Canada Trying its Hand at Hedge Fund Registration

Date: Wednesday, January 17, 2007

Unbowed by the failure of the U.S. Securities and Exchange Commission’s hedge fund registration rule, Canada is trying its hand at the same. It may be easier to make that happen north of the border, because hedge funds already are required to register if they manage portfolio assets. The Canadian Securities Administrators is merely looking to expand that. "Regulators in Canada recognize the increased popularity of hedge funds among retail investors," Jean St-Gelais, chairman of the CSA and president and CEO of the provincial Autorité des marchés financiers (Québec), said in a statement. "We feel the necessary regulatory framework is in place, and it is important to continually examine the framework against new products in our evolving markets." And review they did. The CSA, prompted by a task force report last fall that sought the creation of framework to allow retail sale of hedge funds, examined 37 hedge funds and nine principal protected notes (PPNs) over several months. In its CSA Staff Notice 81-316 Hedge Funds, the group identified six areas of concern, including issues related to PPN, referral arrangements, distributions, disclosure and registration of fund managers, and how it would monitor or improve these areas. Among the recommendations are that HF managers must meet certain standards of competence, integrity, financial backing and conflict-of-interests management ability. "Nobody can devise a regulatory system that is so airtight that fraud never takes place," David Brown, chairman of the provincial Ontario Securities Commission, told the Toronto Star. "It is just not possible." The move toward registration is seen as a direct result of two major hedge fund frauds last year involving Toronto-based Portus Alternative Asset Management and Montreal-based Norshield Asset Management (Canada). Investors in both firms were burnt, but while customers of the former are likely to recover more than 85% of their investment, the latter may see only pennies on the dollar.