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CFTC Regulation 4.7 for Registered CTAs and CPOs

“Lite-Touch” Regulatory Approach for Certain CFTC Registrants

In general, CFTC registered CPOs and CTAs must adhere to certain disclosure and reporting requirements as specified in the Commodity Exchange Act (“CEA”) and regulations thereunder.  However, some CFTC registered firms can operate under a “lite-touch” regulatory regime if the firm only provides investment management services to qualified eligible persons.  The lite-touch regulatory regime is available under CFTC Rule 4.7 to both CPOs and CTAs who file the exemption with the NFA.

This post will provide an overview of the firms which are eligible for the exemption and an overview of the relief granted.  We post the entire text of the exemption at the end of this post.

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Eligibility for Exemption

In general, the exemption is available for firms which meet the following requirements:

  1. Registered with the CFTC as a CPO or CTA
  2. Investors/Clients are only qualified eligible persons (QEPs)
  3. 4.7 Exemption filed with the NFA
  4. Offering/Disclosure Documents contain CFTC disclaimer

The central reason why some firms will want to utilize the exemption is to keep from going through the disclosure document review process with the NFA which can take anywhere from 3 weeks to 3 months depending on a number of factors.  Please note that firms must already be registered with the CFTC which means that Principals and APs will generally need to have the Series 3 exam license.  If a CPO wants to remain unregistered, the firm may be able to use the 4.13(a)(4) exemption instead of the 4.7 exemption.

Filing the Exemption

To file the notice for exemption, the firm will need to access the NFA’s online registration system and complete the required exemption filing.  In order to claim the exemption, the CPO or CTA will be required to certify that:

  • neither the CPO/CTA nor its Principals are subject to statutory disqualifications under sections 8a(2) or 8a(3) of the CEA;
  • the CPO/CTA will comply with the applicable requirements of Rule 4.7 (see below for full text of rule);
  • and for CPOs, that the exempt pool will be offered and operated in compliance with the requirements of Rule 4.7.

Generally, the exemption becomes effective upon filing, assuming there are no errors with the filing.  It is important to note that the exemption ceases to be effective once a CPO’s/CTA’s circumstances change rendering it ineligible for the exemption.  The CPO/CTA must promptly notify the NFA of such change.

Requirements From Which CPO/CTA is Exempt

Under the 4.7 exemption, CPOs are granted the following:

  • Disclosure Relief
    • exempt from delivering to potential investors disclosure documents pursuant to Rule 4.21 or file/submit amendments of disclosure documents with the NFA pursuant to Rule 4.26
    • exempt from the specific disclosure document requirements pursuant to Rule 4.24 (e.g. risk disclosure statements, potential conflicts of interest, risk factors, etc.)
    • exempt from the performance disclosure requirements pursuant to Rule 4.25

*If the CPO chooses to provide investors with an offering memorandum, it must not be misleading and must contain the risk disclosure statement pursuant to Rule 4.7(b)(1).

  • Reporting Relief
    • exempt from the full reporting requirements to Rule 4.22(a)( and (b) but the CPO must provide investors with a quarterly statement within 30 days of the end of the quarter which includes: (i) NAV of the exempt pool, (ii) change in NAV, and (iii) NAV per outstanding interest
  • Annual Report Relief
    • exempt from the annual reporting requirements of Rule 4.22(c) and (d) but the CPO must file and distribute, within 90 days of the end of the year, an annual report for the exempt pool that contain: (i) a statement of financial condition, (ii) statement of income, (iii) footnote disclosures and other material information
  • Recordkeeping relief
    • exempt from the full recordkeeping requirements of Rule 4.23 but the CPO must maintain the reports discussed above and all books and records related to the exempt pool in accordance with Rule 1.31

Under the 4.7 exemption, CTAs are granted the following:

  • Disclosure Relief
    • the CTA is similarly exempt from disclosure documents requirements pursuant to Rule 4.31, 4.34, 4.35, and 4.36
  • Recordkeeping Relief
    • exempt from the full recordkeeping requirements of Rule 4.33 but the CTA must maintain all books and records related to the exempt accounts in accordance with Rule 1.31

Important Items to Note

  • 4.7 Exempt CPOs will still need to file quarterly NFA Rule 2-46 reports for the funds which they manage.
  • CPOs must remember that while they may file a Rule 4.7 exemption for a particular pool and thus be exempt from the above requirements, the CPO is not exempt as related to the other non-exempt pools that it may operate.

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The full text of Rule 4.7 is reprinted below:

§ 4.7   Exemption from certain part 4 requirements for commodity pool operators with respect to offerings to qualified eligible persons and for commodity trading advisors with respect to advising qualified eligible persons.

This section is organized as follows: Paragraph (a) contains definitions for the purposes of §4.7; paragraph (b) contains the relief available to commodity pool operators under §4.7; paragraph (c) contains the relief available to commodity trading advisors under §4.7; paragraph (d) concerns the Notice of Claim for Exemption under §4.7; and paragraph (e) addresses the effect of an insignificant deviation from a term, condition or requirement of §4.7.

(a) Definitions…..[intentionally omitted

(b) Relief available to commodity pool operators. Upon filing the notice required by paragraph (d) of this section, and subject to compliance with the conditions specified in paragraph (d) of this section, any registered commodity pool operator who offers or sells participations in a pool solely to qualified eligible persons in an offering which qualifies for exemption from the registration requirements of the Securities Act pursuant to section 4(2) of that Act or pursuant to Regulation S, 17 CFR 230.901 et seq., and any bank registered as a commodity pool operator in connection with a pool that is a collective trust fund whose securities are exempt from registration under the Securities Act pursuant to section 3(a)(2) of that Act and are offered or sold, without marketing to the public, solely to qualified eligible persons, may claim any or all of the following relief with respect to such pool:

(1) Disclosure relief.

(i) Exemption from the specific requirements of §§4.21, 4.24, 4.25 and 4.26 with respect to each exempt pool; Provided, That if an offering memorandum is distributed in connection with soliciting prospective participants in the exempt pool, such offering memorandum must include all disclosures necessary to make the information contained therein, in the context in which it is furnished, not misleading; and that the following statement is prominently disclosed on the cover page of the offering memorandum, or, if none is provided, immediately above the signature line on the subscription agreement or other document that the prospective participant must execute to become a participant in the pool:

“PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR THIS POOL.”

(ii) Exemption from disclosing the past performance of exempt pools in the Disclosure Document of non-exempt pools except to the extent that such past performance is material to the non-exempt pool being offered; Provided, That a pool operator that has claimed exemption hereunder and elects not to disclose any such performance in the Disclosure Document of non-exempt pools shall state in a footnote to the performance disclosure therein that the operator is operating or has operated exempt pools whose performance is not disclosed in this Disclosure Document.

(2) Periodic reporting relief . Exemption from the specific requirements of §§4.22(a) and (b); Provided, That a statement signed and affirmed in accordance with §4.22(h) is prepared and distributed to pool participants no less frequently than quarterly within 30 calendar days after the end of the reporting period. This statement must be presented and computed in accordance with generally accepted accounting principles and indicate:

(i) The net asset value of the exempt pool as of the end of the reporting period;

(ii) The change in net asset value from the end of the previous reporting period; and

(iii) The net asset value per outstanding unit of participation in the exempt pool as of the end of the reporting period.

(A) Either the net asset value per outstanding participation unit in the exempt pool as of the end of the reporting period, or

(B) The total value of the participant’s interest or share in the exempt pool as of the end of the reporting period.

(iv) Where the pool is comprised of more than one ownership class or series, the net asset value of the series or class on which the account statement is reporting, and the net asset value per unit or value of the participant’s share, also must be included in the statement required by this paragraph (b)(2); except that, for a pool that is a series fund structured with a limitation on liability among the different series, the account statement required by this paragraph (b)(2) is not required to include the consolidated net asset value of all series of the pool.

(v) A commodity pool operator of a pool that meets the conditions specified in §4.22(d)(2)(i) of this part to present and compute the commodity pool’s financial statements contained in the Annual Report in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board and has filed notice pursuant to §4.22(d)(2)(ii) of this part also may use such International Financial Reporting Standards in the computation and presentation of the account statement.

(3) Annual report relief.

(i) Exemption from the specific requirements of §4.22(c) and (d) of this part; Provided, That within 90 calendar days after the end of the exempt pool’s fiscal year

or the permanent cessation of trading, whichever is earlier, the commodity pool operator electronically files with the National Futures Association and distributes to each participant in lieu of the financial information and statements specified by those sections, an annual report for the exempt pool, affirmed in accordance with §4.22(h) which contains, at a minimum:

(A) A Statement of Financial Condition as of the close of the exempt pool’s fiscal year (elected in accordance with §4.22(g));

(B) A Statement of Operations for that year;

(C) Appropriate footnote disclosure and such further material information as may be necessary to make the required statements not misleading. For a pool that invests in other funds, this information must include, but is not limited to, separately disclosing the amounts of income, management and incentive fees associated with each investment in an investee fund that exceeds five percent of the pool’s net assets. The income, management and incentive fees associated with an investment in an investee fund that is less than five percent of the pool’s net assets may be combined and reported in the aggregate with the income, management and incentive fees of other investee funds that, individually, represent an investment of less than five percent of the pool’s net assets. If the commodity pool operator is not able to obtain the specific amounts of management and incentive fees charged by an investee fund, the commodity pool operator must disclose the percentage amounts and computational basis for each such fee and include a statement that the CPO is not able to obtain the specific fee amounts for this fund;

(D) Where the pool is comprised of more than one ownership class or series, information for the series or class on which the financial statements are reporting should be presented in addition to the information presented for the pool as a whole; except that, for a pool that is a series fund structured with a limitation on liability among the different series, the financial statements are not required to include consolidated information for all series.

(ii) Except as provided in §4.22(d)(2) of this part, such annual report must be presented and computed in accordance with generally accepted accounting principles consistently applied and, if certified by an independent public accountant, so certified in accordance with §1.16 of this chapter as applicable.

(iii) Legend.

(A) If a claim for exemption has been made pursuant to this section, the commodity pool operator must make a statement to that effect on the cover page of each annual report.

(B) If the annual report is not certified in accordance with §1.16, the pool operator must make a statement to that effect on the cover page of each annual report and state that a certified audit will be provided upon the request of the holders of a majority of the units of participation in the pool who are unaffiliated with the commodity pool operator.

(4) Recordkeeping relief. Exemption from the specific requirements of §4.23; Provided, That the commodity pool operator must maintain the reports referred to in paragraphs (b)(2) and (b)(3) of this section and all books and records prepared in connection with his activities as the pool operator of the exempt pool (including, without limitation, records relating to the qualifications of qualified eligible persons and substantiating any performance representations) at his main business address and must make such books and records available to any representative of the Commission, the National Futures Association and the United States Department of Justice in accordance with the provisions of §1.31.

(c) Relief available to commodity trading advisors. Upon filing the notice required by paragraph (d) of this section, and subject to compliance with the conditions specified in paragraph (d) of this section, any registered commodity trading advisor who anticipates directing or guiding the commodity interest accounts of qualified eligible persons may claim any or all of the following relief with respect to the accounts of qualified eligible persons who have given due consent to their account being an exempt account under §4.7:

(1) Disclosure relief.

(i) Exemption from the specific requirements of §§4.31, 4.34, 4.35 and 4.36; Provided, That if the commodity trading advisor delivers a brochure or other disclosure statement to such qualified eligible persons, such brochure or statement shall include all additional disclosures necessary to make the information contained therein, in the context in which it is furnished, not misleading; and that the following statement is prominently displayed on the cover page of the brochure or statement or, if none is provided, immediately above the signature line of the agreement that the client must execute before it opens an account with the commodity trading advisor:

“PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT DOCUMENT.”

(ii) Exemption from disclosing the past performance of exempt accounts in the Disclosure Document for non-exempt accounts except to the extent that such past performance is material to the non-exempt account being offered; Provided, That a commodity trading advisor that has claimed exemption hereunder and elects not to disclose any such performance in the Disclosure Document for non-exempt accounts shall state in a footnote to the performance disclosure therein that the advisor is advising or has advised exempt accounts for qualified eligible persons whose performance is not disclosed in this Disclosure Document.

(2) Recordkeeping relief. Exemption from the specific requirements of §4.33; Provided, That the commodity trading advisor must maintain, at its main business office, all books and records prepared in connection with his activities as the commodity trading advisor of qualified eligible persons (including, without limitation, records relating to the qualifications of such qualified eligible persons and substantiating any performance representations) and must make such books and records available to any representative of the Commission, the National Futures Association and the United States Department of Justice in accordance with the provisions of §1.31.

(d) Notice of claim for exemption.

(1) A notice of a claim for exemption under this section must:

(i) Provide the name, main business address, main business telephone number and the National Futures Association commodity pool operator or commodity trading advisor identification number of the person claiming the exemption;

(ii)

(A) Where the claimant is a commodity pool operator, provide the name(s) of the pool(s) for which the request is made; Provided, That a single notice representing that the pool operator anticipates operating single-investor pools may be filed to claim exemption for single-investor pools and such notice need not name each such pool;

(B) Where the claimant is a commodity trading advisor, contain a representation that the trading advisor anticipates providing commodity interest trading advice to qualified eligible persons;

(iii) Contain representations that:

(A) Neither the commodity pool operator or commodity trading advisor nor any of its principals is subject to any statutory disqualification under section 8a(2) or 8a(3) of the Act unless such disqualification arises from a matter which was previously disclosed in connection with a previous application for registration if such registration was granted or which was disclosed more than thirty days prior to the filing of the notice under this paragraph (d);

(B) The commodity pool operator or commodity trading advisor will comply with the applicable requirements of §4.7; and

(C) Where the claimant is a commodity pool operator, that the exempt pool will be offered and operated in compliance with the applicable requirements of §4.7;

(iv) Specify the relief claimed under §4.7;

(v) Where the claimant is a commodity pool operator, state the closing date of the offering or that the offering will be continuous;

(vi) Be filed by a representative duly authorized to bind the commodity pool operator or commodity trading advisor;

(vii) Be filed electronically with the National Futures Association through its electronic exemption filing system; and

(viii)

(A)

1 ) Where the claimant is a commodity pool operator, except as provided in paragraph (d)(1)(ii)(A) of this section with respect to single-investor pools and in paragraph (d)(1)(viii)(A)( 2 ) of this section, be received by the National Futures Association:

i ) Before the date the pool first enters into a commodity interest transaction, if the relief claimed is limited to that provided under paragraphs (b)(2), (3) and (4) of this section; or

ii ) Prior to any offer or sale of any participation in the exempt pool if the claimed relief includes that provided under paragraph (b)(1) of this section.

2 ) Where participations in a pool have been offered or sold in full compliance with part 4, the notice of a claim for exemption may be filed with the National Futures Association at any time; Provided, That the claim for exemption is otherwise consistent with the duties of the commodity pool operator and the rights of pool participants and that the commodity pool operator notifies the pool participants of his intention, absent objection by the holders of a majority of the units of participation in the pool who are unaffiliated with the commodity pool operator within twenty-one days after the date of the notification, to file a notice of claim for exemption under §4.7 and such holders have not objected within such period. A commodity pool operator filing a notice under this paragraph (d)(1)(viii)(A)( 2 ) shall either provide disclosure and reporting in accordance with the requirements of part 4 to those participants objecting to the filing of such notice or allow such participants to redeem their units of participation in the pool within three months of the filing of such notice.

(B) Where the claimant is a commodity trading advisor, be received by the Commission before the date the trading advisor first enters into an agreement to direct or guide the commodity interest account of a qualified eligible person pursuant to §4.7.

(2) The notice will be effective upon receipt by the National Futures Association with respect to each pool for which it was made where the claimant is a commodity pool operator and otherwise generally where the claimant is a commodity trading advisor; Provided, That any notice which does not include all the required information shall not be effective, and that if at the time the National Futures Association receives the notice an enforcement proceeding brought by the Commission under the Act or the regulations is pending against the pool operator or trading advisor or any of its principals, the exemption will not be effective until twenty-one calendar days after receipt of the notice by the National Futures Association and that in such case an exemption may be denied by the Commission or the National Futures Association or made subject to such conditions as the Commission or the National Futures Association may impose.

(3) Any exemption claimed hereunder shall cease to be effective upon any change which would cause the commodity pool operator of an exempt pool to be ineligible for the relief claimed with respect to such pool or which would cause a commodity trading advisor to be ineligible for the relief claimed. The pool operator or trading advisor must promptly file a notice advising the National Futures Association of such change.

(4)

(i) Any exemption from the requirements of §4.21, 4.22, 4.23, 4.24, 4.25 or 4.26 claimed hereunder with respect to a pool shall not affect the obligation of the commodity pool operator to comply with all other applicable provisions of part 4, the Act and the Commission’s rules and regulations, with respect to the pool and any other pool the pool operator operates or intends to operate.

(ii) Any exemption from the requirements of §4.31, 4.33, 4.34, 4.35 or 4.36 claimed hereunder shall not affect the obligation of the commodity trading advisor to comply with all other applicable provisions of part 4, the Act and the Commission’s rules and regulations, with respect to any qualified eligible person and any other client to which the commodity trading advisor provides or intends to provide commodity interest trading advice.

(e) Insignificant deviations from a term, condition or requirement of §4.7.

(1) A failure to comply with a term or condition of §4.7 will not result in the loss of the exemption with respect to a particular pool or client if the commodity pool operator or the commodity trading advisor relying on the exemption shows that:

(i) The failure to comply did not pertain to a term, condition or requirement directly intended to protect that particular qualified eligible person;

(ii) The failure to comply was insignificant with respect to the exempt pool as a whole or to the particular exempt account; and

(iii) A good faith and reasonable attempt was made to comply with all applicable terms, conditions and requirements of §4.7.

(2) A transaction made in reliance on §4.7 must comply with all applicable terms, conditions and requirements of §4.7. Where an exemption is established only through reliance upon paragraph (e)(1) of this section, the failure to comply shall nonetheless be actionable by the Commission.

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Cole-Frieman & Mallon LLP provides comprehensive legal, registration and compliance services for CFTC registered firms.  Bart Mallon can be reached directly at 415-868-5345.

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.

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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.

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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.

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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

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.

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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

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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.

NASAA’s Proposed Model Rule to Exempt Private Fund Advisors from State Registration

One of the consequences of the Dodd-Frank Act is that federal and state jurisdiction over investment advisor firms will change.  In general, fund managers with less than $150 million in AUM will not be subject to registration with the SEC.*  While such managers will not be subject to SEC registration, they may be subject to investment adviser registration in the manager’s state of operation.  Laws from state to state on this issue differ widely but the North American Securities Administrator Association (NASAA) is trying to bring some continuity and certainty with respect to state registration requirements.  NASAA is proposing that states adopt regulations which requires private fund managers to register as investment advisers with the state unless that manager only provides advice to funds which are exempt under Section 3(c)(7).

*note: if a fund manager also has separately managed accounts, the manager will need to be SEC registered unless the manager has less than $100 million in AUM.

Of course it will be up to the states to decide whether or not to adopt the proposed rule, but if the proposal is adopted by any state, it would mean that many more managers would need to register at the state level if such managers were not registered with the SEC (in many, but perhaps not all cases).  I have written a number of times that most state securities divisions do not have the resources to handle an increase in IA registrations so I believe it unlikely that states securities divisions will lobby the legislatures for an increase in registrations under the NASAA proposal (for many states).  This proposal is essentially the first step toward states discussing the larger issue of how the securities laws will change in response to the changes from Dodd-Frank – we are likely to hear more about this story in the coming months as the SEC and states begin to more fully understand how legislative changes will affect their normal operating routines with respect to investment advisers.

Below we have provided some background on the proposed rule and the text of the proposed rule.

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Background & NASAA’s Proposed Model Rule

Prior to Dodd-Frank, the “private adviser exemption” from SEC registration applied to any investment advisor who during the course of the preceding 12 months had fewer than 15 clients (a fund is counted as one client) and who did not generally hold itself out to the public as an investment advisor.   Most hedge fund managers generally would utilize this exemption from IA registration with the SEC.  Title IV of the Dodd-Frank Act eliminated this exemption and in its place, created new registration and reporting rules for private fund advisers.

As we noted above, certain managers (including managers to venture capital funds and private equity funds) with less than $150 million in AUM will be exempt from SEC registration.  These managers exempt from SEC registration are called “exempt reporting advisers” (ERAs) and, although exempt from “registration” with the SEC, must still submit reports to the SEC (see Exempt Reporting Adviser Requirements).  In addition, these managers may still be required to register at the state level.

NASAA is proposing that managers of Section 3(c)(7) funds be exempt from state registration and that all other fund managers be subject to registration with the state securities division.  The stated rationale for this proposal is that investors in Section 3(c)(7) funds must be qualified purchasers and therefore do not need managers to be registered with the state securities commission.  To qualify for the NASAA exemption at the state level, the adviser must:

  1. not be subject to a disqualification (which includes various criminal, civil, and regulatory disciplinary events),
  2. solely advise 3(c)(7) fund(s),
  3. file with the state the report that is required by the SEC (the condensed Form ADV, discussed in the Exempt Reporting Advisers article), and
  4. pay applicable fees.

IA representatives associated with the ERA firm would also be exempt from state registration and licensing requirements.

NASAA’s proposed model rule would not apply to advisers of private funds with $150 million or more in AUM which are required to register with the SEC and satisfy any state notice filing requirements.

Request for Comments

NASAA is seeking comments on this proposed model rule.  Comments should be submitted electronically to advcomments@nasaa.org or by mail to NASAA, Attn: Joseph Brady, 750 First Street, NE, Suite 1140, Washington, DC, 20002 by January 24, 2011.

NASAA’a proposed model rules are reprinted below and can be found here.

Our Thoughts

We have not heard states discussing the NASAA proposal.  We also do not think that anything will be happening with this model rule immediately as states will be focusing on trying to figure out how to deal with the expected increase in state applications because of Dodd-Frank.

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Proposed NASAA Model Rule on Private Fund Adviser Registration and Exemption Rule XXX. Registration exemption for exempt reporting advisers

a. Subject to the provisions of paragraph (b) herein, an investment adviser solely to one or more private funds, shall be exempt from the registration requirements of Section XXX [identify authority] and shall be considered an exempt reporting adviser in this state if the adviser satisfies the following conditions:

(1) neither the adviser nor any of its advisory affiliates are subject to a disqualification as described in Section 230.262 of title 17, Code of Federal Regulations, or any successor thereto;

(2) the adviser acts as an adviser solely to private funds that qualify for the exclusion from the definition of “investment company” under Section 3(c)(7) of the Investment Company Act of 1940;

(3) the adviser files with the state a copy of each report and amendment thereto that an exempt reporting adviser under the Investment Advisers Act of 1940 would be required to file with the Securities and Exchange Commission pursuant to SEC Rule 275.204-4, along with a consent to service of process complying with Section XXX [identify authority]; and

(4) the adviser pays the fees specified in Section XXX [identify authority].

b. A federal covered investment adviser shall not be eligible for this exemption and shall comply with the state notice filing requirements applicable to such advisers.

c. An investment adviser representative is exempt from the registration requirements of Section XXX [identify authority] if he or she is employed by or associated with an adviser that is exempt from registration in this state pursuant to paragraph (a.) above.

d. As used in this rule a private fund means an issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for sections 3(c)(1) or 3(c)(7) of the Act.

e. The report filings described in paragraph (a.)(3) above shall be made electronically through the IARD. A report shall be deemed filed when the report and the fee required by Section XXX [identify authority] are filed and accepted by the IARD on the state’s behalf.

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Bart Mallon is an attorney who works with both state and SEC registered fund managers.  His firm, Cole-Frieman & Mallon LLP, routinely provides regulatory and compliance services to registered investment advisers.  He can be reached directly at 415-868-5345.

Hedge Fund Events January 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.

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January 6

January 12-14

January 11

January 11

January 12

January 18

January 18

January 19

January 19

January 19-21

January 20

January 20

January 20

January 20-21

January 24

January 25

January 26

January 26-27

January lasix without rx 27

January 27

January 27

January 27

January 27

January 27

January 31

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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, a leading hedge fund law firm.  He can be reached directly at 415-868-5345.

Bay Area Hedge Fund Event | September 29, 2010

The Bay Area Hedge Fund Roundtable is having an event next week.  Cole-Frieman & Mallon LLP will be attending and we hope to see you there.  Details on the event can be found below.

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The Bay Area Hedge Fund Roundtable presents:

A Conversation About Global Investing Trends – One Year Later

FEATURING:

John Burbank of Passport Capital

Patrick Wolff of Clarium Capital Management

SEPTEMBER 29, 2010 SAN FRANCISCO, CA at 3 PM

Sens Restaurant at 4 Embarcadero Center, Promenade Level

Please RSVP to info@bayhedge.org

The Bay Area Hedge Fund Roundtable (“BAHR”) is an informal (and not for profit) organization of members of the Bay Area hedge fund community that was established in 2001.  BAHR strives to provide intelligent, fresh perspectives from industry leaders on current developments and offer an open, casual environment where members can exchange information and expertise and further develop their relationships within the industry.

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Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund legal services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

Hedge Fund Events September 2010

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.

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September 1-2

September 7-8

September 8-9

September 10

September 12

September 12

September 13-14

September 13-14

September 13-15

September 13-16

September 14

September 14

September 14

September 14-15

September 15

September 15-16

September 15-16

September 16

September 16

September 16

September 16-17

September 16-17

September 20-22

September 21

September 21

September 21-22

September 21-22

September 21-22

September 21-22

September 22

September 22-24

September 25

September 26-28

September 26-28

September 28-29

September 28

September 28

September 28

September 28-29

September 29

September 29

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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, a leading hedge fund law firm.  He can be reached directly at 415-868-5345.