Regulators decide no specific rules needed for hedge funds

Date: Saturday, February 25, 2006
Author: Paul Waldie- Globe & Mail

Canada's securities regulators have decided not to introduce specific regulations governing hedge funds.

"We have a full group of rules that apply to all those sorts of vehicles," David Wilson, chairman of the Ontario Securities Commission, told reporters yesterday. "So we think the existing rules, by and large, if they are properly used and properly implemented and complied with, will do the job."

Mr. Wilson made the comments after a speech at a Toronto securities conference. In his speech he said the Canadian Securities Administrators, the umbrella organization for Canada's provincial securities commissions, has "pretty much decided that hedge funds per se do not require their own separate regulatory regime."

However, he said regulators are reviewing how some hedge fund-related products are sold to retail investors. In particular, he said the CSA is considering new rules governing "principal protected notes." These notes typically come with a guarantee on the principal amount invested and they are often tied to the performance of a group of hedge funds. Some sell for as little as $500 apiece and they are generally sold without a prospectus.

"We need to take a hard look at whether this [prospectus] exemption is suitable for highly complex structured products targeted at the mass market of retail investors," he said during his speech.

Hedge funds have become a $30-billion industry in Canada, but there have been a couple of high-profile scandals recently, such as the collapse of Portus Alternative Asset Management Inc. and Norshield Financial Group. Last November, just after being named OSC chairman, Mr. Wilson said he planned to target hedge funds for greater regulation, calling them a "new frontier" for securities regulators. "Recent scandals have placed the spotlight on this new industry, and the need for greater transparency," he said at that time.

Regulators are also working on new rules governing how income trusts calculate and report their cash distributions, he said yesterday. By design, income trusts are supposed to spin off cash to unitholders. But there are no rules governing how that cash flow is calculated. Mr. Wilson said the CSA is hoping to come up with a "definition that provides consistency for investors.

"So when an income trust says 'this is what our distributable cash flow is,' it's calculated in essentially the same way for every income trust," Mr. Wilson said.