Arrow Capital Management Inc. et al.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief permitting alternative mutual funds to process purchases and redemptions of units on a weekly basis -- net asset value is calculated on a daily basis -- subject to conditions regarding disclosure in the simplified prospectus and fund facts documents -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 9.3(1), 10.3(1), 19.1.
June 17, 2020
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 ARROW CANADIAN ADVANTAGE ALTERNATIVE CLASS, ARROW GLOBAL ADVANTAGE ALTERNATIVE CLASS, EAST COAST INVESTMENT GRADE INCOME FUND, WAVEFRONT GLOBAL DIVERSIFIED INVESTMENT CLASS (the Existing Funds)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Existing Funds, of which the Filer is the investment fund manager, and similarly structured investment funds managed by the Filer (the Future Funds and together with the Existing Funds, the Funds or individually, a Fund), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that exempts a Fund from subsection 9.3(1) and subsection 10.3(1) of National Instrument 81-102 Investment Funds (NI-81-102) to permit each Fund to process purchase and redemption orders for its securities, as described in their simplified prospectus and fund facts documents, on a weekly basis at their net asset value (NAV) per security calculated as at the last Valuation Date (as defined below) of each week in which the purchase or redemption order for such securities is received;
(the Exemption 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 the other provinces and territories of Canada (collectively, the Other Jurisdictions) (together with the Jurisdiction, the Canadian Jurisdictions).
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.
AIF means an annual information form of a Fund prepared in accordance with Form 81-102F2 -- Contents of Annual Information Form under National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), as the same may be amended from time to time;
Alternative Fund means a Fund that is an alternative mutual fund under NI 81-102;
Prospectus means a simplified prospectus of a Fund prepared in accordance with Form 81-101F1 -- Contents of Simplified Prospectus under NI 81-101 as the same may be amended from time to time.
This decision is based on the following facts represented by the Filer on behalf of itself and the Funds:
1. The Filer is a corporation existing under the laws of Ontario having its registered head office in Toronto, Ontario.
2. The Filer is the investment fund manager and portfolio manager of each Existing Fund. The Filer, or an affiliate, will be the investment fund manager and portfolio manager of the Future Funds.
3. 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.
4. The Filer is not in default of securities legislation in any of the Canadian Jurisdictions.
5. The Funds are or will be open-ended public Alternative Funds governed by NI 81-102.
6. The Funds are or will be organized as trusts or as part of a mutual fund corporation established under the laws of the Province of Ontario.
7. The Funds will distribute securities in each of the Canadian Jurisdictions pursuant to a Prospectus, AIF and fund facts documents, prepared and filed in accordance with NI 81-101 and accordingly, each Fund, is, or will be, a reporting issuer in the Canadian Jurisdictions where the Exemption Sought is relied upon.
8. The Funds are not in default of applicable securities legislation in any of the Canadian Jurisdictions.
9. In a notice of special meeting and management information circular mailed to unitholders of the East Coast Investment Grade Income Fund (the East Coast Fund) dated May 13, 2020, the Filer proposed to unitholders of the East Coast Fund to restructure the East Coast Fund by converting it to an open-end alternative mutual fund from a closed-end investment fund whose units are listed for trading on the Toronto Stock Exchange (the TSX) under the symbol ECF.UN (the Restructuring). Unitholders approved the Restructuring at a special meeting of unitholders held on June 12, 2020. As part of the Restructuring, the name of the East Coast Fund will be changed to Arrow EC Income Advantage Alternative Fund from East Coast Investment Grade Income Fund. The units will be de-listed from the TSX as part of the Restructuring.
10. The East Coast Fund has filed a Prospectus, AIF and fund facts documents such that the East Coast Fund will become an alternative mutual fund to which NI 81-102 applies in that the East Coast Fund has fundamental investment objectives that permits it to borrow, sell securities short and invest in specified derivatives in a manner not permitted for non-alternative mutual funds under NI 81-102.
11. The NAV of each Fund will be calculated at the close of regular trading, normally 4:00pm (Eastern Time), on a day the Toronto Stock Exchange is open (a Valuation Date).
12. The Filer will calculate the NAV for each Fund on each Valuation Date in order to meet its obligations under National Instrument 81-106 Investment Fund Continuous Disclosure regarding the use of derivatives, including the obligation to daily mark-to-market the value of its derivatives.
13. Subsections 9.3(1) and 10.3(1) of NI 81-102 require that the purchase price and redemption price of a security of a mutual fund to which a purchase order and redemption order pertains, respectively, be the NAV per security next determined after receipt by each Fund of the purchase order and redemption order, respectively.
14. As will be described in each Fund's Prospectus and fund facts documents, each Fund will process purchase and redemption orders for its securities on a weekly basis at their NAV per security calculated as at the last Valuation Date of each week in which the purchase order for such securities is received.
15. The Filer has determined that effecting such purchases and redemptions on a weekly basis, strikes the best balance between the needs of a securityholder to invest or access its assets in a timely and orderly manner, and the need to minimize the impact of such transactions on other securityholders in each Fund.
16. The Filer believes that weekly purchases and redemptions will reduce portfolio turnover resulting in lower transaction costs in the form of brokerage commissions and the bid-ask spread. Further, it has determined that weekly redemptions will protect each Fund from having to reduce positions at less than ideal times during potentially challenging market conditions. This will ensure that all securityholders of each Fund will be treated fairly in instances where a Fund is not able to unwind its portfolio holdings in an orderly manner to honour the redemption requests at the time.
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 Exemption Sought is granted provided that each Fund:
1. processes, and discloses in its Prospectus and in the "Quick Facts" section of its fund facts document that it processes, purchase and redemption orders for its securities on a weekly basis at their NAV per security calculated as at the last Valuation Date of the week in which the purchase order for such securities is received (the Transaction Processing Frequency); and
2. discloses in the "Who should invest in the Fund?" section of the Part B of its Prospectus and in the "Who is this Fund for?" section of its fund facts document, the Transaction Processing Frequency and that the Fund is only suitable for investors who can accept the Transaction Processing Frequency.
Investment Funds & Structured Products Branch
Ontario Securities Commission