Thanks in part to the Madoff scandal still unfolding in the
United States, the Ontario Securities Commission has launched a
focused compliance review of hedge funds. Managers of hedge funds,
including many registered investment counsel and portfolio managers
(ICPMs), have been asked to complete a detailed questionnaire on an
expedited basis, with a return date of February 20, 2009.
In contrast to the review of hedge funds completed by the
Canadian Securities Administrators in 2007, the OSC's current
review covers more market participants and can be expected to delve
more deeply into the structure and operation of hedge funds. Staff
define hedge funds for the purposes of the questionnaire as being
"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. This definition also includes fund
The questionnaire asks for information on the numbers of
unitholders in each fund, including whether or not those
unitholders are retail or institutional, and the percentage of
those unitholders that are Ontario residents. Staff also focus on
the service providers to hedge funds and their managers, the
history of subscriptions and redemptions over the past 18 months,
portfolio holdings for each hedge fund, counterparty exposure,
valuation of hedge fund assets, and performance. Staff specifically
ask whether the hedge funds invested in Madoff-managed funds.
It is clear that staff's questionnaire is merely the first
step in the OSC's efforts to ensure they are on top of the
hedge fund industry in Canada. Staff are looking for "red
flags" that would justify further investigations of a hedge
fund operation and will follow-up with selected market participants
to carry out on-site compliance reviews.
Managers of hedge funds should ensure that they complete the
OSC's questionnaire in a timely manner providing complete and
accurate information in response to the questions. It is vital that
managers also ensure that their compliance procedures, including
their written policies and procedures, are up-to-date, accurate and
reflect current regulatory expectations.
For a primer on regulatory expectations for hedge fund managers,
here for BLG's Registrant Regulation and Compliance Alert
Hedge Fund Managers: Time for Your Annual Check-up? Quick Tips
on Doing a Self-Diagnosis.
* * * * * *
BLG's Registrant Regulation and Compliance practice group,
includes a special focus on legal services for hedge fund managers.
We provide a full range of legal services, including advice and
assistance on becoming and continuing to be registered with the
Canadian securities regulators and/or members of the SROs. Services
for our clients have included developing and designing, as well as
reviewing and assessing, compliance procedures and practices
relating to regulatory and internal policy requirements, assisting
in building or strengthening compliance capability, conducting
audits and investigations, identifying operational problems and
devising appropriate solutions and responding to regulatory
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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