JOINT CODE OF ETHICS
THE ARBITRAGE FUNDS
WATER ISLAND CAPITAL, LLC
1. STATEMENT OF GENERAL FIDUCIARY PRINCIPLES
This Code of Ethics is based on the principles that (i) Access Persons (as
such term is hereinafter defined) owe a fiduciary duty to, among others, the
shareholders of the Fund to conduct their personal transactions in Securities in
a manner which neither interferes with Fund portfolio transactions nor otherwise
takes unfair or inappropriate advantage of an Access Person's relationship to
the Fund; (ii) in complying with this fiduciary duty, Access Persons owe
shareholders the highest duty of trust and fair dealing; and (iii) Access
Persons must, in all instances, place the interests of the shareholders of the
Fund ahead of the Access Person's own personal interests or the interests of
others. For example, in order to avoid the appearance of conflict from a
personal transaction in a Security, the failure to recommend that Security to,
or the failure to purchase that Security for, the Fund may be considered a
violation of this Code.
Access Persons must adhere to these general fiduciary principles, as well as
comply with the specific provisions of this Code. Technical compliance with the
terms of this Code will NOT automatically insulate an Access Person from
scrutiny in instances where the personal transactions in a Security undertaken
by such Access Person show a pattern of abuse of such Access Person's fiduciary
duty to the Fund and its shareholders or a failure to adhere to these
general fiduciary principles.
2. DEFINITIONS
(a) "Fund" means The Arbitrage Funds, a registered investment company and
any series or portfolios of such Fund that adopts this Code.
(b) "Access Person" means any director, trustee, officer, managing general
partner, general partner, or Advisory Person, and all relatives living
within the same household as such Access Person.
(c) The "1940 Act" means the Investment Company Act of 1940, as amended.
(d) "Advisory Person" means (i) any employee of either the Fund, Water
Island Capital, LLC (the "investment adviser") or of any company in a
control relationship to the Fund who, in connection with the employee's
regular functions or duties, makes, participates in, or normally
obtains information regarding the current purchases or sales of a
Security by the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (ii) any
natural person in a control relationship to the Fund or the investment
adviser who normally obtains information concerning current
recommendations made to the Fund with regard to the purchases or sales
of a Security.
(e) A Security is "being considered for purchase or sale" when a
recommendation to purchase or sell a Security has been made and
communicated and, with respect to the person making the recommendation,
when such person seriously considers making such a recommendation.
(f) "Beneficial ownership" shall be interpreted in the same manner as it
would be in determining whether a person is subject to the provisions
of Section 16 of the Securities Exchange Act of 1934, and the rules
and regulations thereunder, except that the determination of direct or
indirect beneficial ownership shall apply to all Securities which an
Access Person has or acquires. As a general matter, "beneficial
ownership" will be attributed to an Access Person in all instances
where the Access Person (i) possesses the ability to purchase or sell
the Securities (or the ability to direct the disposition of the
Securities); (ii) possesses voting power (including the power to vote
or to direct the voting) over such Securities; or (iii) receives any
benefits substantially equivalent to those of ownership.
(g) "Control" shall have the same meaning as that set forth in Section 2
(a)(9) of the 1940 Act.
(h) "Disinterested trustee" means a trustee of the Fund who is not an
"interested person" of the Fund within the meaning of Section 2(a)(19)
of the 1940 Act and the rules and regulations thereunder.
(i) "Purchase or sale of a Security" includes, among other things, the
writing of an option to purchase or sell a Security.
(j) Security" shall have the meaning set forth in Section 2(a)(36) of the
1940 Act, and shall include equity and debt securities; options on and
warrants to purchase equity or debt securities; shares of closed-end
investment companies; and Related Securities. "Related Securities"
are instruments and securities that are related to, but not the same
as, a Security. For example, a Related Security may be convertible
into a Security, or give its holder the right to purchase the
Security. For purposes of reporting, "Security" shall include futures
contracts. "Security" shall not include: securities issued by the
Government of the United States (including short term debt securities
which are U.S. government securities pursuant to Section 2(a)(16) of
the 1940 Act); bankers' acceptances; bank certificates of deposit;
commercial paper; shares of registered open-end investment companies;
and other high quality short-term debt instrument, including
repurchase agreements.
(k) "Public Company" means any entity subject to the reporting requirements
of the Securities Exchange Act of 1934.
3. EXEMPTED TRANSACTIONS
The prohibitions of Section 4 of this Code shall not apply to:
(a) Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control.
(b) Purchase or sales of Securities which are not eligible for purchase
or sale by the Fund.
(c) Purchases or sales that are non-volitional on the part of either the
Access Person or the Fund, subject to the provisions of Section 4(h) of
this Code.
(d) Purchases which are either: made solely with the dividend proceeds
received in a dividend reinvestment plan; or part of an automatic
payroll deduction plan, whereby an employee purchases securities issued
by an employer.
(e) Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its Securities, to the extent such
rights were acquired from such issuer, arid any sales of such rights so
acquired.
4. PROHIBITED TRANSACTIONS AND ACTIVITIES
(a) No Access Person shall purchase or sell, directly or indirectly, any
Security in which he or she has, or by reason of such transaction
acquires, a direct or indirect beneficial ownership interest and which
he or she knows, or should have known, at the time of such purchase or
sale:
(i) is being considered for purchase or sale by the Fund; or
(ii)is being purchased or sold by the Fund.
(b) No Access Person shall induce or cause the Fund to take action, or to
fail to take action, for the purpose of achieving a personal benefit,
rather than to benefit the Fund. Examples of this would include causing
the Fund to purchase a Security owned by the Access Person for the
purpose of supporting or driving up the price of the Security, and
causing the Fund to refrain from selling a Security in an attempt to
protect the value of the Access Person's investment, such as an
outstanding option.
(c) No Access Person shall use knowledge of the Fund's portfolio
transactions to profit by the market effect of such transactions. One
test that will be applied in determining whether this prohibition has
been violated will be to review the Securities transactions of Access
Persons for patterns. However, it is important to note that a violation
could result from a single transaction if the circumstances warranted a
finding that the provisions of Section 1 of this Code have been
violated.
(d) All Access Persons are prohibited from acquiring any Security
distributed in an initial public offering, until trading of the Security
commences in the secondary market.
(e) All Access Persons are prohibited from acquiring Securities for their
personal accounts in a private placement made by an issuer that is a
Public Company, without the express prior approval of the President
of the Fund's investment adviser (or his designee). In instances where
an Access Person, after receiving prior approval, acquires a Security in
a private placement, the Access Person has an affirmative obligation to
disclose this investment to the President of the Fund's investment
adviser (or his designee) if the Access Person participates in any
subsequent consideration of any potential investment, by the Fund, in
the issuer of those Securities. The Fund's decision to purchase
Securities of such an issuer (following a purchase by an Access Person
in an approved personal transaction) will be subject to an independent
review by the President of the Fund's investment adviser, or his
designee, so long as the person conducting such review has no personal
interest in the issuer.
(f) All Access Persons are prohibited from executing a personal transaction
in any Security on a day during which the Fund has a pending "buy" or
"sell" order for that Security, until the Fund's order is either
executed or withdrawn.
(g) All Access Persons are prohibited from serving on the boards of
directors of any Public Company, absent express prior authorization from
the President of the Fund's investment adviser (or his designee).
Authorization to serve on the board of a Public Company may be granted
in instances where the President of the Fund's investment adviser (or
his designee) determines that such board service would be consistent
with the interests of the Fund and its shareholders. If prior approval
to serve as a director of a Public Company is granted, an Access Person
has an affirmative duty to recuse himself from participating in any
deliberations by the Fund regarding possible investments in the
securities issued by the Public Company on whose board the Access Person
sits.
(h) Notwithstanding the other restrictions of this Code to which trustees
are subject, subparagraphs (d) through (f) of this Section 4 shall not
apply to Disinterested trustees or to a director who has no position
with the Fund or its investment adviser or principal underwriter (or
their respective affiliates) which would afford him access to portfolio
trading activities conducted for the Fund.
5. REPORTING
(a) Every Access Person shall report to the Fund the information described
in Section 5(c) of this Code with respect to transactions in any
Security in which such Access Person has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership.
(b) A Disinterested trustee of the Fund need only report a personal
transaction in a Security if such trustee, at the time of that personal
transaction, knew or, in the ordinary course of fulfilling his or her
official duties as a trustee of the Fund, should have known that, during
the 15-day period immediately preceding or following the date of the
personal transaction by the trustee, such Security was purchased or sold
by the Fund or was being considered for purchase or sale by the Fund or
its investment adviser.
(c) Every report shall be made not later than 10 calendar days after the
end of the calendar quarter in which the transaction to which the report
relates was effected, shall be dated and signed by the Access Person
submitting the report, and shall contain the following information:
(i) the date of the transaction, the title and the number of shares,
and the principal amount of each Security involved;
(ii) the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(iii)the price at which the transaction was effected;
(iv) the name of the broker, dealer or bank through whom the transaction
was effected;
(v) if there were no personal transactions in Securities during the
period, either a statement to that effect or the word "None"
(or some similar designation); and
(vi) the date that the report is submitted by the Access Person.
(d) Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he or
she has any direct or indirect beneficial ownership in the Security
to which the report relates.
(e) Every Access Person (except Disinterested trustees) is required to
direct his or her broker to forward to the President of the Fund's
investment adviser (or his designee), on a timely basis, duplicate
copies of both confirmations of all personal transactions in Securities
effected for any account in which such Access Person has any direct or
indirect beneficial ownership interest and periodic statements relating
to any such account.
(f) Every Access Person (except Disinterested trustees) shall report
annually to the Fund the following information with respect to all
Securities held by such Access Person, which information must be current
as of a date no more than 30 days before the report was submitted:
(i) the title, number of shares and principal amount of each Security
in which the Access Person had any direct or indirect beneficial
ownership;
(ii) the name of any broker, dealer or bank with whom the Access Person
maintains an account in which any securities are held for the
direct or indirect benefit of the Access Person; and
(iii)the date that the report is submitted by the Access Person.
In addition, all Access Persons are required, on an annual basis, to
certify that they have received, read, and understand the provisions
of this Code, and that they recognize that they are subject to its
provisions. Such certification shall also include a statement that
the Access Person has complied with the requirements of this Code and
that the Access Person has disclosed or reported all holdings of or
personal transactions in Securities that are required to be disclosed
or reported pursuant to the requirements of this Code.
(g) Every Access Person (except Disinterested trustees), not later than
10 days after becoming an Access Person, is required to report the
following information:
(i) the title, number of shares and principal amount of each Security
in which the Access Person had any direct or indirect beneficial
ownership when the person became an Access Person;
(ii) the name of any broker, dealer or bank with whom the Access Person
maintained an account in which any securities were held for the
direct or indirect benefit of the Access Person as of the date the
person became an Access Person; and
(iii)the date that the report is submitted by the Access Person.
6. SANCTIONS
Upon discovering a violation of this Code, the Board of Trustees of the Fund
may take such actions or impose such sanctions, if any, as it deems
appropriate, including, among other things, a letter of censure or
suspension, a fine, or a recommendation of the termination of the employment
of the violator. (In instances where a member of the Access Person's
household commits the violation, any sanction would be imposed on the Access
Person.) The filing of any false, incomplete or untimely reports, as
required by Section 5 of this Code, may (depending on the circumstances) be
considered a violation of this Code.
This Code of Ethics was approved by the Board of Trustees of the Fund at a
meeting held on May 24, 2000.
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Secretary
