CSA Plans to Boost Oversight of Hedge Fund Managers (Update2)

Date: Wednesday, February 21, 2007
Author: Joe Schneider, Bloomberg

 Feb. 20 (Bloomberg) -- Canada plans to force hedge fund managers to register with regulators and pass tests to prove their proficiency, in a bid to prevent fund collapses like that of Portus Alternative Asset Management Inc.

Under the plan, hedge fund managers and sales staff also would have to clear a background check, the Canadian Securities Administrators said at a Toronto news conference today. Once they meet those and other conditions, the registration would be recognized by regulators across the country.

The proposal will help increase oversight of an industry whose assets were estimated at C$26.6 billion ($22.7 billion) in June 2004, according to an October report from the Investment Dealers Association of Canada. The move also may hasten efforts to reconcile securities regulation over all in Canada's 13 territories and provinces, which each have their own rules.

``It's a big step in the long process of greater harmonization across the country,'' Ontario Securities Commission Chairman David Wilson said in a telephone interview. ``To have it all under one umbrella, one set of rules, right from coast to coast. There's the big picture. It's the first time ever.''

The agency will seek comments over the next four months before implementing the proposal by the end of the year, said Randee Pavalow, director of capital markets at the OSC. A national registry of fund managers should be ready by April 2008, Pavalow said.

More Scrutiny

The securities administrators have intensified scrutiny of hedge funds since 2005, when regulators shut Portus amid allegations the fund's managers used investors' money improperly. Last year, U.S. hedge-fund manager Amaranth Advisors LLC lost about $6.5 billion after its Calgary-based trader Brian Hunter made incorrect bets on natural gas prices.

The Investment Dealers Association of Canada said in a report last year that hedge funds should be regulated in the same manner as mutual funds to protect investors unfamiliar with their risks. The report included 65 recommendations.

Hedge funds are private pools of capital that allow managers to participate in the gains of the money invested.

Under the proposed rules, companies that get paid for referring clients to other investment firms also will have to disclose that information.

In the case of Portus, the hedge fund paid about 1,000 financial advisers, including Manulife Financial Corp., for recommending the investment to their clients. Portus became one of the fastest-growing hedge funds in Canada and had about C$800 million in assets when it collapsed after an OSC investigation.

To contact the reporters on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net