Arrow Capital Management Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval of investment fund merger -- approval required because the merger does not meet all the pre-approval criteria in National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.6(1), 5.7(1)(b) and 19.1(1).
May 27,2021
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF ARROW CAPITAL MANAGEMENT INC. (the Filer) AND EXEMPLAR INVESTMENT GRADE Fund (the Terminating Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) for approval of the proposed merger (the Merger) of the Terminating Fund into Arrow EC Income Advantage Alternative Fund (the Continuing Fund, and together with the Terminating Fund, the Funds) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Approval Sought).
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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, Yukon and Northwest Territories (together with Ontario, the Canadian Jurisdictions).
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 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 and the Funds
1. The Filer is a corporation existing under the laws of Ontario with its registered head office in Toronto, Ontario.
2. The Filer is registered in the following categories in the jurisdictions as indicated below:
(a) Ontario: Portfolio Manager, 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.
3. The Filer is the investment fund manager and portfolio manager of each of the Funds.
4. Each of the Funds is an open-end mutual fund trust established under the laws of Ontario by a declaration of trust pursuant to which the Filer is the trustee.
5. Each of the Funds is a reporting issuer under the applicable securities legislation in the Canadian Jurisdictions and subject to NI 81-102.
6. Securities of the Terminating Fund (and of other certain mutual funds forming part of the Exemplar Mutual Funds fund family) are currently qualified for distribution in the Canadian Jurisdictions pursuant to the simplified prospectus, annual information form and fund facts documents dated July 3, 2020 (the Terminating Fund Offering Documents).
7. Securities of the Continuing Fund (and of other certain alternative mutual funds forming part of the Arrow Alternative Mutual Funds fund family) are currently qualified for distribution in the Canadian Jurisdictions pursuant to the simplified prospectus, annual information form and fund facts documents dated June 26, 2020 (collectively, the Continuing Fund Offering Documents and together with the Terminating Fund Offering Documents theTerminating Documents).
8. The net asset value (NAV) for each series of the Funds is calculated on a daily basis in accordance with the Funds' valuation policy and as described in the Offering Documents.
9. Neither the Filer nor the Funds are in default of securities legislation in any of the Canadian Jurisdictions.
Reason for Approval Sought
10. Regulatory approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular, the investment objectives and fee structure of the Continuing Fund are not, or may not be considered to be, "substantially similar" to the investment objectives of the Terminating Fund.
11. The investment objectives of the Terminating Fund and the Continuing Fund are as follows:
Exemplar Investment Grade Fund (Terminating Fund)
Arrow EC Income Advantage Alternative Fund (Continuing Fund)
The investment objective of the Terminating Fund is to generate income and capital preservation by investing in a diversified portfolio of primarily North American investment grade corporate bonds.
The investment objective of the Continuing Fund is to generate income and preserve capital by investing in a diversified portfolio of primarily North American investment grade corporate bonds.
The fund will use leverage. The leverage will be created through the use of cash borrowings, short sales and derivative contracts. The fund's leverage shall not exceed the limits on the use of leverage described in the simplified prospectus or as otherwise permitted under applicable securities legislation.
12. The fee structure of the Terminating Fund and the Continuing Fund are as follows:
Exemplar Investment Grade Fund (Terminating Fund)
Arrow EC Income Advantage Alternative Fund (Continuing Fund)
Management Fees
A, AI, AN, U -- 1.30% F, FI, FN, G, ETF -- 0.80% I -- negotiated with Arrow
A, AD, U -- 1.45% F, FD, G, ETF -- 0.95% I -- negotiated with Arrow
Performance Fees
The Terminating Fund does not pay a performance fee.
The Continuing Fund pays a performance bonus per unit equal to 15% of the amount by which the Adjusted Net Asset Value per unit at the end of the fiscal year exceeds the highest year end Adjusted Net Asset Value per unit previously achieved. For these purposes, "Adjusted Net Asset Value per unit" of any series of securities of the Continuing Fund means the Net Asset Value per unit of that series at the end of a fiscal year plus the aggregate amount of all distributions or dividends previously declared on a per unit basis in respect of such series of unit, without giving effect to the accrual of any performance bonus.
13. Except as described in this decision, the Merger complies with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Merger
14. In its capacity as the manager of the Funds, the Filer proposes to merge the Terminating Fund into the Continuing Fund.
15. In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, a press release describing the proposed Merger has been issued and the press release, material change report, amendment to the simplified prospectus of the Terminating Fund, amendment to the annual information form of the Terminating Fund and the amended and restated fund facts documents of the Terminating Fund, all dated May 5, 2021, and which give notice of the proposed Merger, have been filed via SEDAR.
16. The unitholders of the Terminating Fund will be asked to approve the Merger at a meeting of the unitholders of the Terminating Fund expected to be held on or about June 17, 2021.
17. Subject to receipt of the unitholder approvals and the Approval Sought, the Merger is expected to occur on or about June 25, 2021, or as soon as practicable thereafter (the Effective Date).
18. The proposed Merger does not require approval of existing unitholders of the Continuing Fund as the Filer has determined that the proposed Merger does not constitute a material change to the Continuing Fund.
19. As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), the Independent Review Committee (IRC) has been appointed for the Funds. The Filer presented the terms of the Merger to the IRC for a recommendation. The IRC reviewed the proposed Merger and provided a positive recommendation for the Merger, having determined that the Merger, if implemented, would achieve a fair and reasonable result for each of the Funds and their respective unitholders. A summary of the IRC's recommendation has been included in the notice of special meeting sent to unitholders of the Terminating Fund as required by section 5.1(2) of NI 81-107.
20. A notice of meeting, management information circular (the Circular), proxy and the most recently filed fund facts document(s) of the applicable series of the Continuing Fund (the CF Fund Facts, and together with the Circular and proxy, the Meeting Materials) were mailed to unitholders of the Terminating Fund commencing on May 13, 2021 and have been filed via SEDAR.
21. The Meeting Materials contain the CF Fund Facts, a description of the proposed Merger, information about the Terminating Fund and the Continuing Fund, a description of their differences and income tax considerations for investors of the Funds and the IRC's recommendation regarding the Merger so that the unitholders of the Terminating Fund could consider this information before voting on the Merger. The Meeting Materials also describe the various ways in which investors can obtain a copy of the simplified prospectus and annual information form of the Continuing Fund, as well as the most recent interim and annual financial statements and management reports of fund performance for the Continuing Fund, at no cost.
22. Costs and expenses associated with the Merger will be borne by the Filer and will not be charged to the Funds. The costs of the Merger include legal, printing, mailing and regulatory fees, as well as proxy solicitation and brokerage costs.
23. Subject to receiving the necessary approvals, including unitholder approval at the unitholder meeting, effective as of the close of business on June 18, 2021, the Terminating Fund will cease distribution of securities and any new purchases of securities will not be allowed. The Terminating Fund will remain closed to purchase-type transactions, except pursuant to the Terminating Fund's pre-authorized purchase program, until it is merged with the Continuing Fund on the Effective Date. All systematic programs shall remain unaffected until the business day immediately before the Effective Date.
24. Unitholders in the Terminating Fund will continue to have the right to redeem their securities up to the close of business on the last business day before the effective date of the Merger.
25. Following the Merger, all optional services (such as systematic withdrawal plans) will continue to be available to investors. Unitholders of the Terminating Fund will be automatically enrolled in comparable plans with respect to their corresponding securities of the Continuing Fund unless they advise otherwise.
26. Unitholders may change or cancel any systematic program at any time and unitholders of the Terminating Fund who wish to establish one or more systematic programs in respect of their holdings in the Continuing Fund may do so following the Merger.
27. Unitholders of the Terminating Fund who elected to receive distributions in cash from the Terminating Fund before the Merger will receive distributions in cash from the Continuing Fund after the Merger.
28. No sales charges will be payable by unitholders of the Funds in connection with the Merger.
29. The Merger will be completed as a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act (Canada) (the Tax Act).
30. The Terminating Fund and the Continuing Fund are, and are expected to continue to be at all material times, mutual fund trusts under the Tax Act and, accordingly, units of both Funds are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax free savings accounts.
31. As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.
Benefits of the Merger
32. The Filer believes that the Merger is in the best interests of the Terminating Fund and the Continuing Fund and their unitholders and will be beneficial to unitholders of the Terminating Fund and the Continuing Fund for the following reasons:
(a) the Continuing Fund has a similar investment objective and investment strategy as the Terminating Fund and is managed by the same team of investment personnel;
(b) a significant portion of the Terminating Fund's investments are similar to investments in the Continuing Fund;
(c) the Continuing Fund is an alternative mutual fund, as described below, which provides the Manager with a more comprehensive and flexible mandate to meet the investment objectives of the Terminating Fund;
(d) the Continuing Fund, notwithstanding similar investment objective, investment strategy and investment personnel, has enjoyed better performance over its life than that enjoyed by the Terminating Fund over such period;
(e) the Merger will provide economies of scale by eliminating duplicative administrative and regulatory costs of operating the Terminating Fund and the Continuing Fund as separate mutual funds, including, but not limited to, regulatory filing fees, audit fees, accounting and legal expenses; and
(f) following the Merger, the Continuing Fund will have more assets allowing for increased portfolio diversification opportunities and a smaller proportion of assets set aside to fund redemptions.
33. In light of the disclosure in the Circular, unitholders of the Terminating Fund should have had all the information necessary to determine whether the proposed Merger is appropriate for them and will continue to have their daily redemption rights under the terms of the Declaration of Trust of the Funds to permit them to exit the Terminating Fund should they not wish to become unitholders of the Continuing Fund.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make a decision.
The decision of the principal regulator under the Legislation is that the Approval Sought is granted.
Application File #: 2021/0267