By James Hamilton, J.D., LL.M.
After a review of hedge funds, the Canadian Securities Administrators have recommended that hedge fund managers be required to register. Registration is appropriate, reasoned the CSA, given the role that fund managers play in establishing and running investment funds and providing a broad range of services, including fund valuation. This recommendation has some power behind it since the review on Ontario, British Columbia and Quebec, which taken together have to constitute the center of gravity of Canadian asset management. The 2006 Allen Report on modernizing Canadian securities legislation had also recommended that hedge fund managers be registered. Currently, fund managers need not be registered unless they are also managing portfolio assets, in which case they must be registered as advisers.
We all know how historically difficult it has been to define hedge funds, i.e. the SEC has never done it, but the CSA took a crack at a definition for purposes of the review, and it is not a bad try. The CSA broadly defined hedge funds as investment pools that use alternative investment strategies not generally available to traditional mutual funds such as taking both long and short positions and using arbitrage, leverage, options, futures, bonds and other financial instruments to capitalize on market conditions.
In the view of the CSA, the registration requirements for fund managers should focus on ensuring that they have the resources to carry out their functions, or to properly supervise the functions if they are contracted to a third party, and to provide proper services to investors. They must also manage their conflicts of interest and have sufficient proficiency and integrity to carry out their functions. Finally, registration would ensure that they have adequate capital and insurance to provide protection for investors and minimize the risk of loss and disruption.