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IDA urges more diligence in handling hedge funds, worth $26.6B in Canada

Date: Friday, May 27, 2005
Author: Canadian Press

TORONTO (CP) - The Investment Dealers Association of Canada has raised concerns about hedge funds including the applicability of securities law, market practices and fees.

In a report Friday, the IDA said the expansion of hedge funds into the retail markets has heightened concerns about a number of issues, including the ability of hedge fund managers to meet expectations raised by their marketing and the lack of disclosure of hedge fund operations and financial affairs.

The association said unlike mutual funds, hedge funds - which combine long and short positions in an effort to reduce risk and maximize returns on a perceived trend in the market - operate under exemptions from securities distribution laws.

"Theoretically, that limits their investor base to the sophisticated and affluent investors that are capable of protecting their own interests," the report said.

"However, there has been a widespread move into retail distribution of hedge funds or hedge-fund related products in Canada and elsewhere."

The IDA made five recommendations in the study including:

-Re-issue the advisory to all members reminding them of the prohibition of "off-book" transactions.

-Develop industry guidance on acceptable practices for referral arrangements.

-Issue an advisory to all members reminding them of their responsibility to conduct due diligence on products recommended to clients.

-Review guidelines or standards regarding disclosure, conflicts of interest and internal controls for IDA members.

-Restrict IDA members from conducting securities-related activities in an affiliate with a limited market dealer registration when such activities could be conducted by the member.