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Securities regulators say hedge fund manager registration should be mandatory

Date: Friday, January 12, 2007
Author: David Friend, Canadian Business

TORONTO (CP) - Canadian securities regulators say the mounting popularity and possible risks of hedge funds highlight the need to register hedge fund managers operating in Canada.

A review of hedge funds released by the Canadian Securities Administrators on Friday said an appropriate securities regulatory framework already exists for such funds but there is room for improvement.

At present, fund managers are required to be registered only if they're also managing portfolio assets.

Hedge funds are private pools of capital that seek high returns by investing in stocks, commodities, currencies, derivatives and undervalued companies on behalf of clients, usually wealthy investors. Their key appeal is that the funds are designed to reduce risk while maximizing the return on investment.

However, hedge funds can unduly influence stock, currency and commodities markets negatively and they have been blamed for helping to push oil prices to record levels last year as billions of dollars of investor money moved rapidly in and out of paper investments seeking maximum profits.

The investigation into hedge funds was handled by the Ontario, B.C. and Quebec commissions using 13 market participants based on their size.

The group said in its review that registration should be mandatory to recognize "the role fund managers play in establishing, promoting and running investment funds and providing or overseeing a broad range of services."

Registration, they said, will also ensure fund managers "have the resources to carry out their functions, or to properly supervise the functions if they are contracted to a third party, and to provide proper services to investors" and "manage their conflicts of interest."

Leslie Byberg, manager of the investment funds branch at the Ontario Securities Commission, said the recommendation "comes as part of a broader proposal to include fund mangers of any kind of investment fund."

Mark Purdy, chief investment officer at Toronto-based investment management firm Arrowhedge Parters, emphasized that regulators should proceed with caution when setting the rules.

"You don't want too much regulation that would stifle entrepreneurial spirit. As long as there's a balance between regulation and the protection of the end client then I think the system will work," he said.

"The regulatory frameworks that's here in Canada we're completely fine with."

The securities administrators also plan to investigate the distribution and sale of principal protected notes, which are fixed-income securities that include a minimum return on investment.

Concerns raised in this area said investors might not be getting enough disclosure about their notes to make an informed decision.

Further details will be available in a "registration reform project" set to be released by regulators in late February.

Other areas needing improvement include referral arrangements, distribution and disclosure.