Canadian regulators are going to require fund managers to be registered with provincial securities commissions as part of a multi-pronged project to improve oversight of the scandal-plagued hedge fund sector.
The Canadian Securities Administrators (CSA), an umbrella group for provincial securities commissions, said yesterday it will introduce new registration requirements for fund managers — those people who set up, operate, and promote fund companies.
Registration means regulators will ensure fund managers have appropriate capital and insurance, and have sufficient experience and proficiency to carry out their duties, said Leslie Byberg, manager of investment funds at the Ontario Securities Commission.
Currently, individuals who manage specific investment portfolios must be registered. But the executives who set up and operate the fund management companies are not covered by registration requirements.
OSC chairman David Wilson said regulators have spent the past two years reviewing hedge fund regulations, and feel “the broad structure” of existing regulation is adequate to cover the sector. But he added there is work to do in a few specific spots, such as fund manager registration.
“We wouldn't want to create the impression everything is fine and there's nothing more to do,” he said in an interview.
Hedge funds have been the focus of regulatory attention since several major scandals emerged in 2005 involving failed companies such as Portus Alternative Asset Management Inc. and Norshield Asset Management (Canada) Ltd., leading to huge losses to investors.
In a notice released yesterday, the CSA said it reviewed 37 hedge funds and nine similar investments known as principle protected notes (PPNs) worth a total of $2.65-billion, and identified “concerns” with their marketing documents and fee disclosure.
The notice said there were problems with the way performance returns were presented, and with the lack of clarity about how much investors are paying in fees when they buy hedge fund products. The notice included advice to fund managers about proper disclosure practices.
Mr. Wilson said yesterday regulators are also considering two other reforms to address weaknesses identified at hedge funds.
One issue being studied involves PPNs, which are financial instruments often used to market hedge fund investments, but are not considered to be securities for regulatory purposes.
Regulators have raised concerns about PPNs since 2005, but have still not decided how to address the lack of regulatory oversight. Mr. Wilson said yesterday part of the problem is that PPNs are considered bank products, rather than securities, and therefore fall under federal regulation.
He said regulators hope to be able to make decisions about regulating PPNs within the next three months.
Another issue being reviewed are referral rules. Many clients are referred to hedge fund companies by their financial advisers, and regulators want to ensure those clients' interests are still protected when the client moves to the hedge fund company. New referral rules are expected to be included in a detailed registration reform project expected to be released by the end of February.
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