Monthly Archives: February 2011

Cole-Frieman & Mallon LLP Quarterly Newsletter – 1st Quarter 2011

Below is our quarterly newsletter.  If you would like to be added to our distribution list, please contact us.

****

February 18, 2010
www.colefrieman.com

Clients and Friends,

There have been an extraordinary amount of regulatory developments over the past three plus months of concern to investment managers.  These include:

  • SEC Registration Issues
  • New Form ADV Part 2
  • New Form PF
  • CFTC Proposals
  • Yearly Update Issues
  • Other Regulatory Updates

Below we detail these developments and also provide some of our thoughts on the current regulatory environment. Please feel free to contact us with any thoughts or questions on these matters.

****

SEC Registration Issues

New Fund Manager Registration Requirement – under the Dodd-Frank Act, the previous exemption from registration for fund managers was eliminated.  This generally means that hedge fund and private equity fund managers will be required to register as investment advisers with the SEC.  Recently the SEC has proposed rules with respect to the new registration requirement.  Broadly this means:

  • investment managers with less than $100MM AUM will need to register with the state securities commission unless an exemption from registration applies;
  • investment managers with more than $100MM AUM will need to register with the SEC unless another exemption applies; and
  • investment managers only to hedge funds or private funds (i.e. no separately managed accounts) with less than $150MM AUM will not need to register with the SEC, but may need to register with the state securities commission.

The SEC has proposed transition rules for managers who are moving to or from SEC registration.

The comment period on the proposed regulations closed recently and we expect to see final regulations promulgated within the next couple of months.  Even if exempt from adviser registration, fund managers may fall into a new reporting category called “exempt

reporting advisers.”

Exempt Reporting Advisers – under proposed Rule 204-4, there is a new category of advisers called “exempt reporting advisers” (“ERAs”) which are generally advisers (i) only to venture capital funds or (ii) to private funds (hedge funds and private equity funds) with less than $150MM of AUM combined.  These ERAs will still be required to report certain information on Form ADV including information about the firm, its clients, and its owners.  ERAs would be required to make annual and periodic updates and be subject to a filing fee.

New Form ADV Part 2

In 2010 the SEC created a new and completely different Form ADV Part 2.  The old form included “check the box” representations and longer explanations in Schedule F.  The old form has now been replaced by a long form plain English discussion of the adviser’s business.  While the basic type of information provided to customers/investors remains essentially the same, the new format adds a significant amount of length to the brochure.  In addition to the firm part of the brochure, managers will also need to complete a supplement for each of the firm’s IA representatives who meet certain activity requirements.   The changes to new Form ADV Part 2 are fairly significant and we recommend that firms allocate plenty of time to update the form.

Managers should also note that the SEC has estimated it will cost managers between $3,000 and $5,000 to complete the new form.  Based on a couple of revisions we have already completed, we feel this is an accurate estimate for many private fund managers.

Form PF

As part of the Dodd-Frank Act, investment advisers will be required to file reports containing information on their businesses for the assessment of systemic risk.  Accordingly, the SEC, in conjunction with the CFTC, recently proposed a new Form PF which SEC registered investment advisers will be required to file on either a quarterly or annual basis, depending on AUM.  The form as currently proposed requires managers to provide detailed information on their investment strategies and positions.  There is likely to be significant pushback from the investment management community and reporting requirements may change when the final form and regulations are promulgated.

CFTC Proposals

Just recently the CFTC proposed to rescind the current 4.13(a)(3) and 4.13(a)(4) exemptions from CPO registration.  Rescission of these widely used exemptions means that more investment managers would be required to register with the CFTC.  The CFTC also proposed rescinding the 4.5 exemption (applicable to mutual fund managers).

Additionally, CPOs and CTAs would be required to file Form PF (if also registered with the SEC) as well as new Form CPO-PQR and Form CTA-PR.

Yearly Updating

Annual ADV Update for IA Firms – most registered IA firms (state and SEC) will be required to submit an annual update of Form ADV by March 31.  Most of these firms will also be required to submit the new Form ADV Part 2 which, as discussed above, is more time consuming to prepare.  We recommend that registered IA firms begin the updating process with their law firm or compliance consultant by the end of this month.

CFTC & NFA Annual Compliance – the beginning of the year means CFTC registered firms will need to focus on quarterly and annual compliance matters.  Major items include: quarterly CPO reporting, quarterly email review (if applicable under the firm’s compliance program), yearly review of compliance manual and procedures, NFA self-examination checklist, privacy policy review and delivery to clients, ethics training, annual reports and audit (CPOs), and bunched orders allocation procedure review (CTA).  Note: some CPOs may be able to apply for exemptive relief from the annual audit requirement.

Other Items

SEC Releases Two Studies – the Dodd-Frank Act required the SEC to produce two studies which were released in late January.

In the SEC study on Uniform Fiduciary Duty for Broker Dealers, the SEC staff recommended that the SEC should apply a uniform fiduciary duty with respect to both IA and BD firms which provide personalized investment advice with respect to securities to retail customers.  The staff also recommended harmonizing a number of regulations which should be applied consistently to similarly situated BDs and IAs.

In the SEC study on Enhancing IA Examinations, the SEC staff dealt with the issue of the SEC’s limited budget and how the Commission should deal with IA examinations in light of insufficient resources.  The staff recommended that Congress direct the SEC to take one of three courses of action: (i) impose user fees on SEC registered investment advisers, (ii) authorize FINRA or another SRO to examine SEC registered investment advisers, and/or (iii) authorize FINRA to examine dual registrants (firms registered as both an IA and BD).  We are likely to hear much more on this issue in the coming months.

State IA Exemption for Hedge Fund Managers – NASAA, the organization generally representing the state securities divisions, recommends that states should amend their investment adviser regulations to exempt from registration only those managers who provide investment advice solely to Section 3(c)(7) hedge funds.  If adopted by any state, this would increase the number of firms required to register with the state as investment advisers.  Because the states are already having difficulties with their budgets and maintainingappropriate staffing levels for the current amount of registered firms, it is unlikely that many (if any) states will adopt the recommended model rule.

Other – the CFTC recently provided additional guidance to managers on disclosures for performance fees.

****

For assistance with any compliance, registration, or planning issues with respect to any of the above topics, please contact Bart Mallon of Cole-Frieman & Mallon LLP at 415-868-5345.

Cole-Frieman & Mallon LLP is a law firm with a national client base and is focused on the investment management industry.  Our clients include hedge fund managers, investment advisers, commodity advisors, and other investment managers.  We also provide general business and start up legal advice and have an emerging practice in real estate and cleantech.

Please note our new address:

Cole-Frieman & Mallon LLP
150 Spear Street, Suite 825
San Francisco CA 94105

Form CPO-PQR

Proposed Form CPO-PQR Released

For your review, we have published the proposed Form CPO-PQR which can be found here: Form CPO-PQR

As recently proposed by the CFTC, registered commodity pool operators will be required to file proposed From CPO-PQR on either a quarterly or annual basis depending on assets under management and scope of business activities.  There are special rules for those managers who are also registered as an investment adviser with the SEC and who file Form PF.

This post will provide an overview of the major aspects of the Form COP-PQR as it is currently proposed.

****

Who is required to file Form CPO-PQR?

All CPOs are required to file at least parts of Form CPO-PQR.

When do managers need to file Form CPO-PQR?

Most managers will need to file some parts of Form CPO-PQR on a quarterly basis.  Some managers, depending on assets under management, will need to file additional sections of the form on either an annual or quarterly basis.

The sections of the form will need to be filed within 15 days of the end of the quarter; however, for some managers, some sections will not need to be completed until 90 days after

the end of the quarter.

What are the sections of Form CPO-PQR?

Form CPO-PQR has 3 major sections.  F

  • Schedule A – must be filed by all CPOs which operate at least one pool during the quarter within 15 days of the end of the quarter.
  • Schedule B – must be filed by Mid-Sized CPOs annually within 90 days of the end of the year and Large CPOs quarterly within 15 days of the end of the quarter.
  • Schedule C – must be filed by Large CPOs quarterly within 15 days of the end of the quarter.

A Mid-Sized CPO is a CPO that had at least $150 million in pool AUM as of the close of business on any day during a quarter.

A Large CPO is a CPO that had at least $1 billion in pool AUM as of the close of business on any day during a quarter.

Note: Schedule B and Schedule C may not have to be filed with the CFTC if the CPO has completed certain sections of Form PF and meet other certain requirements.

Details of the Schedules

Schedule A

Part 1 – includes information with respect to the firm such as name, NFA ID #, contact person, chief compliance officer, # of employees, # of owners, # of pools

Part 2 – includes information on each pool which was operated during the quarter.  For each commodity pool this information includes:

  • Identifying information: mame of pool, NFA ID#, jurisdiction of organization, fiscal year end, structure
  • Outside Administrator: name, contact info, NFA ID#, start of relationship, services provided, % of pool assets valued by outside administrator
  • Broker – name, NFA ID #, contact info
  • Other service providers – carrying broker, trading manager, custodian, auditor, marketer
  • Information regarding assets over quarte
    • Beginning AUM & NAV
    • Ending AUM & NAV
    • Income over quarter
    • Additions, withdrawals and redemptions over quarter
  • Monthly ROR calculated in accordance with CFTC regulations
  • Schedule of investments – there is a drill down on cash, equities, alternatives, fixed income, derivatives, options, investment funds, longs/shorts, positive/negative OTE, long/short option value, pool positions exceeding 5% of NAV
  • Subscriptions & redemption information

Schedule B

Schedule B applies to both Mid-Sized and Large CPOs.  The information is essentially the same information as required in Sections 1.b and 1.c of Form PF.  The following information is required for each pool which is managed by the CPO:

  • Pool Information – name, NFA ID#, strategy,  % of assets traded using algorythim, investor information
  • Borrowings & types of creditors – total borrowings, listing of creditors
  • Counterparty credit exposure – aggregate counterparty exposure, listing of counterparties
  • Trading & clearing – for derivatives, securities and repos
  • Value of aggregate derivative positions

Schedule C

Schedule C is only completed by Large CPOs.  Schedule C will not need to be completed if the Large CPO has completed certain parts of Form PF.

Part 1 – the following information is required for each CPO:

  • Geographical breakdown of pools investments
  • Turnover rate of aggregate portfolio of pools
  • Duration of pools’ fixed income investments

Part 2 – the following information is required for each Large Pool:

  • Basic information – name, NFA ID#, unencumbered cash at end of month, monthly open positions
  • Liquidity of portfolio
  • Pool counterparty credit exposure
  • Pool risk metrics
  • Pool borrowing information
  • Pool derivative positions and posted collateral
  • Pool financing liquidity
  • Information on pool investors
  • Duration of fixed income assets

****

Cole-Frieman & Mallon LLP provides comprehensive legal services for CPOs including completing Form CPO-PQR.  Bart Mallon can be reached directly at 415-868-5345.

CFTC Notice to CPOs re: Annual Reporting Requirement

As we discussed in our post on NFA annual compliance obligations, commodity pool operators will need to submit annual audited reports to the NFA by March 31 of this year.  This requirement applies generally to all CPOs unless the CPO requests exemptive relief from the annual audit requirement.

The CFTC has provided the following notice to remind CPOs about this annual requirement and to also provide some resources to managers regarding the technical aspects of the audit requirement.  The CFTC is recommending that managers provide their audit firms with the notice below so the firm can appropriate prepare the audited finacial statements.

The full notice is reprinted in full below.

****

U.S. Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5430
Facsimile: (202) 418-5536

February 2, 2011

To: All Commodity Pool Operators
Attention: Chief Financial Officer
Subject: Annual Reporting for Commodity Pools

The Division of Clearing and Intermediary Oversight (“DCIO” or “Division”) of the Commodity Futures Trading Commission (“CFTC” or “Commission”) is issuing this letter to assist commodity pool operators (“CPOs”) with the preparation and filing of commodity pool annual financial reports required under the Commodity Exchange Act (“Act”) and Commission regulations.1  This letter highlights current regulatory changes affecting CPOs with respect to financial filings and provides reminders of regulatory requirements in response to common deficiencies observed in prior years’ annual reports.  CPOs, including those that operate in non-U.S. jurisdictions, are encouraged to provide this letter to their public accountants and others assisting in the preparation of commodity pool annual financial statements.

The Division has issued similar guidance letters in prior years, which are available at the Commission’s website.2  Those letters should be consulted as they contain information relevant for many commodity pools, including the following topics:

In addition, CFTC interpretations and other staff letters that provide written guidance concerning the Act and the Commission’s regulations are available on the Commission’s website.  In particular, an illustrative example regarding Regulation 4.22(e)(2) is available in CFTC Interpretative Letter 94-3 (http://www.cftc.gov/tm/tm94-03.htm), Special Allocations of Investment Partnership Equity.

I. Recent Regulatory Activity

The CFTC issued final forex rules, which became effective on October 18, 2010.   Any firm acting as a counterparty to certain off-exchange forex transactions involving retail persons is required to register as a Retail Foreign Exchange Dealer. In addition, any individual acting as a forex solicitor, account manager and/or pool operator is required to register with the Commission as an Introducing Broker, Commodity Trading Advisor (CTA) or CPO, as appropriate, and to become a member of the National Futures Association (NFA).

NFA also adopted compliance rules applicable to CPOs as follows:

  • Rule 2-45 prohibits a CPO from permitting a commodity pool to use any means to make a direct or indirect loan or advance of pool assets to the CPO or any person or entity affiliated with the CPO.
  • Rule 2-46 requires each CPO that is a member of NFA to file, on a quarterly basis, with NFA, the following information for each pool the CPO operates that is subject to a reporting requirement under Regulation 4.22 (which includes exempt pools under Commission Regulation 4.7):
    • the identity of the pool’s administrator, carry broker(s), trading manager(s) and custodian(s);
    • a statement of changes in net asset value for the quarterly reporting period;
    • monthly performance for the three months comprising the quarterly reporting period; and
    • a schedule of investments identifying any investment that exceeds 10% of the pool’s net asset value at the end of the quarterly reporting period.

Such information must be filed with NFA within 45 days of the end of the quarterly reporting period, and must be filed using NFA Easyfile electronic filing system.

NFA also updated the Self Examination Checklist for CPOs and CTAs as of September 2010. NFA Compliance Rule 2-9 (Supervision) requires members to review their operations on a yearly basis using the NFA self-examination checklist

II. Filing Deadlines and Procedures for Commodity Pool Annual Reports

Commission regulations establish the dates by which commodity pool annual reports must be provided to pool participants and received by the NFA.

Specifically, Commission regulations provide that:

  • Commodity pool annual reports must be distributed to pool participants and filed with NFA within 90 calendar days of the pool’s fiscal year end.  The filing date for annual reports with a year end of December 31, 2010 is March 31, 2011.  Copies of the annual reports must be filed with the NFA.  A CPO should not file copies of the annual reports with the Commission.
  • CPOs must submit annual reports to NFA electronically in accordance with NFA’s EasyFile electronic filing system (http://www.nfa.futures.org/NFA-electronic-filings/easyFile-Pool-filers.HTML) and procedures.
  • An annual report may be distributed in hardcopy or electronically to pool participants.  The CPO, however, must obtain a participant’s prior consent to distribute an annual report in electronic format.
  • Applications for an extension of time to file an annual report must be submitted to NFA prior to the annual report due date and must include the information required by Regulation 4.22(f)(1).  Any request for an extension of time that exceeds 90 days from the original due date must be submitted to the Commission, and a copy filed with NFA.  The Commission generally does not grant extensions that would exceed 90 days from the original due date.
  • CPOs of commodity pools that invest in other collective investment vehicles may obtain an “automatic” 90-day extension of the distribution and filing due date by submitting the information specified by Regulation 4.22(f)(2) to NFA prior to the original due date.  In subsequent years, the CPO will be presumed to operate the pool as a fund of funds and continue to qualify for the automatic extension.  However, the CPO is obligated to inform the NFA if those circumstances change and to begin filing within the standard 90-day time frame.  In addition, this extension of time has been made available to Regulation 4.7 exempt pools, even if the report is not audited by a certified public accountant.
  • Draft financial statements.  Some CPOs have filed incomplete, or “draft,” unaudited financial statements for pools exempt under Regulation 4.7 to meet the due dates for such filings.  CPOs are reminded that although Regulation 4.7 provides exemption from certain requirements, including the requirement that financial statements be subject to an audit by a certified public accountant, annual reports filed with NFA and distributed to pool participants must include all required information and be in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) or, in some instances, International Financial Reporting Standards (“IFRS”) to be considered timely filed.  Draft unaudited financial statements do not satisfy the filing requirements.

III. Master/Feeder and Fund of Funds

Master/Feeder Structures. FASB ASC 946-205-45-6 permits nonpublic feeder pools either to follow the disclosure and reporting provisions of FASB ASC 946-210, or to present a complete set of master financial statements with each feeder financial statement.

Fund of Funds. Year end  pool financial statements must disclose specific income and fee information for investee pools as specified in Regulation 4.22(c)(5).  CPOs must disclose amounts of income and fees associated with investments in investment partnerships that exceed five percent of the commodity pool’s net assets.  Illustrative disclosures are in Attachment B to this letter.

If a commodity pool’s annual financial statements are found deficient with respect to compliance with GAAP, the CPO may be required to revise the commodity pool’s financial statements, distribute the revised statements to participants, and re-file the statements with NFA.

IV. Requests for Limited Relief from U.S. GAAP Compliance for Certain Offshore Commodity Pools

Regulation 4.22(d)(2), applicable to year end  annual reports,  permits CPOs that operate commodity pools organized under the laws of a non-U.S. jurisdiction to prepare financial statements for such pools using IFRS, provided that:

  • The use of IFRS does not conflict with any representations made in the pool’s offering memorandum or other operative document;
  • The IFRS financial statements contain a condensed schedule of investments as required by U.S. GAAP (FASB ASC 946-210-50), or, if required, a full schedule of investments;
  • The IFRS financial statements report any special allocations of partnership equity in accordance with Commission Regulation 4.22(e)(2); and
  • If IFRS would require that the pool consolidate its financial statements with another entity, such as a feeder fund consolidating with its master fund, all applicable disclosures required by U.S. GAAP for the feeder fund must be presented with the reporting pool’s consolidated financial statements.

To claim the relief to use IFRS accounting standards, the CPO must file a notice with NFA within 90 days after the end of the pool’s fiscal year.  Furthermore, Regulations 4.22(a)(5) and 4.7(b)(2) permit a CPO to present a pool’s periodic account statements and other disclosure documents on the same basis as that of its annual report.

In addition, Division staff has, on a case-by-case basis, provided limited relief to CPOs that operate offshore pools by allowing such commodity pools to prepare and to present their financial statements in accordance with another comprehensive basis of accounting other than IFRS, such as United Kingdom or Irish accounting standards, instead of U.S. GAAP.  In each case, the Division’s relief to use accounting standards other than U.S. GAAP was conditioned upon the offshore pool following the additional elements now required by Regulation 4.22(d)(2)(i).

CPOs seeking to prepare and present their offshore pools’ financial statements on another comprehensive basis of accounting other than IFRS may request relief from the U.S. GAAP requirement by submitting their requests, enumerating compliance with each of the elements specified in Regulation 4.22(d)(2), to the undersigned at the address shown on this letterhead.  If you have any further questions, contact Ronald Carletta, Branch Chief, or Al Goll, Auditor, at the phone numbers or addresses listed in Attachment A.

V. Reports of Liquidating Pools

Commission Regulation 4.22(c)(7) provides for the filing and distribution of a final annual report within 90 days of a pool’s permanent cessation of trading.  Alternatively, the CPO of a liquidating pool may provide the following information within 90 days of the permanent cessation of trading in lieu of an otherwise required final annual report:

  • Statements of Operations and Changes in Net Assets for the relevant period as contained in the regulation; and,
  • An explanation of the winding down of the pool’s operations with written disclosure that all interests in, and assets of, the pool have been redeemed, distributed, or transferred on behalf of participants; or
  • In the event that all interests in, and assets of, the pool have not been distributed, redeemed, or transferred to participants by the time the final report is issued, the CPO must disclose the value of assets remaining to be distributed and an approximate timeframe for when the CPO expects distribution to occur.  If the CPO is unable to complete distribution within the estimated timeframe, the CPO must update the above detailed information to both NFA and the pool’s participants in writing.

If the CPO is not able to liquidate the pool’s assets within time to prepare, file, and distribute the final annual report as prescribed by the regulation, Commission Regulation 4.22(c)(7) requires the CPO to provide written notice to each participant and NFA, disclosing the following:

  • The value of assets remaining to be liquidated, the timeframe within which liquidation is expected to occur, any impediments to liquidation and any fees or expenses that will be charged to the pool prior to final distribution;
  • Which financial reports the CPO will continue to provide to participants from the time of the cessation of trading until the final annual report is distributed, and the frequency of such reports, pursuant to the pool’s constitutive documents; and
  • The timing of the final annual report.

Additionally, a CPO who is availing itself of the alternative filing in lieu of a final annual report may file unaudited information provided that the CPO obtains waivers from all participants and certifies the same to NFA when the final report is filed.

This relief also is applicable for pools that have claimed an exemption under Regulations 4.7 or 4.12.

VI. Accounting Resources

A. FASB Accounting Standards Codification

On July 1, 2009 the Financial Accounting Standards Board (FASB) launched the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental U.S. GAAP.  Although the FASB does not provide guidance in how specific requirements of GAAP are referred to in footnotes of financial statements, it notes that prior to the issuance of the Codification it was not unusual for footnotes to refer to specific standard numbers (for example, “as required by Statement 133”). Because these references are no longer the source of GAAP, such references will change. The FASB encourages the use of plain English to describe broad Topic references in the future. For example, to refer to the requirements of the Derivatives and Hedging Topic, they suggest a reference similar to “as required by the Derivatives and Hedging Topic of the FASB Accounting Standards Codification” and not use the specific numeric reference.

B. AICPA Commodities Audit Practice Aid

The AICPA Audit Practice Aid, Audits of Futures Commission Merchants, Introducing Brokers, and Commodity Pools Second Edition (product number 006639), is a useful tool for auditors and accountants of commodity entities.  It can be purchased at the AICPA website: http://www.CPA2biz.com.  CPOs and public accountants should also ensure that they monitor the Commission for recent developments which may not be reflected in the Audit Practice Aid.

C. AICPA Audit Risk Alert

The AICPA 2010 Audit Risk Alert (“ARA”) Financial Institutions Industry Developments, Including Depository and Lending Institutions and Brokers and Dealers in Securities contains sections on the commodities industry.  The ARA can be purchased at the AICPA website: http://www.CPA2biz.com.

D. FASB ASC Topic 820 (Formerly FAS 157, Fair Value Measurements)

Resources that may be helpful in understanding and applying FASB ASC Topic 820 are:

  • Measurements of Fair Value in Illiquid (or Less Liquid) Markets, issued by the AICPA Center for Audit Quality available at http://www.thecaq.org/resources/pdfs/MeasurementsIlliquidMarkets.pdf.
  • ASC 275-10-50, Risks and Uncertainties (AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, when auditing financial statements that contain complex fair value measurements);
  • ASC 820-10, Fair Value Measurements and Disclosure: Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) –  (guidance that generally the net asset value reported by investee investment companies will continue to be an acceptable fair value indicator, with certain exceptions.)

E. AICPA Technical Guidance

Beginning at paragraph 8.23, the AICPA Audit and Accounting Guide, Investment Companies (May 1, 2010 edition) discusses organization and offering costs.  The AICPA issued technical guidance regarding accounting treatment of offering costs incurred by investment partnerships.3  This guidance:

  • Provides that investment partnerships that continually offer interests should defer offering costs incurred prior to commencement of operations and then amortize such costs, generally on straight-line basis, over the time period that it continually offers interests, up to a maximum of 12 months; and
  • Defines the phrase “continually offer interests.”

Registrants are reminded that organization costs are not affected by this guidance and must be charged to expense as incurred as required by FASB Codification Section 720-15-25-1 (AICPA SOP No. 98-5,

Reporting on the Costs of Start-up Activities.)  However, if appropriately disclosed to investors and potential investors, net asset value used to compute investment entrance and exit values, may be adjusted to amortize such costs differently, but generally not to exceed a period of 60 months.

IX. DCIO and NFA Contact Information

If a CPO, a public accountant, or other member of the public has any questions on the foregoing, please feel free to contact the DCIO staff or NFA staff listed in Attachment A to this letter.

Very truly yours,

Thomas J. Smith
Director and
Chief Accountant

————————————————————————-

1 The Act is codified at 7 U.S.C. paragraph 1 et seq.  The Commission’s regulations are found in Title 17 of the Code of Federal Regulations.  The Commission’s internet website, www.cftc.gov, provides links to both the Act and Commission regulations.

2 Prior letters from 1998 forward are available at the Commission’s website at http://www.cftc.gov/industryoversight/intermediaries/guidancecporeports.html.

3 See paragraph 8.33 of the AICPA Audit and Accounting Guide, Investment Companies (May 1, 2010 edition).

————————————————————————-

ATTACHMENT A
CFTC DIVISION OF CLEARING AND INTERMEDIARY OVERSIGHT CONTACT INFORMATION

Regional Office Locations
Eastern Region
140 Broadway, 19th Floor
New York, NY 10005-1146

Contacts
Ronald A. Carletta
Phone: (646)-746-9726
E-Mail: [email protected]

Al Goll
Phone: (646)-746-9723
E-Mail: [email protected]

Fax: (646)-746-9937

Location of CPO’s Principal Office
All states east of the Mississippi River, except Illinois, Indiana, Michigan, Ohio, and Wisconsin. Any location outside of the United States

Regional Office Locations
Central Region
525 West Monroe Street
Suite 1100
Chicago, IL 60661

Contacts
Lisa M. Marlow
Phone: 312-596-0566
Fax: 312-596-0711
E-Mail: [email protected]

Location of CPO’s Principal Office
Illinois, Indiana, Michigan, Ohio, and Wisconsin

Regional Office Locations
Southwestern Region
Two Emanuel Cleaver II Boulevard, Suite 300
Kansas City, MO 64112

Contacts
Kurt Harms
Phone: 816-960-7711
Fax: 816-960-7750
E-Mail: [email protected]

Location of CPO’s Principal Office
All states west of the Mississippi River

National Futures Association Contact Information

National Futures Association
300 South Riverside Plaza,
Suite 1800
Chicago, IL 60606

Tracy Hunt, Senior Manager, Compliance
Phone: 312-781-1284
Fax: 312-559-3453

****

Cole-Frieman & Mallon LLP provides comprehensive compliance and regulatory support for CTAs and CPOs.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

NFA 2011 Annual Regulatory Reminder

Earlier this year we provided a general overview of the annual compliance requirements for CPOs and CTAs.  The NFA has just released their annual reminder for all CFTC registratants (including IBs, FCMs and RFEDs).  The NFA notice, reprinted below in full, provides a good overview of what CFTC registered firms need to be focusing on during the next month or so.

CFTC registered firms are reminded that now is a good time to review and revise their compliance manuals and complete the NFA self-examination process.

****

Notice I-11-06
February 03, 2011

Annual Regulatory Reminder

National Futures Association has always been committed to providing our Members with the resources they need to meet their regulatory obligations as efficiently as possible. Therefore, we are providing you with an annual reminder regarding certain requirements that are not part of your day-to-day operations. This list does not capture all of your responsibilities for the upcoming year, but it should help remind you of certain non-routine requirements.

Within the next 12 months you will be required to:

  1. Complete the Annual Update process on the anniversary date of your firm’s registration. This process includes (1) completing the electronic Annual Registration Update; (2) electronically submitting the firm’s Annual Questionnaire on NFA’s website and (3) paying your annual registration fees and NFA dues.  Failure to satisfy all of the requirements in the annual update process within 30 days of your anniversary date will result in the withdrawal of your firm’s NFA registration and/or Membership. NFA’s BASIC system displays information reflecting whether or not firms are actively engaged in futures-related business activity or retail off-exchange foreign currency activities. If you commence operations, you should update your Questionnaire in order to change how your status is displayed in BASIC.
  2. Complete NFA’s Self-Examination Checklist located on NFA’s website at http://www.nfa.futures.org/NFA-compliance/publication-library/self-exam-checklist.HTML.
  3. Send your firm’s Privacy Policy to every current customer, client and pool participant (in addition to sending it to every new customer when the customer opens an account, enters into an advisory agreement, or purchases a subscription). For guidance in preparing your policy, please consult NFA’s Privacy Policy questionnaire (Appendix D of the Self-Exam Checklist).
  4. Test your Disaster Recovery Plan and make any necessary adjustments. For guidance in preparing your plan, please consult NFA’s Business Continuity and Disaster Recovery Plan questionnaire (Appendix B of the Self-Exam Checklist).
  5. Provide Ethics Training as outlined in your firm’s written Ethics Training Procedures. For guidance in developing your procedure, please consult NFA’s Ethics Training Policy questionnaire (Appendix C of the Self-Exam Checklist).
  6. Supervise the operations of any Branch Offices, including conducting an annual onsite inspection of every Branch Office.

If you are a registered Commodity Trading Advisor, you will also be required to:

  1. File any new exemption notices electronically through NFA’s Exemption System.
  2. If soliciting new clients, distribute a Disclosure Document that is no more than 9 months old and that has been reviewed and accepted by NFA. Ensure that the document includes a complete business background and discloses all potentialconflicts of interest in accordance with NFA’s recent guidance. Disclosure Documents should be filed electronically throughNFA’s Disclosure Document System.
  3. If placing bunched orders, analyze each trading program at least quarterly to ensure that the order allocation method has been fair and equitable and document this analysis.
  4. The FCM that carries your client accounts will be contacting your clients to verify that the information obtained under NFA Compliance Rule 2-30(c) remains materially accurate, and provide the client with an opportunity to correct and complete the information. If the FCM notifies you of any material changes to the information, assess whether additional risk disclosure is required to be provided to the client based on the changed information.

If you are a registered Commodity Pool Operator, you will also be required to:

  1. File any new exemption notices electronically through NFA’s Exemption System.
  2. If soliciting new pool participants, distribute a Disclosure Document that is no more than 9 months old and that has been reviewed and accepted by NFA. Ensure that the document includes a complete business background and discloses all potential conflicts of interest in accordance with NFA’s recent guidance. Disclosure Documents should be filed electronically through NFA’s Disclosure Document System.
  3. Update your CPO Questionnaire on NFA’s website for any pools that have liquidated.
  4. Submit to NFA through NFA’s EasyFile system, and distribute to current participants, a certified Annual Report for each pool as of the close of the pool’s fiscal year. CFTC Regulations require Commodity Pool Operators to follow strict deadlines and filing requirements, and failing to meet those deadlines may result in a disciplinary action against a CPO. To learn more about EasyFile, go to NFA’s website and access the seminar at http://www.nfa.futures.org/NFA-compliance/NFA-education-training/webinars.HTML. Since NFA acts as the CFTC’s delegate when NFA receives and reviews Annual Reports, the reports are subject to requests under FOIA. CPOs may request confidential treatment of Annual Reports but must strictly follow the CFTC procedures contained in CFTC Regulation 145.9 for filing such requests. For information on how to request confidential treatment of Annual Reports filed with NFA, consult the information on NFA’s website at http://www.nfa.futures.org/NFA-compliance/NFA-commodity-pool-operators/cpo-confidential-treatment-requests.HTML.  When preparing pool Annual Reports, refer to the CFTC’s annual letter for useful tips.
  5. Within 45 days after the end of each quarter, submit to NFA through NFA’s EasyFile system, a Pool Quarterly Report for each pool that you operate. Information required to be filed includes: (a) the identity of the pool’s administrator, carrying broker(s), trading manager(s) and custodian(s); (b) a statement of changes in net asset value; (c) monthly performance for the three months comprising the quarterly reporting period; and (d) a schedule of investments identifying any investment that exceeds 10% of the pool’s net asset value at the end of the quarterly reporting period.

If you are a registered Introducing Broker, you will also be required to:

  1. Conduct Anti-Money Laundering (“AML”) training for relevant employees and complete an audit of your AML procedures and training. For guidance in developing your AML procedures, use NFA’s AML Procedures System.
  2. The FCM that carries your customer accounts will be contacting your customers to verify that the information obtained under NFA Compliance Rule 2-30(c) remains materially accurate, and provide the customer with an opportunity to correct and complete the information. If the FCM notifies you of any material changes to the information, assess whether additional risk disclosure is required to be provided to the customer based on the changed information.
  3. If you are not operating pursuant to a guarantee agreement, submit a certified annual report within 90 days after the firm’s fiscal year end. IBs that are also registered as Broker/Dealers (“BDs”) must submit the report within 60 days after the firm’s fiscal year end. IBs that are not also registered as BDs must file this certified statement via NFA’s EasyFile system.
  4. If you are not operating pursuant to a guarantee agreement, submit semi-annual 1-FR-IB filings via EasyFile within 17 business days of the date of the statement (in addition to completing and maintaining monthly net capital computations). IBs also registered as BDs may file via WinJammer and must also file with NFA all statements required by FINRA. All financial statements should be prepared using the accrual basis of accounting as required by Generally Accepted Accounting Principles.

If you are a registered Futures Commission Merchant or Retail Foreign Exchange Dealer, you will also be required to:

  1. Conduct Anti-Money Laundering (“AML”) training for relevant employees and complete an audit of your AML procedures and training. For guidance in developing your AML procedures, use NFA’s AML Procedures System.
  2. Review your Point of Contact information for USA PATRIOT Act 314(a) information requests and notify NFA of any changes (FCMs only).
  3. Supervise the operations of any GIBs, including conducting an annual onsite inspection of every GIB.
  4. Contact active customers who are individuals, at least annually, to verify that the information obtained from that customer under NFA Compliance Rule 2-30(c) remains materially accurate, and provide the customer with an opportunity to correct and complete the information. If the customer notifies you of any material changes to the information, assess whether additional risk disclosure is required to be provided to the customer based on the changed information. However, if another FCM or IB introduces the customer’s account on a fully disclosed basis or a CTA directs trading in the account, then notify that Member of the changes to the customer’s information.
  5. Submit a certified annual report within 90 days after the firm’s fiscal year end, or if your firm is also registered as a Broker/Dealer, within 60 days after the fiscal year end (in addition to submitting the firm’s monthly Focus II/I-FR-FCM with NFA via WinJammer).
  6. For firms that offer off-exchange foreign currency futures and options contracts (FOREX) to retail customers, provide written information regarding NFA’s Background Affiliation Status Information Center (BASIC), including the website address to every current customer (in addition to sending it to every new customer when the customer opens an account).
  7. For firms that offer FOREX to retail customers, review the security, capacity, credit and risk-management controls, and records provided by your electronic trading systems and certify that the requirements outlined in NFA Interpretive Notice 2-36(e) have been met. Prepare a certification, signed by a principal who is also a registered AP, and provide a hardcopy to NFA with the submission of your annual audited financial statement.

If your firm or its clients trade security futures products (futures whose underlying instrument is either a single security or a narrow-based security index), consult NFA’s website for a comprehensive listing of your requirements athttp://www.nfa.futures.org/NFA-compliance/NFA-general-compliance-issues/security-futures-products.HTML.

We recommend that you keep this email as a reference guide to ensure that all requirements are completed on time throughout the year.

We also want to remind you again: Every firm that is required to be registered as an FCM, RFED, IB, CPO or CTA in connection with its FOREX activity must be approved by NFA as a FOREX firm. NFA Members are prohibited from engaging in retail Forex transactions with these firms unless the firm has received this designation. In addition, FOREX firms must have at least one principal who is registered as an Associated Person (AP) and is approved as a FOREX AP. All individuals who solicit retail FOREX business or who supervise that activity must have taken and passed two exams — the National Commodity Futures Examination (Series 3) and the Retail Off Exchange Forex Examination (Series 34), which is a new exam focusing exclusively on Forex-related questions. However, individuals who were registered as APs, sole proprietors or floor brokers on May 22, 2008, do not need to take the Series 34 exam unless there has been a

two year gap in their registration since that date.

As always, if you need assistance with these or any other NFA requirements, please contact NFA’s Information Center at (800) 621-3570.

****

Cole-Frieman & Mallon LLP provides comprehensive compliance and regulatory support for CTAs and CPOs.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Form PF

Proposed Form PF Released

For your review, we have published the proposed Form PF which can be found here: Form PF.

According to an SEC proposal announcement last week, SEC registered managers will be required to file proposed Form PF with the SEC on either a quarterly or annual basis in the future.  Form PF is a multi-purpose form to be used by all types of SEC registered investment advisers – hedge fund managers, private equity fund managers, and liquidty fund managers. While the level of specificity changes with AUM (high AUM managers must disclose more information), Form PF requests much more information from fund managers than have previously been required to be provided to regulators.

This post will provide an overview of the major aspects of the Form PF as it is currently proposed.

[Please note that the form is highly dependant on precise definitions. The discussion below is general and I have not discussed some of the nuances. For example, when I discuss AUM, the discussion is necessarily general.]

****

Who is required to file Form PF?

Mangers must file Form PF if they meet the following two tests:

  1. Registered or required to be registered with the SEC and
  2. Provide advice to a private fund (generally a 3(c)(1) or 3(c)(7) fund) *

* the term private fund is defined in Form PF.

When do managers need to file Form PF?

Managers will need to file Form PF either (i) on an annual basis if they have less than $1 billion of AUMor (ii) on a quarterly basis if they have more than $1 billion of AUM.

If the manager files on an annual basis, the filing will need to be completed within 90 days of the end of the manager’s fiscal year.

If the manager files on a quarterly basis, the filing will need to be completed within 15 days of the end of the calendar quarter.

What are the sections of Form PF?

Form PF has 5 major sections. For managers filing on an annual basis, generally only Section 1 will need to be completed. For managers filing on a quarterly basis, Sections 2, 3 or 4 will need to be completed depending on the types of investment vehicles for which the manager provides investment advice.  The sections are:

  • Section 1 – All Filers
  • Section 2 – Hedge Fund Managers with at least $1B AUM
  • Section 3 – Liquidity Fund Managers with at least $1 B AUM
  • Section 4 – Private Equity Fund Managers with at least $1 B AUM
  • Section 5 – Managers Applying for Hardship Exemption

More Detail on Section 1 and Section 2

Section 1

Section 1 applies to all managers who are registered with the SEC.

Section 1a

Contains more general information on the manager and its business.

Section 1b

Managers must provide the following information on the “private funds” which they manage:

  • gross and net asset value
  • borrowing/creditor information
  • derivative positions
  • investor concentration
  • detailed performance information, including performance after performance fees

Section 1c

Managers must provide the following information on the “hedge funds” which they manage:

  • strategy
  • % of assets traded using algorithm
  • counterparties/exposure
  • % of equity, debt, ABS traded on and off exchange
  • % of equity, debt, ABS cleared by a central clearing counterparty (CCP) and not cleared by a CCP
  • % of derivatives traded on and off exchange
  • % of derivatives cleared by a CCP and not cleared by a CCP
  • % of repos and clearing information

Section 2

Section 2 of Form PF requires managers to provide the SEC with a surprising amount of detail with respect to the fund, the fund’s investment strategy, counterparties and investors. Below we have provided an overview of some of the different requirements.

Section 2a

Generally the following information for the manager as a whole:

  • drill down of positions – equity, corporate bonds, convertible bonds, sovereign and muni bonds, loans, repos, ABS/structured products, credit derivatvies, commodities, cash
  • turnover rate
  • geographic breakdown of instruments

Section 2b

For each fund, the following information for such fund:

  • drill down of investments
  • liquidity
  • positions representing 5% or more of fund’s NAV
  • counterparty information
  • CCP information
  • reporting VaR
  • how market factors effect fund’s portfolio
  • secured/unsecured borrowing
  • investor information – side pockets, whether manager has right to suspend withdrawals, whether there are gates, whether there is currently a suspension of withdrawals, whether the gate provision is currently enacted

Section 3 and Section 4

These sections include questions which are applicable to liqidty funds and private equity funds. They are structured similar to section 2 (a & b), but overall there is less information requested.

Other

Items to Note

Form PF instructions are very specific with respect to the information that should be completed in the certain sections. In addition, there are unique items that may not apply to all firms which need to be considered. Some of these items to note with respect to the form:

  • there will be issues with respect to related persons
  • there will be sub-adviser issues
  • managers must understand the difference between reporting for individual funds v. reporting for fund structures (i.e. master-feeder, mini-master, parallel)
  • there are many new definitions (135 defined terms in the glossary – 11 pages worth!)
  • special rules for managers making transitions (quarterly to annually) and final filings
  • private fund identification numbers are required and can only be obtained by filing Form ADV (original or amended filing)
  • filing Form PF is done electronically, signed by a managing member of the firm
  • there are likely to be confusions with definitions (likely to be worked out during and after the comment period)

Initial Thoughts

I am still fully developing my thoughts on the form and should have more detailed thoughts in later posts – in the meantime, my bullet point thoughts are as follows:

  • The form seems to be thoughtfully laid out.
  • The amount and detail of the questions is surprising.
  • Managers with many funds are going to face a large reporting burden.

****

Bart Mallon provides investment adviser registration services through Cole-Frieman & Mallon LLP, a law firm focused on the investment management industry.  He can be reached directly at 415-868-5345.

Hedge Fund Events February 2011

The following are various hedge fund events happening this month. Please email us if you would like us to add your event to this list.

****

February 2

February 6-8

February 8

February 8-9

February 10

February 10

February 10

February 13-16

February 15

February 15

February 15

February 16

February 16

February 16

February 16

February 17

February 17

February 18

February 22

February 22

February 23

February 23

February 23

February 24

February 24

February 28

****

Bart Mallon, Esq. runs the hedge fund law blog and provides hedge fund registration and compliance services to hedge fund managers through Cole-Frieman & Mallon

LLP.  He can be reached directly at 415-868-5345.