Canadian Regulators Take Aim at Hedge Fund Brokers

Canada's mutual fund self-regulatory body, the Mutual Fund Dealers Association (MFDA), is investigating if sales agents at certain firms, including Manulife Securities International Ltd. and the Berkshire Group of Companies, sent clients to Portus Alternative Asset Management Inc., a hedge fund under scrutiny by Canadian regulators, according to The Globe and Mail.

The Ontario Securities Commission alleges that Portus, the fastest-growing Canadian hedge fund with an estimated $20 million in new investment funds coming in each week, violated a number of securities laws. To that end, last week, regulators placed a two-week ban on Portus forbidding it from recruiting new clients or receiving more money for existing accounts.

The MFDA is concerned that some Canadian firms might have failed to determine the suitability of Portus' funds for their clients. It has notified its members to stop referring clients to Portus immediately.

Agents who send clients to Portus receive a fee that amounts to 5% of the initial investment, making it a very lucrative business. The firms in question, though, are sticking to their guns. Manulife, which has directed $200 million-plus in investments to Portus in less than two years, for example, says that it did due diligence on the Portus products before it referred clients to the hedge fund.

A spokesman for Manulife said that while the company has not ended its relationship with Portus, it is waiting for the results of the regulatory probe.