Arrow Hedge Partners Inc. et al.

Decision

Headnote

Ontario-only -- relief granted from sections 111(2)(b) and 111(3) of the Securities Act (Ontario) and sub-clause 13.5(2)(a)(ii) of National Instrument 31-103 - Registration Requirements and Exemptions to permit pooled funds to invest with fund-on-fund structure in other pooled funds, including trusts - each Top Fund is a trust and each Underlying Fund is a trust -- relief subject to normal conditions

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(3) and 113.

National Instrument 31-103 - Registration Requirement and Exemptions -- ss. 13.5(2)(a)(ii) and 15.1.

December 13, 2010

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

AND

IN THE MATTER OF

ARROW HEDGE PARTNERS INC. AND

MARRET ASSET MANAGEMENT INC.

(the Filers)

AND

ARROW HIGH YIELD FUND AND

ARROW-MARRET RESOURCE YIELD FUND

DECISION

Background

The Ontario Securities Commission (the Commission) has received an application from the Filers on behalf of each of the Filers, the Arrow High Yield Fund (the Arrow Top Fund) and the Arrow-Marret Resource Yield Fund (the A rrow-Marret Top Fund, and together with the Arrow Top Fund, the Initial Top Funds) and any other investment fund which is not a reporting issuer under the Securities Act (Ontario) (the Act) established, advised or managed by Arrow Hedge Partners Inc. (the Manager) and/or Marret Asset Management Inc. (Marret) after the date hereof (the Future Top Funds and, together with the Initial Top Funds, the Top Funds) for a decision under the securities legislation of Ontario (the Legislation), exempting:

(a) the Manager, Marret and the Top Funds, in respect of the Top Funds investment in any of the Arrow Distressed Securities Fund (the Initial Arrow Underlying Fund), the Marret High Yield Strategies Fund (MHY) and Marret Investment Grade Bond Fund (MIGB and, together with MHY, the Initial Marret Underlying Funds) (collectively, the Initial Underlying Funds) or any other investment fund which is not a reporting issuer under the Act, established, advised or managed by the Manager or Marret after the date hereof (the Future Underlying Funds and, together with the Initial Underlying Funds, the Underlying Funds), from the restriction in paragraph 111(2)(b) and subsection 111(3) of the Act that prohibits a mutual fund from knowingly making and holding an investment in a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder (the Related Issuer Relief); and

(b) the Manager with respect to each of the Top Funds that invests its assets in the Initial Arrow Underlying Fund or any other investment fund under the Act established, advised or managed by the Manager after the date hereof (the Future Arrow Underlying Funds and together with the Initial Arrow Underlying Fund, the Arrow Underlying Funds), from the restriction in sub-clause 13.5(2)(a)(ii) of National Instrument 31-103 Registration Requirement and Exemptions (NI 31-103) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase securities of an issuer in which a responsible person or an associate of the responsible person is a partner, officer or director unless the written consent of the client to the purchase is obtained before the purchase (the Arrow Consent Requirement Relief).

together, the Requested Relief.

Representations

This decision is based on the following facts represented by the Manager and Marret:

Manager

1. The Manager is a corporation incorporated under the Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.

2. The Manager is registered with the Commission as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer under the Act and as a Commodity Trading Manager under the Commodity Futures Act (Ontario).

3. Pursuant to separate management agreements (the Management Agreements), the Manager is the manager of each of the Initial Top Funds and will be the manager of the Future Top Funds and is, or will be, responsible for managing the assets of the Top Funds and has, or will have, complete discretion to invest and reinvest or to arrange for the investment and reinvestment of the Top Funds' assets, and is, or will be, responsible for executing or arranging for the execution of all portfolio transactions in respect of the Top Funds.

4. Pursuant to the Management Agreements, the Manager has the power and authority to appoint an investment adviser to manage the investment portfolios of the Initial Top Funds and will have the power and authority to appoint investment advisers to manage the investment portfolios of the Future Top Funds.

5. The Manager is also the trustee and manager of the Initial Arrow Underlying Fund and will be the trustee and manager of the Future Arrow Underlying Funds and is, or will be, responsible for managing the assets of the Arrow Underlying Funds and has, or will have, complete discretion to invest and reinvest or to arrange for the investment and reinvestment of the Arrow Underlying Funds' assets, and is, or will be, responsible for executing or arranging for the execution of all portfolio transactions for the Arrow Underlying Funds.

6. The Manager is not a reporting issuer in any jurisdiction of Canada and is not, to its knowledge, in default of securities legislation of any jurisdiction of Canada.

Marret

7. Marret is a corporation incorporated under the Business Corporations Act (Ontario) with its head office located in Toronto, Ontario.

8. Marret is registered with the Commission as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer under the Act and as a Commodity Trading Manager under the Commodity Futures Act (Ontario).

9. Pursuant to an investment advisor agreement between the Manager and Marret dated July 19, 2004, the Manager appointed Marret as investment advisor to the Manager in respect of the Arrow Top Fund.

10. Pursuant to an investment advisor agreement between the Manager and Marret dated November 13, 2008, the Manager appointed Marret as investment advisor to the Manager in respect of the Arrow-Marret Top Fund.

11. Marret is not a reporting issuer in any jurisdiction of Canada and is not, to its knowledge, in default of securities legislation of any jurisdiction of Canada.

Arrow Underlying Funds

12. The Initial Arrow Underlying Fund is an open-ended trust established under the laws of the Province of Ontario pursuant to a trust indenture dated as of May 21, 2003 as amended by a first supplemental trust indenture dated as of March 26, 2007.

13. Each of the Arrow Underlying Funds has, or will have, separate investment objectives, strategies and/or restrictions.

14. Securities of the Initial Arrow Underlying Fund are offered on a private placement basis in each of the provinces and territories of Canada pursuant to available exemptions from the prospectus requirement in accordance with National Instrument 45-106Prospectus and Registration Exemptions (NI 45-106).

15. The Initial Arrow Underlying Fund is not a reporting issuer under the Act.

Marret Underlying Funds

16. MHY is a closed end investment fund established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of May 28, 2009 and is managed by Marret. Equity Transfer & Trust Company is the trustee of MHY.

17. On June 17, 2009, MHY completed an initial public offering of 21,500,000 units pursuant to a final prospectus dated May 28, 2009. Units of MHY are publicly traded on the Toronto Stock Exchange (the TSX) under the symbol MHY.UN.

18. MIGB is a closed end investment fund established under the laws of the Province of Ontario pursuant to a declaration of trust made as of September 29, 2009 and is managed by Marret. Equity Transfer & Trust Company is the trustee of MIGB.

19. On October 23, 2009, MIGB completed an initial public offering of 26,700,000 units pursuant to a final prospectus dated September 29, 2009. Units of MIGB are publicly traded on the TSX under the symbol MIG.UN

20. Marret is also the portfolio advisor to each of the Initial Marret Underlying Funds.

21. Each of the Underlying Funds established, advised or managed by Marret has, or will have, separate investment objectives, strategies and/or restrictions.

22. The Initial Marret Underlying Funds are reporting issuers in each of the provinces of Canada and are not, to Marret's knowledge, in default of securities legislation of any province of Canada.

Top Funds

23. The Arrow Top Fund was established pursuant to a trust indenture dated as of January 1, 2002, as amended and restated by an amended restated trust indenture dated as of February 28, 2002 and as further amended by a first supplemental trust indenture dated as of April 30, 2002 and a second supplemental trust indenture dated as of July 19, 2004. The Manager also acts as trustee of the Arrow Top Fund.

24. The Arrow-Marret Top Fund was established pursuant to a trust indenture dated as of February 1, 2007, as amended by a first supplemental trust indenture dated as of July 9, 2009. The Manager also acts as trustee of the Arrow-Marret Top Fund.

25. Each of the Top Funds is, or will be, a mutual fund for the purposes of the Act.

26. Securities of each of the Top Funds, are, or will be, sold pursuant to available prospectus exemptions in accordance with NI 45-106.

27. The Arrow Top Fund was established to achieve a high level of income and potential capital gains with an attractive risk return profile and moderate volatility. The Arrow Top Fund's activities will involve the purchase, sale and short sales of high yield bonds and debt obligations of primarily publicly listed United States corporations. The Arrow Top Fund may also purchase or sell short common shares, preferred shares, government bonds, instalment receipts, options, futures and other securities in accordance with its investment objective, strategy and restrictions. The Arrow Top Fund's strategy includes investing in securities of companies where the price of their securities has been, or is expected to be affected by a bankruptcy or otherwise "out of favour" distressed situation such as reorganization, distressed sale of assets and other restructuring events. The investment strategy of the Arrow Top Fund also permits investments in other investment funds such as the Initial Underlying Funds, the Future Arrow Underlying Funds and/or the Future Marret Underlying Funds.

28. The Arrow-Marret Top Fund was established to achieve a high level of income and potential capital gains with an attractive risk return profile and moderate volatility. To achieve its objective, the Arrow-Marret Top Fund purchases and may sell short non-investment grade and investment grade corporate debt, bank loans and commitments, debt with equity warrants attached, convertible debt, Canadian income trusts, common shares, preferred shares, futures and other securities in accordance with the Arrow-Marret Top Fund's investment objective and restrictions. In addition, the investment strategy of the Arrow-Marret Top Fund permits investments in other investment funds such as the Initial Underlying Funds, the Future Arrow Underlying Funds and/or the Future Marret Underlying Funds.

29. The Initial Top Funds will only purchase units of the applicable Initial Marret Underlying Fund when the following conditions are met:

(a) with respect to any purchase of MHY units, when the market price per MHY unit is at a discount to its net asset value per unit; and

(b) with respect to any purchase of MIGB units, when the market price per MIGB unit is at a discount to its net asset value per unit;

30. None of the Initial Top Funds are a reporting issuer under the Act. None of the Future Top Funds will be a reporting issuer under the Act.

Fund-on-Fund Structure

31. The Top Funds allow investors in the Top Funds to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies through, primarily, direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure). The Manager and Marret believe that the Fund-on-Fund Structure provides an efficient and cost-effective manner of pursuing portfolio diversification on behalf of the Top Funds rather than through the direct purchase of securities.

32. Purchasers of securities of a Top Fund may subscribe for securities of the Top Funds pursuant to a subscription agreement (the Subscription Agreement).

33. Prior to the execution of the Subscription Agreement, the purchaser will be provided with a copy of the Top Fund's offering memorandum or, if no offering memorandum is prepared in respect of the Top Fund, will be provided with details about the Top Fund and given disclosure respecting relationships and potential conflicts of interest between the Top Fund and the applicable Underlying Funds.

34. Where an offering memorandum is prepared for a Top Fund, the offering memorandum will disclose that the Top Fund may purchase units of the Underlying Funds, the fact that the Underlying Funds are also managed and/or advised by the Manager and/or Marret, as applicable, the approximate or maximum percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Fund, and the process or criteria used to select the Underlying Funds.

35. Each of the Top Funds will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) and will otherwise comply with the requirements of NI 81-106 applicable to them. Each of the Underlying Funds which are subject to NI 81-106 will prepare annual audited financial statements and interim unaudited financial statements. The holdings by a Top Fund of securities of an Underlying Fund will be disclosed in the financial statements of the Top Fund.

36. Securityholders of a Top Fund will receive, on request, a copy of the offering document of the Underlying Funds, if available, and the audited annual financial statements and interim unaudited financial statements of any Underlying Fund in which the Top Fund invests.

37. Securityholders invested in the Initial Top Funds will receive written disclosure, in the next regular communication, of the fact that the Top Fund may purchase units of the Underlying Funds in accordance with the terms of this decision, the fact that the Underlying Funds will be under common management, the approximate or maximum percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Fund, and the process or criteria used to select the Underlying Funds.

38. There will be no sales fees or redemption fees payable by a Top Fund in respect of an acquisition, disposition or redemption of securities of an Underlying Fund by the Top Fund other than brokerage fees incurred on the purchase or disposition of securities of an Underlying Fund that are purchased or disposed of in the secondary market.

39. The Manager will ensure that the arrangements between or in respect of a Top Fund and an Underlying Fund are such as to avoid the duplication of management fees and incentive fees.

40. The Manager or Marret, as applicable, will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of an Underlying Fund, unless the Top Fund is the sole owner of the securities of the Underlying Fund at the time of the meeting or the effective date of the resolution, in which case the Manager or Marret, as applicable, will arrange for all the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund.

41. Marret is entitled to management fees with respect to the Initial Marret Underlying Funds and to management and performance fees with respect to their underlying funds, Marret HYS Trust and Marret IGB Trust, respectively, pursuant to management agreements with the Initial Marret Underlying Funds, Marret HYS Trust and Marret IGB Trust. Marret will ensure that there is no increase in the fees paid to it as a result of the investment by the Top Funds.

42. The amounts invested from time to time in an Underlying Fund by a Top Fund may exceed 20% of the outstanding voting securities of the Underlying Fund. As a result, each Top Fund could, either alone or together with other Top Funds, become a substantial security holder of an Underlying Fund. The Top Funds are, or will be, related mutual funds by virtue of the common management by the Manager.

Generally

43. In the absence of the Related Issuer Relief, the Top Funds would be precluded from implementing the Fund-on-Fund Structure due to certain investment restrictions in the Legislation.

44. In the absence of the Arrow Consent Requirement Relief, each Top Fund would be precluded from investing in an Arrow Underlying Fund, unless the consent of each investor in the Top Fund is obtained, since the Manager or, an officer and/or director of the Manager (considered a responsible person within the meaning of the applicable provisions of NI 31-103) may also be an officer and/or director of, or may perform a similar function for or occupy a similar position with, the Arrow Underlying Fund.

45. Any investment made by a Top Fund in an Underlying Fund will be aligned with the investment objectives, investment strategy, risk profile and other principal terms of the Top Fund.

46. A Top Fund's investments in the Underlying Funds represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the funds concerned.

Decision

The Commission is satisfied that the decision meets the test set out in the Legislation for the Commission to make the decision.

The decision of the Commission under the Legislation is that the Requested Relief is granted, provided that the Manager and Marret, as applicable, ensure that;

(a) securities of a Top Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;

(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental objectives of the Top Fund;

(c) no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;

(d) no sales fees or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund other than brokerage fees incurred on the purchase or disposition of securities of an Underlying Fund that are purchased or disposed of in the secondary market;

(e) the Manager or Marret, as applicable, does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of an Underlying Fund, unless the Top Fund is the sole owner of the securities of the Underlying Fund at the time of the meeting or the effective date of the resolution, in which case the Manager or Marret, as applicable, will arrange for all the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the Top Fund;

(f) the offering memorandum (or other similar document) of each Top Fund discloses:

(i) that the Top Fund may purchase units of the Underlying Funds;

(ii) the fact that the Underlying Funds are also managed and/or advised by the Manager and/or Marret, as applicable;

(iii) the approximate percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Fund; and

(iv) the process or criteria used to select the Underlying Fund.

(g) the Manager provides written disclosure in the next regular written communication made after the date of this decision to existing investors in the Initial Top Funds, of the following:

(i) that the Top Fund may purchase units of the Underlying Funds;

(ii) the fact that the Underlying Funds are also managed and/or advised by the Manager and/or Marret, as applicable;

(v) the approximate percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Fund; and

(vi) the process or criteria used to select the Underlying Fund.

The Related Issuer Relief

"Darren McKall"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission

The Arrow Consent Requirement Relief

"Mary Condon"
Commissioner
Ontario Securities Commission
 
"Margot Howard"
Commissioner
Ontario Securities Commission