Arrow Epic North American Diversified Fund et al. - MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications - subparagraph 121(2)(a)(ii) of the Securities Act (Ontario) (the Act) -- exemption from the requirements in paragraph 118(2)(b) of the Act that prohibits a portfolio manager from knowingly causing any investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager-- The Applicant wanted relief in order to implement a merger of two mutual funds that are not reporting issuers. The Applicant represented that the merger was in the best interests of the funds and the trade is a one-time trade conducted with common valuation procedures.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 118(2)(b), 121(2)(a)(ii).

March 7, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO AND SASKATCHEWAN

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

ARROW EPIC NORTH AMERICAN DIVERSIFIED FUND and

ARROW EPIC CAPITAL FUND (the Funds)

AND

IN THE MATTER OF

ARROW HEDGE PARTNERS INC.

(the Filer)

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer, in connection with the merger of Arrow Epic North American Diversified Fund (the Terminating Fund) and Arrow Epic Capital Fund (the Continuing Fund) (each a Fund and collectively the Funds) for a decision under the securities legislation of the Jurisdictions (the Legislation) granting relief from the restriction in the Legislation which prohibits a portfolio manager from knowingly causing any investment portfolio managed by it to purchase or sell the securities of any issuer from or to the account of a responsible person, any associate of a responsible person or the portfolio manager, in order to implement the merger of the Terminating Fund and the Continuing Fund (the Requested Relief).

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

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

1. The Filer intends to merge the Terminating Fund into the Continuing Fund (the Merger).

2. The Filer is a corporation established under the laws of Ontario with its head office in Toronto, Ontario. The Filer is the manager, trustee and portfolio manager of the Funds.

3. Each of the Funds is established under the laws of the Province of Ontario as a "mutual fund in Ontario" as defined under the Securities Act (Ontario).

4. Each Fund offers its units in all provinces and territories of Canada pursuant to applicable prospectus exemptions.

5. Each Fund is not a "reporting issuer" under the Legislation and is not subject to National Instrument 81-102 Mutual Funds.

6. Epic Capital Management Inc. (Epic Capital) is a portfolio sub-advisor to the Filer in respect of each of the Funds.

7. Each of the Filer and Epic Capital is registered with the Ontario Securities Commission as an advisor in the category of investment counsel and portfolio manager. Neither the Filer nor Epic Capital is registered as an advisor in any other province or territory.

8. The Filer has decided to effect the Merger because of the small sizes of the Funds, the similarities in their investment portfolios and the desire to have Epic Capital focus on one investment objective and strategy.

9. Unitholders of the Terminating Fund will be asked to approve the Merger at a special meeting of unitholders to be held on March 16, 2006 (the Meeting). In connection with the Meeting, the Filer will be sending to the unitholders of the Terminating Fund a notice of meeting, management information circular and a related form of proxy (collectively, the Meeting Materials). If unitholders approve the Merger, it is proposed that the Merger will occur on or about March 17, 2006 (the Effective Date), subject to regulatory approvals, where necessary and in any event no later than March 31, 2006.

10. The Merger is expected to take place using the following steps:

(a) The assets of the Terminating Fund will be transferred to the Continuing Fund at a value determined in accordance with the valuation procedures set out in the constating documents of the Terminating Fund and the Continuing Fund.

(b) On the Effective Date, the Continuing Fund will acquire substantially all of the investment portfolio and other assets of the Terminating Fund. In return, the Continuing Fund will issue to the Terminating Fund units of the Continuing Fund having an aggregate net asset value equal to the value of the assets acquired.

(c) The Continuing Fund will not assume any of the Terminating Fund's liabilities. Instead, the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date.

(d) The Terminating Fund will declare, pay and automatically reinvest a distribution to its unitholders of net income and net capital gains and income (if any).

(e) On the Effective Date, all of the units of the Terminating Fund will be automatically redeemed at their net asset value which will be paid by delivering to its unitholders units of an equivalent class of the Continuing Fund having an equal aggregate net asset value.

(f) The Terminating Fund will be wound-up as soon as reasonably possible following the Merger.

(g) All tax elections and tax returns in connection with the Merger will be prepared and filed by each of the Funds.

11. The Filer believes the Merger is in the best interests of unitholders as the Continuing Fund will be larger in size enabling it to take advantage of cost efficiencies. Also, Epic Capital will be able to focus on a single strategy rather than have to divide its management time.

12. The Funds have substantially similar fee structures and valuation procedures.

13. The assets of the Terminating Fund will be transferred to the Continuing Fund in accordance with the steps described above. Because the transfer of assets will take place at a value determined by common valuation procedures and the issue of units will be based upon the relative net asset value of the assets received by the Continuing Fund, the Filer believes that there will be no conflict of interest for the Filer to effect the Merger.

14. Units of the Funds are redeemable weekly at their respective net asset values up to the Valuation Date prior to the Meeting. Unitholders of the Terminating Fund will be sent the Meeting Materials informing them of the Merger and will be able to redeem their units at any time prior to the Merger, should they wish to do so. Unitholders of the Terminating Fund also have the right to switch, any time, their investment in the Terminating Fund to securities of a comparable class of another fund of the Filer without paying any redemption fee to the Terminating Fund or the Filer (although the investor's dealer may charge a fee of up to 2% of the value of the units switched).

15. In the opinion of the Filer, the Merger will not adversely affect unitholders of the Terminating Fund or the Continuing Fund and will in fact be in the best interests of unitholders of each of the Funds.

16. Under the Legislation, the Filer, as portfolio manager of the Funds, would be considered a responsible person and, because the Filer is the trustee of each Fund, the Filer would also be considered an associate of a responsible person. Therefore, in the absence of this order, the Filer would be prohibited from selling the securities of the Terminating Fund to the Continuing Fund in connection with the Merger.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that the Merger is completed no later than March 31, 2006.