Securities Law & Instruments

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions --approval of restructuring involving two investment funds -- approval required because restructuring does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 -- the continuing fund does not have substantially similar fee structure as the terminating fund -- the restructuring will not be a "qualifying exchange" or tax-deferred transaction under the Income Tax Act (Canada) -- securityholders of the terminating fund not permitted to redeem their securities prior to the date of the restructuring -- securityholders of terminating funds provided with timely and adequate disclosure regarding the restructuring and the continuing fund.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, paragraph 5.5(1)(b).

March 15, 2016

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 IN THE MATTER OF RAVEN ROCK STRATEGIC INCOME FUND AND RRF TRUST

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Raven Rock Strategic Income Fund (the "Fund") and RRF Trust (the "Reference Fund", and together with the Fund, the "Funds") for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for approval pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds ("NI 81-102") of the proposed restructuring (the "Restructuring") of the Funds (the "Requested Approval").

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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (the "Passport Jurisdictions" and, together with Ontario, the "Jurisdictions").

Interpretation

Defined terms contained in 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:

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

2. The Filer is registered in the following categories in certain of the Jurisdictions indicated below:

(a) Ontario: Portfolio Manager, 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.

3. The Filer is not in default of securities legislation in any of the Jurisdictions.

4. The Fund is a non-redeemable investment fund established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of October 29, 2012, as amended and restated on October 9, 2013 and December 31, 2013. The Filer is the trustee and manager of the Fund.

5. The Reference Fund is an investment fund established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of October 29, 2012, as amended and restated on November 19, 2012. The Filer is the trustee and manager of the Reference Fund.

6. The Fund is a reporting issuer in each of the Jurisdictions and the Reference Fund is currently a reporting issuer in Ontario and Quebec. Neither of the Funds is in default of securities legislation in any of the Jurisdictions.

7. The Fund completed an initial public offering of units ("Fund Units") in the Jurisdictions pursuant to a prospectus dated October 29, 2012. The Fund Units are listed for trading on the Toronto Stock Exchange (the "TSX") under the symbol RRF.UN.

8. The investment objectives of the Fund are to: (i) maximize total returns to Unitholders while reducing risk; (ii) pay monthly tax-advantaged cash distributions; (iii) mitigate the impact of market and interest rate risks through the use of hedging strategies; and (iv) mitigate the impact of foreign exchange risks through the use of currency hedging strategies; by obtaining exposure to a portfolio (the "Portfolio") comprised primarily of U.S. convertible and high yield bonds held by the Reference Fund. To pursue its investment objectives, the Fund is party to a forward agreement dated November 19, 2012 ("Forward Agreement") which provides the Fund with exposure to the returns of the Portfolio held by the Reference Fund.

9. The Reference Fund filed a non-offering prospectus in Ontario and Quebec dated October 29, 2012. All of the outstanding units of the Reference Fund (the "Reference Fund Units") are currently held by the counterparty to the Forward Agreement.

10. The investment objectives of the Reference Fund are to: (i) maximize total returns while reducing risk; (ii) mitigate the impact of market and interest rate risks through the use of hedging strategies; and (iii) mitigate the impact of foreign exchange risks through the use of currency hedging strategies; by holding the Portfolio.

11. The Fund and the Reference Fund currently pay all ongoing costs and expenses incurred in connection with the Fund's operations and administration. The Fund and the Reference Fund also pay the Filer (i) an aggregate annual management fee equal to 1.25% per annum of the net asset value of the Fund, calculated and payable monthly in arrears plus applicable taxes; and (ii) a performance fee equal to 15% of profits during a fiscal year, subject to a hurdle rate of 6.4% per annum. In addition, the Fund pays each registered dealer a service fee equal to 0.50% annually of the net asset value per unit for each unit held by the clients of such registered dealer.

12. The Restructuring will be effected by the following primary steps:

(a) the pre-settlement of the Forward Agreement, resulting in the Fund becoming the sole unitholder of the Reference Fund;

(b) the conversion (the "Conversion") of the Reference Fund to an open-end mutual fund to be administered in accordance with NI 81-102 and all matters ancillary thereto, including,

(i) a change in the name of the Reference Fund to Exemplar U.S. High Yield Fund;

(ii) a change in the investment objectives, investment strategies and investment restrictions of the Reference Fund;

(iii) a change in the structure of the fees that are paid by the Reference Fund to its manager, the Filer; and

(iv) a change in the voting rights attaching to the Reference Fund Units;

(c) the termination of the Fund and, after settlement of the liabilities of the Fund, the in specie distribution to Unitholders of their proportionate share of the net assets of the Fund, being the Reference Fund Units.

13. Unitholders of the Fund approved the Restructuring at a special meeting (the "Meeting") of unitholders held on March 2, 2016, as required pursuant to NI 81-102. In approving the Restructuring, Unitholders, in effect, indicated their acceptance of the fundamental investment objective of the Reference Fund following completion of the Conversion.

14. Subject to necessary regulatory approval, the Restructuring is expected to occur on or about March 16, 2016. The Fund will be wound-up as soon as reasonably practicable following the Restructuring.

15. A notice of meeting, a management information circular dated January 29, 2016 (the "Circular"), and a proxy in connection with the Restructuring was mailed to the Unitholders in accordance with applicable securities laws. The Circular contains a full description of the structure, rationale, benefits and tax consequences of the Restructuring as well as a full description of the Fund, the Reference Fund and the proposed changes to the Reference Fund and the Reference Fund Units in connection with the Conversion. The Circular discloses that Unitholders may obtain at no cost, the Fund's most recent comparative financial statements and the most recent annual management report on the Fund's performance, by contacting the Filer or by accessing the website of the Filer or the System for Electronic Document Analysis and Retrieval ("SEDAR").

16. In connection with the Conversion, a preliminary simplified prospectus (the "Simplified Prospectus") of the Exemplar U.S. High Yield Fund (formerly, the Reference Fund) dated February 4, 2016 was filed in each of the Jurisdictions, other than Nunavut. To the knowledge of the Filer, no unitholders of the Fund are resident in Nunavut. The Simplified Prospectus contains a description of the Reference Fund upon completion of the Conversion.

17. As a result of the Conversion:

(a) the Reference Fund Units will be re-designated as Series A units of the Exemplar U.S. High Yield Fund;

(b) the investment objective of the Reference Fund will be to provide a high level of total return through a combination of income and capital appreciation by primarily investing in higher yielding, lower quality fixed income securities issued by United States corporations;

(c) the Reference Fund will be subject to NI 81-102;

(d) the Filer will remain as manager and trustee of the Reference Fund;

(e) Lazard Asset Management (Canada) Inc. will remain as advisor to the Filer and the Reference Fund and will manage the Portfolio;

(f) CIBC Mellon Trust Company will become the custodian of the Reference Fund;

(g) the Independent Review Committee of the Reference Fund will remain the same;

(h) the Reference Fund will be governed by the master declaration of trust that applies to all of the mutual funds managed by the Filer, which (i) provides for the ongoing issuance of units at net asset value per unit; (ii) provides switching and redemption rights to unitholders; and (iii) enables the funds to distribute units continuously; and

(i) the Reference Fund will pay (i) an annual management fee equal to 1.75% per annum of the Reference Fund's net asset value, calculated and payable monthly in arrears plus applicable taxes; and (ii) all expenses incurred in connection with its operation and administration, including applicable taxes. The Reference Fund will not pay a performance fee.

18. The Filer will pay for the costs and expenses associated with the Restructuring, including the cost of holding the Meeting, soliciting proxies, and mailing the Circular and accompanying materials, the costs of preparing and filing the Simplified Prospectus to commence continuous distribution of the Reference Fund Units and any brokerage commissions payable as a result of any realignment of the Portfolio required in connection with the Restructuring. The Funds will not bear any of the costs and expenses associated with the Restructuring.

19. As required by National Instrument 81-107 Independent Review Committee, the terms of the Restructuring were presented to the independent review committee (the "Independent Review Committee") of the Fund for its review and recommendation. After considering the potential conflict of interest matter related to the Restructuring, the Independent Review Committee provided its positive recommendation for the Restructuring.

20. Unitholders of the Fund will be able to trade their Fund Units on the TSX in the ordinary course until the close of business on the business day before the effective date of the Restructuring and, upon completion of the Restructuring, Unitholders will be able to redeem their Reference Fund Units at the applicable net asset value of such units on a daily basis.

21. On January 25, 2016, a press release was issued and a material change report was filed on SEDAR by each of the Funds relating to the proposed Restructuring.

22. In the opinion of the Filer, the Restructuring satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6(1) of NI 81-102 except as follows:

(a) a reasonable person may not consider the investment objectives and fee structure of the Fund and the Reference Fund upon completion of the Restructuring to be substantially similar. Accordingly, the Restructuring will not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(a)(ii) of NI 81-102;

(b) the Exemplar U.S. High Yield Fund will not be a reporting issuer in Nunavut. Accordingly, the Restructuring will not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(a)(iv) of NI 81-102;

(c) the Restructuring will not be implemented as a "qualifying exchange". Accordingly, the Restructuring will not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(b) of NI 81-102. The Filer has determined that it is in the best interest of Unitholders generally to structure the proposed Restructuring on a taxable basis in the manner described herein because virtually all Unitholders have accrued a capital loss in respect of their Fund Units; and

(d) Unitholders of the Fund will not have the opportunity to redeem their Fund Units for proceeds equal to the net asset value per unit between the date of the press release announcing the Restructuring and the effective date of the Restructuring. Accordingly, the Restructuring will not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(j)(ii) of NI 81-102. The Filer believes that an additional redemption right is not necessary as the Series A units of the Exemplar U.S. High Yield Fund will be redeemable on a daily basis for redemption proceeds per Series A unit equal to the net asset value per Series A unit next calculated and no fees or expenses will be payable by such unitholders in connection with a redemption of units of the Exemplar U.S. High Yield Fund re-designated pursuant to the Restructuring.

23. The Filer believes that the proposed Restructuring will be beneficial to Unitholders for the following reasons:

(a) the early settlement of the Forward Agreement will result in annual savings to the Fund;

(b) the Series A units of the Exemplar U.S. High Yield Fund will be redeemable on a daily basis and for redemption proceeds equal to the net asset value per Series A unit; and

(c) due to the performance of the Fund, the Filer believes that most unitholders have accrued a capital loss in respect of their Fund Units. The proposed Restructuring will result in a deemed disposition of the Fund Units and taxable Unitholders may realize a capital loss (or capital gain) that would otherwise only be realized upon a sale of the Fund Units to the extent that the proceeds of disposition are less than (or exceed) the Unitholder's adjusted cost base and any reasonable cost of disposition.

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 is that the Requested Approval is granted.

"Darren McKall"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission