Arrow Capital Management Inc. (Re), 2024 CanLII 44457

May 16, 2024

(the Jurisdiction)

and

(the Filer)

and

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Continuing Funds and the Other Alternative Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) to grant exemptive relief pursuant to Section 6.1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), Section 19.1 of National Instrument 41-101 General Prospectus Requirements (NI 41-101) and section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102):

(1) that exempts the Continuing Funds from section 3.1 of NI 81-102 to permit the filing of a simplified prospectus for the Continuing Funds (the Simplified Prospectus), notwithstanding that the initial investment required in respect of each of the Continuing Funds (the Seed Capital Requirement) will not be provided (the Seed Capital Relief); and

(2) that exempts the Continuing Funds:

(a) from section 2.1 of NI 81-101 for the purposes of relief requested herein from Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) and Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3);

(i) Item 10 of Part B of Form 81-101F1 to permit each Continuing Fund to use the performance history of the respective Terminating Funds to calculate its investment risk rating in the Simplified Prospectus;

(ii) Item 2 of Part I of Form 81-101F3 to permit each Continuing Fund to use the management expense ratio (MER) and the start date of the respective Terminating Funds in the “Management expense ratio (MER)” and “Date series started” boxes of the Quick Facts table in the fund facts documents of each series of the Continuing Funds (the Fund Facts);

(iii) Item 3 of Part I of Form 81-101F3 to permit each Continuing Fund to show the investments of the respective Terminating Funds in the “Top 10 investments” and “Investment mix” tables in the Continuing Funds’ initial Fund Facts;

(iv) Item 4 of Part I of Form 81-101F3 to permit each Continuing Fund to use the performance history of the respective Terminating Funds to calculate its investment risk rating in the Fund Facts;

(v) Item 5 of Part I of Form 81-101F3 to permit each Continuing Fund to use the performance data of the respective Terminating Funds in the “Average return”, “Year-by-year returns” and “Best and worst 3-month returns” sections of the Fund Facts, notwithstanding that part of the data of Arrow Opportunities Alternative Class (AOAC) relates to a period prior to AOAC offering its securities under a simplified prospectus; and

(vi) Item 1.3 of Part II of Form 81-101F3 to permit each Continuing Fund to use the MER, trading expense ratio (the TER) and fund expenses of the respective Terminating Funds in the “fund expenses” section of the Fund Facts.

(b) from section 3B.2 of NI 41-101 for the purposes of the exemptions sought from Form 41-101F4 Information Required in an ETF Facts Document (Form 41-101F4):

(i) Item 2 of Part I of Form 41-101F4 to permit the Series ETF of Arrow Long/Short Alternative Fund to disclose the start date, MER, average daily volume, number of days traded, market price, net asset value and average bid-ask spread of the Series ETF of Arrow Long/Short Alternative Class as its information in the ETF facts document (the ETF Facts);

(ii) Item 3 of Part I of Form 41-101F4 to permit Arrow Long/Short Alternative Fund to show the investments of Arrow Long/Short Alternative Class in the “Top 10 investments” and “Investment mix” tables in Arrow Long/Short Alternative Fund’s initial ETF Facts;

(iii) Item 4 of Part I of Form 41-101F4 to permit Arrow Long/Short Alternative Fund to use the performance history of Arrow Long/Short Alternative Class to calculate its investment risk rating in the ETF Facts;

(iv) Item 5 of Part I of Form 41-101F4 to permit the Series ETF of Arrow Long/Short Alternative Fund to use the past performance data of the Series ETF of Arrow Long/Short Alternative Class in the “Average return”, “Year-by-year returns” and “Best and worst 3-month returns” sections in the ETF Facts; and

(v) Item 1.3 of Part II of Form 41-101F4 to permit the Series ETF of Arrow Long/Short Alternative Fund to use the MER, TER and fund expenses of Series ETF of Arrow Long/Short Alternative Class in the “Fund expenses” section of the ETF Facts;

(c) from section 4.4 of National Instrument 81-106 - Investment Fund Continuous Disclosures (NI-81-106) from Form 81-106F1 - Contents of Annual and Interim Management Report of Fund Performance (Form 81-106F1) set out below, to permit the Continuing Funds to include in their annual and interim management reports of fund performance (MRFPs) the performance data and information derived and information derived from the financial statements and other financial information (collectively, the Financial Data) of the respective Terminating Funds as follows:

(i) Items 3.1(1), 3.1(7), 3.1(7.1) and 3.1(8) of Part B of Form 81-106F1 to permit each Continuing Fund to use the financial highlights of the respective Terminating Funds in its Form 81-106F1, notwithstanding that part of the data of AOAC relates to a period prior to AOAC offering its securities under a simplified prospectus;

(ii) Items 4.1(1), 4.1(2), 4.2(1), 4.2(2) and 4.3(1) of Part B of Form 81-106F1 to permit each Continuing Fund to use the past performance data of the respective Terminating Funds in its Form 81-106F1, notwithstanding that part of the data of AOAC relates to a period prior to AOAC offering its securities under a simplified prospectus; and

(iii) Items 3(1) and 4 of Part C of Form 81-106F1 to permit each Continuing Fund to use the financial highlights and past performance data of the respective Terminating Funds in its Form 81-106F1, notwithstanding that part of the data of AOAC relates to a period prior to AOAC offering its securities under a simplified prospectus;

(d) from subsections 15.3(2), 15.6(1)(a)(i), 15.6(1)(b), 15.6(1)(d)(i), 15.8(2)(a), 15.8(3)(a) and 15.9(2) of NI 81-102 to permit each Continuing Fund to use the performance data of the respective Terminating Funds in sales communications and reports to securityholders of the Continuing Funds (the Fund Communications), notwithstanding that part of the data of AOAC relates to a period prior to AOAC offering its securities under a simplified prospectus;

(e) from section 15.1.1 of NI 81-102 and Items 2 and 4 of Appendix F Investment Risk Classification Methodology to NI 81-102 to permit each Continuing Fund to calculate its investment risk level using the performance history of the respective Terminating Funds;

(paragraphs (a) through (e) collectively, the Performance Data Relief);

(3) for the Continuing Funds, except for Exemplar Global Growth and Income Fund, the Other Alternative Funds and any alternative mutual fund established or restructured in the future and managed by the Filer or an affiliate of the Filer (the Future Funds, and collectively with the Continuing Funds, except for Exemplar Global Growth and Income Fund, and the Other Alternative Funds, the Alternative Funds):

(a) from subsection 5.1(4) of NI 81-101 which states that a simplified prospectus for an alternative mutual fund must not be consolidated with a simplified prospectus of another mutual fund if the other mutual fund is not an alternative mutual fund;

(the Consolidation Relief); and

(4) for WaveFront Global Diversified Investment Fund (WaveFront Fund), provided it complies with the following terms and conditions of the existing decision (the Former 81-104 Relief) that applies to WaveFront Global Diversified Investment Class In the Matter of Arrow Capital Management Inc and WaveFront Global Diversified Investment Class (June 21, 2019) to permit WaveFront Fund to adopt investment restrictions in NI 81-102 prior to the amendments on January 3, 2019, and be managed in accordance with the restrictions, except as was otherwise permitted by National Instrument 81-104 Commodity Pools (Former 81-104);

(the Past Exemptive Relief and collectively with the Seed Capital Relief, the Performance Data Relief and the Consolidation Relief, the Requested Relief)

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11- 102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (collectively, the Other Jurisdictions) (together with the Jurisdiction, the Canadian Jurisdictions).

Interpretation

Terms defined in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

In addition, the following terms have the meanings set out below:

“Conventional Mutual Funds” means the Other Conventional Mutual Funds and Exemplar Global Growth and Income Class.

“Existing Funds” means the Terminating Funds and the Non-Corporate Class Funds.

“Funds” means the Existing Funds and the Continuing Funds.

“Non-Corporate Class Funds” means the Other Conventional Mutual Funds and the Other Alternative Funds.

“Other Conventional Mutual Funds” means Exemplar Growth and Income Fund and Exemplar Performance Fund.

“Terminating Funds” means Arrow Long/Short Alternative Class, Arrow Global Multi-Asset Alternative Class, Arrow Opportunities Alternative Class, Exemplar Global Growth and Income Class and WaveFront Global Diversified Investment Class.

Representations

This decision is based on the following facts represented by the Filer on behalf of itself and the Funds:

The Filer

The Filer is a corporation existing under the laws of Ontario having its registered head office in Toronto, Ontario.
The Filer is the investment fund manager and portfolio manager of the Terminating Funds and the Non-Corporate Class Funds, and will be the investment fund manager, portfolio manager and trustee of each of the Continuing Funds upon creation.
The Filer is registered in the following categories in the Canadian Jurisdictions as indicated below:

a) Ontario: Portfolio Manager (PM), Investment Fund Manager (IFM); Exempt Market Dealer (EMD) and Commodity Trading Manager under the Commodity Futures Act (Ontario);

b) Alberta: EMD;

c) British Columbia: EMD;

d) Quebec: EMD and IFM; and

e) Newfoundland and Labrador: IFM.

The Filer is not in default of securities legislation in any of the Canadian Jurisdictions.

The Funds

The Terminating Funds are classes of Exemplar Portfolios Limited, a corporation established under the laws of Ontario.
Securities of the Alternative Funds are currently qualified for sale in the Canadian Jurisdictions under a Simplified Prospectus, Fund Facts and ETF Facts (if applicable) prepared in accordance with NI 81-102, each dated June 15, 2023.
Securities of the Conventional Mutual Funds are currently qualified for sale in the Canadian Jurisdictions under a Simplified Prospectus, Fund Facts and ETF Facts (if applicable) prepared in accordance with NI 81-102, each dated July 7, 2023.
Each Continuing Fund is expected on its creation to be an open-ended mutual fund trust established under the laws of the Province of Ontario.
Since the Continuing Funds are either alternative mutual funds or conventional mutual funds, without the Consolidation Relief, the Filer will have to file two separate Simplified Prospectuses at the same time, resulting in duplication of effort required by both the Filer and the regulators and additional printing, renewal and related costs.
On April 22, 2024, the Filer filed a consolidated preliminary and pro forma Simplified Prospectus, Funds Facts and ETF Facts (if applicable) in the Canadian Jurisdictions to qualify the distribution of the securities of each series of the Continuing Funds, Arrow EC Income Advantage Alternative Fund and the Other Conventional Mutual Funds. The Filer will not begin distributing securities of the Continuing Fund prior to the Mergers (as defined below).
Each Continuing Fund is expected to be a reporting issuer under the applicable securities legislation in the Canadian Jurisdictions and is expected to be subject to NI 81-102.
Each Continuing Fund will offer the same series of units as its respective Terminating Fund.
The Existing Funds are not in default of applicable securities legislation in any of the Canadian Jurisdictions.
Each Terminating Fund follows, and each Continuing Fund will follow, the standard investment restrictions and practices established under NI 81-102, except pursuant to the terms of any exemption that has been previously obtained or is requested in this Application.
The Filer proposes to merge each Terminating Fund into the corresponding Continuing Fund (the Mergers) on a tax-deferred basis after the close of business on or about June 21, 2024 (the Merger Date) as follows:

Terminating Fund

Continuing Fund

Arrow Long/Short Alternative Class

Arrow Long/Short Alternative Fund

Arrow Global Multi-Asset Alternative Class

Arrow Global Multi-Asset Alternative Fund

Arrow Opportunities Alternative Class

Arrow Opportunities Alternative Fund

Exemplar Global Growth and Income Class

Exemplar Global Growth and Income Fund

WaveFront Global Diversified Investment Class

WaveFront Global Diversified Investment Fund

The Mergers satisfy the pre-approval criteria set out in section 5.6 of NI 81-102, and the Independent Review Committee of the Terminating Funds approved the Merger at a meeting held on April 4, 2024
As the Continuing Funds are newly established, they will not have their own past performance data on the date the Merger is implemented.

Seed Capital Relief

The Filer does not intend to subscribe for $150,000 of units of each Continuing Fund as required by the Seed Capital Requirement because the assets of the corresponding Terminating Fund (which will become the assets of that Continuing Fund in connection with the implementation of the applicable Merger) are significantly in excess of the $150,000 Seed Capital Requirement. Accordingly, the Filer is of the view that any seed capital injected into a Continuing Fund prior to a Merger will not provide any additional benefit to unitholders.
On the Merger Date, unitholders of a Continuing Fund will hold units of that Continuing Fund equal to the same net asset value as they did before as securityholders of the corresponding Terminating Fund, and therefore, the Continuing Funds will each have already received subscriptions in excess of $150,000.

Performance Data Relief

Subject to receipt of the Seed Capital Relief, the Continuing Funds will not have any assets (other than a nominal amount to establish it) or liabilities at the time of the applicable Merger.
The assets of the Terminating Funds will be transferred to the equivalent Continuing Funds in connection with the implementation of the Mergers.
As the Filer intends to cease distribution of the Terminating Funds at the close of business on the business day prior to the Merger Date, it does not intend to renew the Terminating Funds’ Simplified Prospectus.
Each Continuing Fund will be a newly established investment fund. While each Continuing Fund will have the same assets and liabilities as the corresponding Terminating Fund, as a new fund, it will not have its own Financial Data as at the Merger Date.
The Financial Data of the Terminating Funds is significant information which can assist investors in determining whether to purchase securities of the Continuing Funds. In the absence of the Performance Data Relief, investors will have no historical financial or performance information (such as past performance) on which to base such an investment decision.
Without the Performance Data Relief, the sales communications pertaining to, and the MRFPs of, the Continuing Funds cannot include Financial Data of the Terminating Funds that relate to a period prior to the applicable Merger and the Continuing Funds cannot provide performance data in their sales communications until it has distributed securities under a Simplified Prospectus for at least 12 months.
AOAC had previously received exemptive relief to include Financial Data in its sales communications, MFRPs and Fund Facts from a period prior to AOAC offering its securities under a simplified prospectus.
The Filer proposes to:

a) disclose the series start date of the Terminating Funds as the series start date of the Continuing Funds:

i) under the heading “Fund Details” of each Continuing Fund of Part B in the Simplified Prospectus;

ii) under the subheading “Date series started” under the heading “Quick Facts” in the Fund Facts; and

iii) under the subheading “Date series started” under the heading “Quick Facts” in the ETF Facts (if applicable);

b) use the performance data of the Terminating Funds to calculate the risk rating of the Continuing Funds in:

i) the Simplified Prospectus;

ii) the Fund Facts; and

iii) the ETF Facts (if applicable);

c) use the performance data of the Terminating Fund in:

i) the Fund Communications of the Continuing Funds

ii) the “Year-by-year returns”, “Best and worst 3-month returns” and “Average return” subsections of the Fund Facts for the Continuing Fund; and

iii) the “Year-by-year returns”, “Best and worst 3-month returns” and “Average return” subsections of the ETF Facts for the Arrow Long/Short Alternative Fund;

d) Use the MER, TER, and fund expenses of the Terminating Funds in the “Quick Facts” and “Fund expenses” section in the Fund Facts and ETF Facts (if applicable) for the Continuing Funds;

e) show the investments of the Terminating Funds in the “Top 10 investments” and “Investment mix” tables in the initial Fund Facts and the initial ETF Facts (if applicable) for the Continuing Funds;

f) use the average daily volume, number of days traded, market price, net asset value and average bid-ask spread of Arrow Long/Short Alternative Class in the ETF Facts for Arrow Long/Short Alternative Fund;

g) incorporate by reference into the Simplified Prospectus the most recent annual financial statements and MRFPs of the Terminating Funds for the period ended December 31, 2023, and the most recent interim June 30, 2023 (collectively, the Terminating Fund Disclosure), until such Terminating Fund Disclosure is superseded by more current financial statements and MRFPs of the Continuing Funds;

h) prepare annual MRFPs for the Continuing Funds commencing with the year ending December 31, 2024 and interim MRFPs for the Continuing Funds commencing with the period ending June 30, 2024 using the Terminating Funds’ financial highlights and past performance; and

i) prepare comparative annual financial statements for the Continuing Funds commencing with the year ending December 31, 2024 and interim financial statements for the Continuing Funds commencing with the period ending June 30, 2024 using the Terminating Funds’ financial highlights and past performance.

The Filer is seeking to make the Mergers as transparent as possible for investors of the Terminating Funds. Accordingly, the Filer submits that treating the Continuing Funds as fungible with the corresponding Terminating Fund for purposes of the starting dates, investment holdings and Financial Data would be beneficial to investors and that to do otherwise would cause unnecessary confusion among investors concerning the difference between the Terminating Funds and the Continuing Funds.
The Filer submits that investors will not be misled if the starting dates, investment holdings and Financial Data of the Continuing Funds reflects the starting dates, investment holdings and Financial Data of the corresponding Terminating Fund.

Consolidation Relief

The Filer wishes to combine the Simplified Prospectus of the Alternative Funds with the Simplified Prospectus of the Conventional Mutual Funds.
As noted above, consolidating the Simplified Prospectus would reduce renewal, printing and related costs. Offering the Alternative Funds under the same renewal Simplified Prospectus as the Conventional Mutual Funds would facilitate the distribution of the Alternative Funds in the Canadian Jurisdictions under the same Simplified Prospectus and enable the Filer to streamline disclosure across the Filer’s fund platform. Even though the Alternative Funds are, or will be, Alternative Mutual Funds, they share many common operational and administrative features with the Conventional Mutual Funds that are conventional mutual funds and combining them in the same Simplified Prospectus will allow investors to more easily compare the features of the Conventional Mutual Funds and the Alternative Funds.
NI 41-101 does not contain an equivalent provision to subsection 5.1(4) of NI 81-101. Accordingly, an investment fund manager that manages ETFs is permitted to consolidate a prospectus under NI 41-101 for its ETFs that are alternative mutual funds with a prospectus for its ETFs that are conventional mutual funds. There is no reason why mutual funds filing a prospectus under NI 81-101 should be treated differently from exchange-traded funds filing a long-form prospectus under NI 41-101.
The Filer may make changes to the features of the Non-Corporate Class Funds as part of the process of renewing the Non-Corporate Class Funds’ Simplified Prospectus. The ability to file the Simplified Prospectus of the Alternative Funds with those of the Conventional Mutual Funds will ensure that the Filer can make the operational and administrative features of the Alternative Funds and the Conventional Mutual Funds consistent with each other, if necessary.
If the Consolidation Relief is not granted, it will be necessary for the Filer to file two separate Simplified Prospectuses at the same time.
Investors will continue to receive the fund facts document(s) when purchasing securities of the Alternative Funds or Conventional Funds as required by applicable securities legislation. The form and content of the fund facts document(s) of the Alternative Funds and Conventional Funds will not change as a result of the Consolidation Relief.
The simplified prospectus of the Alternative Funds and Conventional Funds will, as required, be provided to investors, upon request, as required by applicable securities legislation.

Past Exemptive Relief

Each Continuing Fund will have an investment objective and investment strategies that are substantially similar to the investment objective and investment strategies of the corresponding Terminating Fund.
Pursuant to the Former 81-104 Relief, WaveFront Global Diversified Investment Class received exemptive relief:

a) To permit it to adopt investment restrictions contained in NI 81-102 prior to the amendment on January 3, 2019 and be managed in accordance with these restrictions, except as was otherwise permitted by Former 81-104.

Without the Past Exemptive Relief, WaveFront Fund cannot properly effect an investment strategy which is substantially similar to its corresponding Terminating Fund.
The Filer is seeking to make the Continuing Funds as identical as possible to the Terminating Funds, but for the change in structure from classes of a corporation to trusts.
The Filer proposes that WaveFront Fund be permitted to rely on the Former 81-104 Relief as if it is applied directly to it.

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 Seed Capital Relief is granted;
the Performance Data Relief is granted, provided that:

a) the Fund Communications of each series of each Continuing Fund contains the applicable past performance data of the corresponding series of the corresponding Terminating Fund prepared in accordance with Part 15 of NI 81-102, notwithstanding that part of the data of AOAC relates to a period prior to AOAC offering its securities under a simplified prospectus;

b) the Simplified Prospectus:

i) incorporates by reference the Terminating Fund Disclosure, until such Terminating Disclosure is superseded by more current financial statements and MRFPs of the Continuing Fund;

ii) states that the start date for each series of each Continuing Fund is the start date of the corresponding series of the corresponding Terminating Fund; and

iii) discloses the Merger where the start date for each series of the Continuing Fund is stated;

c) the Fund Facts of each series of each Continuing Fund and the ETF Facts of the Series ETF of Arrow Long/Short Alternative Fund:

i) states that the “Date series started” date is the “Date series started” date of the corresponding series of the corresponding Terminating Fund;

ii) includes the performance data of the corresponding series of the corresponding Terminating Funds prepared in accordance with Part 15 of NI 81-102, notwithstanding that part of the data of AOAC relates to a period prior to AOAC offering its securities under a simplified prospectus; and

iii) discloses the Merger where the “Date series started” date is stated;

d) the MRFPs and financial statements for each Continuing Fund include the Financial Data of the corresponding Terminating Fund pertaining to the corresponding series of the Terminal Fund and disclose the Mergers for the relevant time periods, notwithstanding that part of the data of AOAC relates to a period prior to AOAC offering its securities under a simplified prospectus;

e) each Continuing Fund prepares its Simplified Prospectus, Fund Facts, ETF Facts (if applicable) and other Fund Communications in accordance with the Seed Capital Relief and the Performance Data Relief; and

f) any sales communication, any MRFPs and any Fund Facts that contain performance data of Arrow Opportunities Alternative Fund (AOAF) relating to a period prior to when AOAC was a reporting issuer discloses:

i) that AOAF was not a reporting issuer during such period;

ii) that the expenses of AOAF would have higher during such period had AOAF been subject to the additional regulatory requirements applicable to a reporting issuer; and

iii) performance data of AOAF for 10-, 5-, 3- and one-year period, when applicable.

the Consolidation Relief is granted; and
the Past Exemptive Relief is granted, provided that:

a) WaveFront Fund is an alternative mutual fund subject to NI 81-102 and whereby its corresponding Terminating Fund, WaveFront Global Diversified Investment Class, had previously filed a long form prospectus as a commodity pool under Former NI 81-104 prior to NI 81-102 being amended on January 3, 2019; and

b) this decision shall expire upon a material change in the fundamental investment objectives and investment strategies of WaveFront Fund.

“Darren McKall”

Darren McKall, Manager

Investment Management

Ontario Securities Commission

Application No.: 2024/0216

SEDAR+ No.: 6114926