Canada: Proposed Regulation Of Asset Managers And Best Practices For Hedge Funds Released - Canadian And U.S. Implications

Hedge Fund Transparency Act 2009

On January 29th, Senators Chuck Grassley and Carl Levin introduced the Hedge Fund Transparency Act of 2009 (HFTA) to give the Securities and Exchange Commission (SEC) authority to require all hedge funds, private equity funds and other similar entities, including Canadian funds with US investors, to register with the SEC. The new legislation, like a version of the legislation introduced two years ago by Senator Grassley, would require such funds to file annual disclosure forms, maintain books and records in accordance with SEC standards and to cooperate with requests for information from the SEC. In addition, Senator Levin drafted new provisions that would require funds to establish an anti-money laundering program and report suspicious transactions.

Unlike the bill's predecessor which amended the Investment Advisers Act, the HFTA amends the Investment Company Act (ICA). The bill would impose the requirements summarized above on hedge funds, private equity funds, venture capital funds, real estate funds and other investment funds that have or manage at least $50 million in assets and typically rely on an exemption from the ICA registration requirement by limiting the number of US investors to not more than 100 or by issuing securities only to "qualified purchasers". Currently, Canadian (and other non-US) private equity funds and hedge funds rely on such exemptions when offering securities in the US. Under HFTA, such non-US investment funds will be subject to the same requirements, described above, as US funds. For Canadian hedge funds, the HFTA will mandate compliance similar to that required of advisors under Canadian provincial regulation. For private equity and other funds that are not currently regulated in Canada or the US, the effect of the bill will be more dramatic.

The senators said their legislation is needed because of the 2006 decision of the D.C. Circuit Court of Appeals, which provided that the SEC went beyond its statutory authority when it passed rules requiring mandatory registration of hedge funds. In support of the HFTA, Senator Levin stated "if the events of the last year have taught us anything, it's that we need to regulate firms that are big enough to destabilize our economy if they fail. It's time to subject financial heavyweights like hedge funds to federal regulation and oversight to protect our investors, markets, and financial system."

It is our understanding that the HFTA has the support of treasury secretary Timothy Geithner and Mary Schapiro, the new head of the SEC. The bill will be referred to the Senate Committee on Banking, Housing and Urban Affairs.

Hedge Fund Managers and Investors' Best Practices

Two private sector committees, comprised of disparate representatives of hedge funds and their investors and appointed by the President's Working Group on Financial Markets (PWG), recently released their final reports outlining principles and best practices related to managing and investing in hedge funds. The PWG was established by executive order in response to the October 1987 stock market crash to give recommendations for legislative and private sector solutions for enhancing the integrity, efficiency and competitiveness of the US financial markets and maintaining investor confidence.

Early in 2007, the PWG published a set of Principles and Guidelines Regarding Private Pools of Capital and later appointed an asset managers' committee to develop best practices for hedge fund managers (Managers' Report) and an investors' committee to establish best practices for investors in hedge funds (Investors' Report). The reports intend to set a new standard of best practices for hedge fund managers and for investors to foster investor protection, enhance market discipline and integrity, reduce systemic risk, and augment regulatory safeguards regarding investor protection.

The reports expressly acknowledge that a one size fits all approach to managing or making investment decisions regarding hedge funds is not appropriate. The Managers' Report encourages managers to assess their current practices, to adopt the best practices applicable to their business and to be able to explain why certain of the recommendations are not appropriate for them. Similarly, the Investors' Report acknowledges that no single set of best practices applies uniformly to every hedge fund investment. Rather, the Investors' Report offers a guide to present and prospective investors to assess whether an investment in hedge funds is appropriate for them and to manage such investments effectively.

The Managers' Report focuses on key areas where best practices will most effectively accomplish the goals of the committee, including better initial and ongoing communication with investors, robust valuation procedures, comprehensive risk management, effective supervision and control of business operations and requiring and promoting a culture of professionalism and regulatory compliance.

The reports do not place all responsibility for complying with best practices on hedge fund managers. The Investors' Report makes recommendations for best practices for those individuals and institutions (fiduciaries) that determine the suitability of investing in hedge funds and provides detailed guidance for those charged with implementing and monitoring the investment decision (investors).

A prudent evaluation must be undertaken by fiduciaries to determine if an investment in hedge funds is appropriate in light of the various factors identified in the Investors' Report. The Investors' Report contains a comprehensive framework for the due diligence process to be undertaken by both fiduciaries and investors prior to any investment and on an on-going basis. This process includes gaining knowledge of the fund's investment strategy, risks, constraints, tax implications, accounting methods, valuation process, liquidity, and reporting commitments. Once an investment decision is made, continued monitoring must be undertaken to understand new risks and their impact on the portfolio. The Investors' Report provides extensive best practice requirements in respect of each of these areas that will promote the report's objectives.

These reports have been released at the height of perhaps the most troubling economic environment that any of us has experienced. The likes of Bernard Madoff are being arrested for allegedly engaging in fraudulent ponzi schemes that will cost investors billions of dollars and hedge funds are gating, freezing redemptions and shutting down operations in unprecedented numbers. Still, hedge funds will continue to play an important role in the global economy by providing investors with alternative means of returns, by increasing liquidity in certain markets, and as substantial participants in the financial system. The reports' recommendations set a new standard for managing and investing in hedge funds and voluntary compliance will contribute to the growth, stability and integrity of the industry and financial markets. In order to stay competitive, fund managers and investors in Canada and the United States should take this time to review internal procedures and strive to achieve the standards established under the reports. These, and similar reports, are likely to be adopted by various non-governmental organizations in Canada and elsewhere and it is clear that law-makers will not be satisfied until further regulatory compliance and oversight are imposed on hedge funds and the markets in which they operate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions