value of the plan’s assets has already been invested in the person, or if 10% or more of the total market value of the plan’s assets would be invested in the person as a result of the investment.25 According to the definitions set out in that Schedule, the word “person” includes a corporation, trust, partnership or fund or an unincorporated association or organization. Another rule contained in Schedule III provides that the plan administrator may not, directly or indirectly, invest the moneys of the plan in the securities of a corporation to which are attached more than 30% of the votes required to elect the directors of the corporation.26 We note that, like the SPPA, the PBSA provides for certain penal offences. Thus, any person who contravenes a provision of the PBSA or its regulations commits an offence and is liable, on summary conviction, to a maximum fine of $100,000 or a maximum term of imprisonment of one year (or both), in the case of an individual.27 In the case of a corporation or other body, the penalty is a maximum fine of $500,000. In the case of R. v. Christophe et al.,28 the Ontario Court of Justice held that certain investments approved by the members of an investment committee contravened one of the applicable rules under the Pension Benefits Act of Ontario and its general regulations, and convicted the members in question of a penal offence. The Court then sentenced each of the individuals to a fine of more than $22,000. Given that there can be significant consequences where investments are made in breach of the law (or regulations, as applicable), pension plan administrators therefore have every interest in ensuring the investments are compliant. In this regard, it is customary to provide a confirmation in a side letter from the investment fund manager that it will ensure that the pension plan administrator is not in breach of certain rules and restrictions as a result of any of the investments made by the fund. Such clauses are common, but, as previously noted, must be negotiated at the time the plan administrator commits capital to the fund. 4. Was a due diligence review done of the proposed investment and are the results of the review satisfactory to the plan administrator? Under the SPPA, the pension committee must notably exercise the prudence, diligence and skill that a reasonable person would exercise in similar circumstances.29 Similarly, under the PBSA, the plan administrator must exercise the degree of care in its administration of the pension plan that a person of ordinary prudence would exercise in dealing with the property of another person.30 With respect to investments, the administrator must invest the assets of the pension fund in a manner that a reasonable and prudent person would apply in respect of a portfolio of investments of a pension fund.31 Accordingly, where the pension plan administrator is considering making a particular investment, including an investment in an investment fund, it should conduct a due diligence review whose scope will vary according to the proposed investment. Indeed, where certain investments are being considered, a prior due diligence review will be simpler and easier. In the case of investments in large investment funds or complex and/or innovative financial instruments, extended and detailed reviews will usually be necessary. Some investments involve the analysis of highly technical and voluminous documentation (such as an investment in a complex master-feeder fund structure). For such investments, it is important to obtain the information and/or particulars necessary to properly identify and understand the potential benefits and risks of the proposed investment before making a decision. In this regard, it will be essential to review the offering memorandum or private placement memorandum of the fund. If the fund is not proposing to issue an offering memorandum, it may be appropriate to require that it do so to ensure that one properly understands the parameters of the investment. Indeed, at the time the plan administrator is making its commitment to the fund, the investment fund may hold very few or no assets (except for open-ended funds such as hedge funds). In such a case, the offering memorandum or private placement memorandum will be almost the only tool that can provide a proper understanding of the portfolio investments that will be made by the fund and the investment strategy that will be used by the manager. Obviously, the fund’s organizational documents must also be reviewed, since they constitute the main contract between the investors and the manager. The plan administrator will also wish to satisfy itself, in particular, that these organizational documents contain protective measures in the event the manager is caught in a conflict of interest, and also contain sufficient information disclosure requirements on the part of the fund manager. As part of its review, the plan administrator should also be able to examine the side letters concluded with all the other investors. If there is no “most favoured nation” type of provision in the fund’s organizational documents, the administrator should negotiate a side letter with the manager that includes such a clause. If the plan administrator does not have all the necessary skills to properly assess the fund’s documentation and make an informed decision on the proposed investment, it should request the assistance of qualified professionals in the field. In the report that these professionals submit to the plan administrator on the results of their analysis, they will, for instance, be able to inform the plan administrator whether the said documentation raises specific questions or problems in relation to the pension plan, or whether some provisions of the documentation differ substantially from the standard documentation generally used in the market for this type of investment. Finally, in all cases where the plan administrator decides to make an investment, it is important for it to properly document both the process followed and its final decision (including the reasons for it).32 Any analysis or report provided by professionals, as well as all the other relevant documents and correspondence leading up to the decision, should be conserved in the plan administrator’s records. According to the data collected by Preqin, 23% of the capital invested worldwide in investment funds in 2012 stemmed from public or private pension funds (source: Benoît Leleux, Hans Van Swaay and Esmeralda Megally, Private Equity 4.0 – Reinventing Value Creation, John Wiley & Sons Ltd., 2015, at p. 38). Section 168 of the SPPA. Sections 169 and 170 of the SPPA. Section 168 of the SPPA. The plan administrator administers the pension plan and pension fund as a trustee (section 8(3) of the PBSA). Sections 7.1(1) and (2) of the PBSR. Section 8(4.1) of the PBSA and sections 6(1) and 7 of the PBSR. Section 8(4.1) of the PBSA. Section 170 of the SPPA. Section 7.1(1) of the PBSR. Superior Court of Montreal, file number 500-06-000294-054. This case was settled out of court and the settlement was approved on May 26, 2015 by the Superior Court of Québec (2015 QCCS 2496). Section 5 of the Securities Act (Quebec). Section 170 of the SPPA. Section 7.1(1) of the PBSR. Unless it is reasonable in the circumstances to act otherwise (section 171.1 of the SPPA). Section 175 of the SPPA. This limit does not however apply in the cases referred to in the second paragraph of that section. Section 180 of the SPPA. Section 180 of the SPPA. Section 180 of the SPPA. Section 257 of the SPPA. Where such an offence is committed by a legal person, the fine is tripled (section 259 of the SPPA). Section 8(5.1) of the PBSA. Section 6(1)a) of the PBSR. Section 9(1) of Schedule III. However, the 10% limit does not apply to the investments listed in section 9(3) of Schedule III, which, among others, include investments in an investment fund that meet the requirements applicable to pension plans set out in Schedule III, investments in a fund that replicates the composition of a widely recognized index of a broad class of securities traded at a marketplace (index funds) and investments in securities issued or fully guaranteed by the Government of Canada, the government of a province, or an agency thereof. Section 11 of Schedule III. The expression “security”, defined in Schedule III, includes, in particular, the shares of any class of shares of a corporation and any ownership interest in the case of any other entity. The 30% limit does not apply to investments made in securities of real estate corporations, resource corporations or investment corporations, as defined in Schedule III. Sections 38(1) and (1.1) of the PBSA. 2009 ONCJ 586. Section 151 of the SPPA. It must also act with honesty and loyalty in the best interest of the plan members and avoid conflicts of interest. Section 8(4) of the PBSA. Section 8(4.1) of the PBSA. The Canadian Association of Pension Supervisory Authorities (CAPSA) stresses the importance of this practice in its Guideline no. 6 (Pension Plan Prudent Investment Practices Guideline) published in November 2011. CAPSA is a national interjurisdictional association of pension regulators whose mission is to facilitate an efficient and effective pension regulatory system in Canada. CAPSA’s Guideline no. 6 is intended to help plan administrators demonstrate the application of prudence to the investment of pension plan assets. Regarding the documenting of the plan administrator’s decisions, this guideline states the following, in particular: “Any time a key decision is made, it should be well documented, and include the reasons and circumstances that were considered.”

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