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Ontario looks to regulate hedge funds

Date: Monday, October 23, 2006
Author: David Clarke, InvestmentNews.com

OTTAWA - Ontario may regulate hedge funds within a "few months," the provincial minister responsible for securities regulations said.

If the Toronto-based Ontario Securities Commission doesn't soon deal with the matter, "we will act on it," Gerry Phillips, the province's minister of government services, told Bloomberg News this month.

"I'm waiting for their recommendation on how they want to deal with it, whether they can deal with it through rulemaking," he said.

Mr. Phillips' comments came in the wake of the report of the Task Force to Modernize Securities Legislation, unveiled this month (InvestmentNews, Oct. 16), which contained proposals on how to improve Canadian hedge fund regulation.

"We believe that a framework should be established to allow hedge funds to be widely sold to the public," the report said.

Canada's hedge fund market in 2004 was estimated to include $23.6 billion (U.S.) in assets under management, of which $9.5 billion was invested by Canadian pension plans, $12.1 billion by investors and the rest by foreign clients of Canadian hedge fund managers, according to the report.

Naturally, the hedge fund association isn't happy with the specter of increased regulation.

"The rules are already in place to deal with hedge funds at the accredited- and institutional-investor level," said Jim McGovern, chairman of AIMA Canada, a Toronto-based chapter of the Alternative Investment Management Association Ltd. of London.

"David Wilson, chairman of the OSC, is stepping up enforcement - which is the correct course of action," he said. "And other global regulators, including the Financial Services Authority in London, are working on or have models in place to deal with hedge funds at the retail level."

The likely Ontario move would affect other provinces.

Ontario isn't a member of the Canadian Securities Administrators' "passport" system, which allows a company that complies with one province's regulations to be recognized in others. So a hedge fund that is bothered by the new regulations, whatever they may be, could move to a different jurisdiction.

Will Quebec and other provinces follow suit?

"It is premature to speculate," said Fr%E9;d%E9;ric Alberro, spokesman for Quebec's securities regulator, Autorit%E9; des march%E9;s financiers. "But the regulation of hedge funds is a preoccupation of all members of the CSA."

The latter, based in Montreal, is Canada's de facto securities regulator.

Unlike their U.S. counterparts, Canadian hedge funds have to register with provincial regulators.

But that didn't stop the collapse last year of Montreal-based Norshield Asset Management (Canada) Ltd. and Toronto-based Portus Alternative Asset Management Inc.

Advisers who referred clients to Portus have been warned not to give their clients advice about selling any Portus investments to a third party.

"In our view, it is not advisable for advisers to provide such advice, as there are many outstanding issues [that] would need to be taken into account before an informed decision is made," Susan Allemang, director of regulatory affairs with the Mississauga, Ontario-based Independent Financial Brokers of Canada, wrote in a Sept. 12 e-mail to advisers connected with the Portus case.

Indeed, Portus bankruptcy trustee KPMG LLP has warned Portus investors that over the next weeks and months, they may receive "multiple unsolicited offers to purchase their claims from a variety of third parties." According to the Toronto office of New York-based KPMG, three U.S. companies have expressed an interest in buying investors' Portus claims: Silver Point Finance LLC of Greenwich, Conn., and Davidson Kempner Capital Management LLC and PrimeShares World Markets LLC, both based in New York.

When the hedge fund collapsed last year, 26,000 investors had $702 million tied up in Portus.

A preliminary estimate by KPMG showed that investors eventually will get back 86 cents on the dollar.

Norshield investors aren't so lucky.

On Oct. 11, the OSC formally accused the company and three of its former top executives of misleading investors and investigators. The OSC also said Norshield receiver RSM Richter Inc., based in Montreal, expects to recover more than $7.4 million of the total $115 million lost by 1,900 retail investors.

Richter also has been trying to track down a further $175 million invested by institutional clients.

"It therefore appears that recovery for retail investors in the Norshield investment structure will be nominal," the OSC said.