Arrow Capital Management Inc. and Wavefront Global Diversified Investment Class (formerly Exemplar Diversified Portfolio)

June 21, 2019

Decision

Headnote

NP 11-203 – Process for Exemptive Relief Application in Multiple Jurisdictions – Relief granted to permit the Fund from subsections 2.1(1), 2.2(1) and paragraphs 2.5(2)(a) and (b) of National Instrument 81-102 Mutual Funds to gain exposure to, and purchase and hold, another investment fund subject to certain conditions. The bottom fund will comply with NI 81-102, except as permitted by Former NI 81-104 and in accordance with the Requested Relief obtained by the Fund. The relief permits the Fund to continue its existing strategy while not permitting it to rely on the new cash borrowing and short selling provisions.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.2(1), 2.5(2)(a), 2.5(2)(c), 9.3, and 19.1.

June 21, 2019

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

WAVEFRONT GLOBAL DIVERSIFIED INVESTMENT CLASS

(formerly Exemplar Diversified Portfolio)

(the Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund of which the Filer is the investment fund manager, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”):

(i) to revoke and replace the Previous Decision (as defined below); and

(ii) to grant exemptive relief pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102):

(A) to permit the Fund to adopt investment restrictions contained in NI 81-102 prior to the amendments on January 3, 2019 and be managed in accordance with these restrictions, except as was otherwise permitted by National Instrument 81-104 Commodity Pools (“Former 81-104”); and

(B) from the requirements set out in subsections 2.1(1.1), 2.2(1) and 2.5(2)(a.1) of NI 81-102, to permit the Fund to acquire and maintain securities of the Sub-Fund (as defined below) and to permit the Sub-Fund, and the Fund indirectly through the Sub-Fund, to invest in the Bottom Fund (as defined below) which has adopted the investment restrictions contained in NI 81-102 and is managed in accordance with these restrictions, except as was otherwise permitted by Former 81-104, and in accordance with any exemptions therefrom obtained by the Fund.

(Collectively, 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 section 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 Ontario, the 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.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a corporation existing under the laws of Ontario having 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 (“PM”), Investment Fund Manager (“IFM”); Exempt Market Dealer (“EMD”) and Commodity Trading Manager under the Commodity Futures Act (Ontario);

(b) Alberta: EMD;

(d) Quebec: EMD and IFM; and

(e) Newfoundland and Labrador: IFM.

3. The Filer is not in default of securities legislation in Ontario or any Other Jurisdiction.

The Fund

4. The Fund is a mutual fund to which NI 81-102 applies. Prior to the alternative mutual fund amendments (the “Alternative Mutual Fund Amendments”) to NI 81-102 becoming effective on January 3, 2019, the Fund was also a “commodity pool” as such term was defined in Former NI 81-104, in that the Fund had adopted fundamental investment objectives that permitted the Fund to gain exposure to or use or invest in specified derivatives in a manner that is now not permitted under NI 81-102.

5. The Fund is a reporting issuer in each of the Jurisdictions and shares of the Fund are currently qualified for distribution in each of the Jurisdictions under the long-form prospectus of the Fund dated June 8, 2018 (the “Fund’s Prospectus”).

6. Concurrent with this application, the Fund is filing a simplified prospectus, annual information form and fund facts such that the Fund will become an alternative mutual fund to which NI 81-102 applies in that the Fund has fundamental investment objectives that permits it to invest in specified derivatives in a manner not permitted for other mutual funds under NI 81-102.

7. The Fund began operations on May 1, 2009 and has continuously operated since that date as a commodity pool, investing in a diversified portfolio of futures and other derivatives on a variety of different underlying assets.

8. The Fund’s investment objective is to seek superior long term absolute and risk-adjusted returns with the potential for low correlation to global equity and fixed-income market returns through the selection and management of long and short positions in a globally diversified portfolio of futures, options, forward contracts and other financial derivative instruments on agricultural and soft commodities, metals, energies, currencies, interest rates and equity indices (the “Underlying Assets”).

9. The Fund may either invest directly in the Underlying Assets, indirectly in the Bottom Fund through the Sub-Fund or a combination of the Underlying Assets and the Bottom Fund. The return of the Fund is based on the combined performance of the direct investments by the Fund in the Underlying Assets and/or the performance of the Bottom Fund’s investment in the Underlying Assets.

10. The Fund does not intend to list the Shares on any stock exchange.

11. The Fund obtained a previous decision dated July 20, 2016 (the “Previous Decision”) exempting the Fund from subsections 2.1(1), 2.2(1), 2.5(2)(a) and (c) of NI 81-102 to permit the Fund to purchase and hold securities of an investment fund (the “Sub-Fund”) and to permit the Sub-Fund, and the Fund indirectly through the Sub-Fund, to invest in a further investment (the “Bottom Fund”). The Bottom Fund is managed with the same investment strategy as the Fund, is sub-advised by the Sub-Advisor and has adopted the investment restrictions contained in NI 81-102 and be managed in accordance with these restrictions, except as otherwise permitted by Former NI 81-104, and in accordance with any exemptions therefrom obtained by the Fund.

12. The Fund may either invest directly in the Underlying Assets, indirectly in the Bottom Fund through the Sub-Fund or a combination of the Underlying Assets and the Bottom Fund. The return of the Fund is based on the combined performance of the direct investments by the Fund in the Underlying Assets and/or the performance of the Bottom Fund’s investment in the Underlying Assets.

13. Prior to the Alternative Mutual Fund Amendments, Former NI 81-104 did not contain an aggregate exposure limit on leverage obtained through specified derivatives transactions for commodity pools. The Alternative Mutual Fund Amendments have moved most of the regulatory framework currently applicable to commodity pools under Former NI 81-104 into NI 81-102 and renamed these funds as “alternative mutual funds”.

14. The aggregate exposure limits in the Alternative Mutual Fund Amendments prevents alternative mutual funds and non-redeemable investment funds under NI 81-102, including the Fund, from obtaining aggregate exposure to cash borrowing, short selling and specified derivatives transactions in excess of 300% of the fund’s net asset value.

15. The new restrictions on aggregate exposure are expected to have a significant impact on the Fund that has operated in accordance with applicable regulatory requirements without limitations on the Fund’s and the Bottom Fund’s aggregate exposure through specified derivatives in their investment strategies prior to the implementation of the Alternative Mutual Fund Amendments.

16. For non-redeemable investment funds, the Alternative Mutual Fund Amendments allow for “grandfathering” of existing funds that may be unduly impacted by the changes, including investment restrictions in subsection 2.9.1, provided the non-redeemable investment fund was established before October 4, 2018, unless the fund has filed a prospectus for which a receipt was issued after that date.

17. Unlike for non-redeemable investment funds, NI 81-102 does not contain transition provisions that would allow for grandfathering of existing commodity pools under the Alternative Mutual Fund Amendments.

18. The Requested Relief is required to permit the Fund to purchase and hold securities, either directly or through the Sub-Fund and Bottom Fund, to obtain exposure to the Underlying Assets managed in accordance with the investment objectives of the Fund. The Fund will be managed in substantially the same manner as it did prior to the implementation of the Alternative Mutual Fund Amendments.

The Sub-Fund and the Bottom Fund

19. Subject to the Previous Decision, the Fund’s investment Sub-Advisor employs an active investment management strategy to pursue the Fund’s investment objectives by directly or indirectly obtaining exposure to the Underlying Assets. The Fund may obtain exposure to the Underlying Assets either directly or in a three-tier structure whereby: (1) the Fund may invest all, other than cash and cash equivalents, or a portion of its assets in non-voting securities of the Sub-Fund; (2) the Sub-Fund invests all of its assets in the Bottom Fund; and (3) the Bottom Fund acquires and maintains the Underlying Assets. In the three-tier structure the return to the Fund, and consequently to the shareholders of the Fund, and the return of the Sub-Fund will be based on the performance of the Bottom Fund, which, in turn, will be based on the performance of the Underlying Assets.

20. The Sub-Adviser to the Fund will be the investment adviser to the Sub-Fund and the Bottom Fund and will actively manage the Underlying Assets. The Sub-Advisor is registered as a commodity trading manager in the province of Ontario and as an exempt market dealer in the provinces of Ontario, Quebec, British Columbia and Alberta and also registered in the United States as a commodity trading advisor and commodity pool operator with the Commodity Futures Trading Commission and as an investment advisor with the Securities and Exchange Commission. The head office of the Sub-Advisor is located in Toronto, Ontario.

21. The Sub-Fund has filed a non-offering prospectus in the provinces of Ontario and Quebec pursuant to which it will become a reporting issuer under the Securities Act (Ontario) and the Securities Act (Québec) and is subject to the continuous disclosure requirements of National Instrument 81-106 Investment Fund Continuous Disclosure (“NI 81-106”). Accordingly, the financial statements and other reports required to be filed by the Sub-Fund will be available through SEDAR.

22. The Bottom Fund has filed a non-offering prospectus in the provinces of Ontario and Quebec pursuant to which it will become a reporting issuer under the Securities Act (Ontario) and the Securities Act (Québec) and is subject to the continuous disclosure requirements of NI 81-106. Accordingly, the financial statements and other reports required to be filed by the Bottom Fund will be available through SEDAR.

23. Both the Sub-Fund and the Bottom Fund are mutual funds because holders of their securities will be entitled to receive on demand, an amount computed by reference to the NAV of the net asset value of the Sub-Fund and the Bottom Fund, respectively. However, the Sub-Fund and the Bottom Fund will not distribute any securities under their respective non-offering prospectus and accordingly the Sub-Fund and the Bottom Fund will be a mutual fund to which NI 81-106 applies, but will not be subject to the requirements of either NI 81-102 or Former NI 81-104.

24. Though not subject to NI 81-102, the Sub-Fund will be a “clone fund” as such term is defined in NI 81-102 as its fundamental investment objective will be to track the performance of the Bottom Fund. The Fund will be the sole securityholder of the participating, non-voting securities of the Sub-Fund. Notwithstanding that the Sub-Fund will be a clone fund, the Sub-Fund will adopt the investment restrictions contained in NI 81-102 except as otherwise permitted by Former NI 81-104 and in accordance with any exemptions therefrom obtained by the Fund, including the exemption obtained to permit the Fund to invest in the Sub-Fund and indirectly in the Bottom Fund.

25. Though not subject to NI 81-102, the Bottom Fund has adopted fundamental investment objectives that permit it to invest in physical commodities or specified derivatives in a manner that is not permitted for other mutual funds under NI 81-102. Notwithstanding that the Bottom Fund will not be subject to NI 81-102, the Bottom Fund has adopted the investment restrictions contained in NI 81-102 and the Underlying Assets will be managed in accordance with these restrictions, except as otherwise permitted by Former NI 81-104 and in accordance with any exemptions therefrom obtained by the Sub-Fund, including the exemption obtained to permit the Sub-Fund to invest in the Bottom Fund.

26. The Fund will only invest in securities of the Sub-Fund, to gain exposure to the Bottom Fund and the Underlying Assets, in accordance with its investment strategies and investment restrictions.

27. The Investment Manager will monitor the Bottom Fund’s compliance with its investment restrictions for the Underlying Assets.

28. The investment by the Fund indirectly in securities of the Bottom Fund will indirectly comply with the requirements of NI 81-102, except that as was otherwise permitted by Former 81-104.

29. As of the date that the Requested Relief is granted, the Filer will no longer to rely on the Previous Decision.

Requested Relief

30. The investment objectives and strategies of the Fund and the Bottom Fund will permit each of the Fund and the Bottom Fund to have aggregate exposure to specified derivatives transactions subject to the investment restrictions contained in NI 81-102, except as otherwise permitted by Former NI 81-104 and subject to receipt of any exemptions therefrom obtained by the Fund or the Bottom Fund.

31. The granting of the Requested Relief will not expose the Fund or its shareholders to additional risks as the Fund will continue to have the same investment exposure as it did prior to the implementation of the Alternative Mutual Fund Amendments and the Fund will not engage in any new borrowing or short selling of securities.

32. The investment by the Fund in securities of the Sub-Fund and by the Sub-Fund in securities of the Bottom Fund represents the business judgement of responsible persons uninfluenced by considerations other than the best interest of the Fund and the shareholders, respectively.

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 Requested Relief is granted provided that:

1. the Fund is an alternative mutual fund subject to NI 81-102 that filed a long form prospectus as a commodity pool under Former NI 81-104 prior to the Alternative Mutual Fund Amendments;

2. the Sub-Fund is an investment fund that complies with the investment restrictions contained in NI 81-102 and the Underlying Assets are managed in accordance with these restrictions, except as otherwise permitted by Former NI 81-104 and in accordance with any exemptions therefrom obtained by the Fund, and the Fund will not engage in any new borrowing or short selling of securities;

3. the Bottom Fund is an investment fund that complies with the investment restrictions contained in NI 81-102 and the Underlying Assets are managed in accordance with these restrictions, except as otherwise permitted by Former NI 81-104 and in accordance with any exemptions therefrom obtained by the Fund, and the Fund will not engage in any new borrowing or short selling of securities;

4. the investment by the Fund in securities of the Sub-Fund to gain indirect exposure to the Bottom Fund and the Underlying Assets is in accordance with the fundamental investment objectives of the Fund;

5. the Sub-Fund is a reporting issuer subject to NI 81-106;

6. the Bottom Fund is a reporting issuer subject to NI 81-106;

7. no securities of the Sub-Fund or the Bottom Fund are distributed in Canada other than the distribution of the securities of the Sub-Fund to the Fund;

8. the investment by the Fund in securities of the Sub-Fund to gain indirect exposure to the Bottom Fund and the Underlying Assets is made in compliance with each provision of NI 81-102, except subsection 2.1(1.1), 2.2(1) and 2.5(2)(a.1) of NI 81-102;

9. the specified derivatives transactions entered into by the Fund, the Sub-Fund and the Bottom Fund will be consistent with the fundamental investment objectives and investment strategies of the Fund;

10. the Fund’s simplified prospectus, annual information form and fund facts documents will disclose, that the Fund will invest in securities of the Sub-Fund, which will in turn invest in the Bottom Fund to gain indirect exposure to the Underlying Assets, and will contain adequate disclosure to ensure that shareholders of the Fund are fully aware of the specified derivatives transactions entered into by the Fund, the Sub-Fund and the Bottom Fund and the risks associated therewith; and

11. this decision shall expire upon a material change in the fundamental investment objectives and investment strategies of the Fund, the Sub-Fund or the Bottom Fund.

“Darren McKall”

Manager

Investment Funds & Structured Products Branch

Ontario Securities Commission