Hedge Funds: No New Regulations Proposed in Canada

Summary: Canada's securities regulators have decided not to introduce specific regulations governing hedge funds. David Wilson, the new chairman of the Ontario Securities Commission, told reporters recently "We have a full group of rules that apply to all those sorts of vehicles. So we think the existing rules, by and large, if they are properly used and properly implemented and complied with, will do the job."

Full Story: Canada's securities regulators have decided not to introduce specific regulations governing hedge funds. Hedge funds have become a $30-billion industry in Canada, and there have been some high-profile scandals recently, including the collapse of Portus Alternative Asset Management Inc. and Norshield Financial Group.

However, David Wilson, the new chairman of the Ontario Securities Commission, told reporters recently "We have a full group of rules that apply to all those sorts of vehicles. 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."

It is important to note that domestic hedge fund managers are already required to be registered in Canada - and do not have the exemptions from registration that exist in the US. The US is now requiring some hedge fund managers to be registered there.

On the other hand, Wilson said Canadian 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.

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