Securities Law & Instruments

Headnote

Section 80 of the Commodity Futures Act (Ontario) -- Relief from the adviser registration requirements of subsection 22(1)(b) of the CFA granted to sub-adviser not ordinarily resident in Ontario in respect of advice regarding trades in commodity futures contracts and commodity futures options traded on commodity futures exchanges and cleared through clearing corporations, subject to certain terms and conditions. Relief mirrors exemption available in section 7.3 of OSC Rule 35-502 -- Non Resident Advisers (Rule 35-502) made under the Securities Act (Ontario).

Statutes Cited

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 22(1)(b), 80.

Securities Act, R.S.O. 1990, c. S.5, as am. -- Rule 35-502 -- Non Resident Advisers.

IN THE MATTER OF

THE COMMODITY FUTURES ACT,

R.S.O. 1990, CHAPTER C. 20, AS AMENDED

(the CFA)

AND

IN THE MATTER OF

ARROW HEDGE PARTNERS INC. AND

NEWSMITH ASSET MANAGEMENT LLP

 

ORDER

(Section 80 of the CFA)

UPON the application (the Application) of Arrow Hedge Partners Inc. (the Principal Adviser) to the Ontario Securities Commission (the Commission) for an order pursuant to section 80 of the CFA, that Newsmith Asset Management LLP (the Sub-Adviser) (including its directors, officers, representatives and employees acting as advisers on its behalf) be exempt, for a period of five years, from the adviser registration requirement in paragraph 22(1)(b) of the CFA in respect of acting as an adviser for the Principal Adviser for the benefit of the Funds (as defined below) regarding commodity futures contracts and commodity futures options traded on commodity futures exchanges (Contracts) and cleared through clearing corporations;

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON the Principal Adviser having represented to the Commission that:

The Principal Adviser and the Sub-Adviser

1. The Principal Adviser is a corporation incorporated under the laws of Ontario and its head office is located in Toronto, Ontario.

2. The Principal Adviser is currently registered as:

(a) a dealer in the category of limited market dealer and an adviser in the categories of investment counsel and portfolio manager under the Securities Act (Ontario) (the OSA); and

(b) an adviser in the category of commodity trading manager under the CFA.

3. The Sub-Adviser is a limited liability partnership formed under the laws of England and its head office is located in London, England.

4. The Sub-Adviser is regulated by the United Kingdom Financial Services Authority and is currently authorized to perform asset management services in the United Kingdom and through European Union (EU) directives in the other member states of the EU. The Sub-Adviser is registered as an investment adviser with the United States Securities and Exchange Commission.

5. The Sub-Adviser is not registered in any capacity under either the CFA or the OSA.

The Funds

6. The Principal Adviser is the trustee and investment manager to the Arrow NS European Fund and such other funds as the Principal Adviser may establish in the future for the benefit of which the Sub-Adviser will provide advice, directly or indirectly, to the Principal Adviser (each, a Fund, and collectively, the Funds). The Funds are, or will be, mutual fund trusts organized under the laws of Ontario. The Funds are, or will be, offered on a private placement basis to accredited investors pursuant to the registration and prospectus exemptions contained in section 2.3 of National Instrument 45-106 -- Prospectus and Registration Exemptions.

7. The Funds may, as part of their investment program, invest in Contracts.

8. The Principal Adviser may, pursuant to a written agreement with each Fund:

(a) act as an adviser (as defined in the OSA) to the Fund in respect of trading securities (as defined in the OSA); and

(b) act as an adviser (as defined in the CFA) to the Fund in respect of trading Contracts,

by exercising discretionary authority in respect of the investment portfolio of the Fund, with discretionary authority to purchase or sell on behalf of the Fund:

(i) securities; and

(ii) Contracts.

9. Pursuant to a written agreement which sets out the duties and obligations of the Sub-Adviser, the Principal Adviser has appointed the Sub-Adviser as a sub-adviser to the Principal Adviser in respect of the purchase or sale of Contracts for the Arrow NS European Fund, and may appoint the Sub-Adviser as a sub-adviser to the Principal Adviser in respect of the purchase or sale of Contracts for other Funds which the Principal Adviser establishes in the future.

The Proposed Advisory Services

10. In connection with the Principal Adviser acting as an adviser to the Funds in respect of the purchase or sale of Contracts, the Principal Adviser may, from time to time, pursuant to a written agreement made between the Principal Adviser and the Sub-Adviser, retain the Sub-Adviser to act as an adviser to it (the Proposed Advisory Services) by exercising discretionary authority on behalf of the Principal Adviser in respect of the investment portfolio of the Funds, with discretionary authority to buy or sell Contracts for the Funds, provided that:

(a) in each case, the Contract must be cleared through an acceptable clearing corporation; and

(b) in no case will any trading in Contracts constitute the primary focus or investment objective of the Fund.

11. Paragraph 22(1)(b) of the CFA prohibits a person or company from acting as an adviser unless the person or company is registered as an adviser under the CFA, or is registered as a representative, partner or officer of a registered adviser and is acting on behalf of the registered adviser. Under the CFA, "adviser" means a person or company engaging in or holding himself, herself or itself out as engaging in the business of advising others as to trading in "contracts", and "contracts" means commodity futures contracts and commodity futures options.

12. By providing the Proposed Advisory Services, the Sub-Adviser will be acting as an adviser with respect to commodity futures contracts and commodity futures options and, in the absence of being granted the requested relief, would be required to register as an adviser under the CFA.

13. There is presently no rule under the CFA that provides an exemption from the adviser registration requirement in paragraph 22(1)(b) of the CFA for a person or company acting as an adviser in respect of commodity futures contracts and commodity futures options that is similar to the exemption from the adviser registration requirement in paragraph 25(1)(c) of the OSA for acting as an adviser (as defined in the OSA) in respect of securities (as defined in the OSA) that is provided under section 7.3 of OSC Rule 35-502 -- Non Resident Advisers (Rule 35-502).

14. The relationship among the Principal Adviser, the Sub-Adviser and the Funds satisfies the requirements of section 7.3 of Rule 35-502.

15. As would be required under section 7.3 of Rule 35-502:

(a) the duties and obligations of the Sub-Adviser will be set out in a written agreement with the Principal Adviser;

(b) the Principal Adviser will contractually agree with the Funds to be responsible for any loss that arises out of the failure of the Sub-Adviser:

(i) to exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the Principal Adviser and the Funds; or

(ii) to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances (together with (i), the Assumed Obligations); and

(c) the Principal Adviser cannot be relieved by the Funds from its responsibility for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations.

16. The Sub-Adviser is not a resident of any province or territory of Canada.

17. The Sub-Adviser is, or will be, appropriately registered or licensed or is, or will be, entitled to rely on appropriate exemptions from such registrations or licences, to provide advice for the Funds pursuant to the applicable legislation of its principal jurisdiction.

18. Prior to purchasing any securities in one or more of the Funds, all investors in the Funds who are Ontario residents will receive written disclosure that includes:

(a) a statement that the Principal Adviser is responsible for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations; and

(b) a statement that there may be difficulty in enforcing any legal rights against the Sub-Adviser (or the individual representatives of the Sub-Adviser) advising the relevant Fund, because such entity is resident outside of Canada and all or substantially all of its assets are situated outside of Canada.

AND UPON the Commission being satisfied that it would not be prejudicial to the public interest for the Commission to grant the exemption requested on the basis of the terms and conditions proposed;

IT IS ORDERED, pursuant to section 80 of the CFA, that the Sub-Adviser (including its directors, officers, representatives and employees acting as advisers on its behalf) is exempt from the adviser registration requirement in paragraph 22(1)(b) of the CFA in respect of the Proposed Advisory Services provided to the Principal Adviser for the benefit of the Funds, for a period of five years, provided that at the relevant time that such activities are engaged in:

(a) the Principal Adviser is registered under the CFA as an adviser in the category of commodity trading manager;

(b) the Sub-Adviser is appropriately registered or licensed, or is entitled to rely on appropriate exemptions from such registrations or licences, to provide advice for the Funds pursuant to the applicable legislation of its principal jurisdiction;

(c) the duties and obligations of the Sub-Adviser are set out in a written agreement with the Principal Adviser;

(d) the Principal Adviser has contractually agreed with the respective Fund to be responsible for any loss that arises out of any failure of a Sub-Adviser to meet the Assumed Obligations;

(e) the Principal Adviser cannot be relieved by a Fund or its securityholders from its responsibility for any loss that arises out of the failure of a Sub-Adviser to meet the Assumed Obligations;

(f) prior to purchasing any securities in a Fund, all investors in the Fund who are Ontario residents will receive written disclosure that includes:

(i) a statement that the Principal Adviser is responsible for any loss that arises out of the failure of the Sub-Adviser to meet the Assumed Obligations; and

(ii) a statement that there may be difficulty in enforcing any legal rights against the Sub-Adviser (or the individual representatives of the Sub-Adviser) for the Fund, because such entity is resident outside of Canada and all or substantially all of its assets are situated outside of Canada.

May 22, 2009

"Lawrence E. Ritchie"

"Mary Condon"