Category Archives: News and Commentary

Hedge Fund Bits and Pieces for March 17, 2017

Happy Friday. This week’s updates below.

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Bitcoin ETF Rejected by SEC – an application to establish an ETF which would be based on a basket of Bitcoins was rejected by the SEC on March 10. The Winklevoss brothers, noted Bitcoin investorss, were the sponsors of the vehicle which was to be called the Winklevoss Bitcoin Trust. In rejecting the proposal, the SEC stated that the Bitcoin markets are unregulated and that the exchange the ETF would be traded on (Bats BZX Exchange) would not be able to enter into “surveillance-sharing” agreements that would be able combat fraudulent or manipulative acts and practices in the Bitcoin market. We expect that there will be future ETF proposals submitted to the SEC and that as the cryptocurrency industry (and specifically the exchanges hosting Bitcoin exchange) becomes more developed, a Bitcoin ETF will at some time be approved for trading. The SEC release can be found here.

Bitcoin Hedge Funds Article – we recently wrote about Bitcoin/ AltCurrency / Cryptocurrency hedge funds.  We believe that this is a burgeoning asset class and we will begin to see more private fund products launched in this space in the coming months.

FINRA Proposal to Scrap Series 7 – last week FINRA filed a proposed rule change with the SEC that would eliminate the Series 7 exam in favor of a more “streamlined” representative-level qualification exam that would include a general knowledge exam and specialized knowledge exam. We have strong thoughts about FINRA’s use of their time to create a new regulatory structure for exams when there has been no specific mandate for this update (no one is asking for this and we don’t know what problem this complete revamp is solving). We also (personally) believe that FINRA could better spend its time focused on matters that its member firms are asking to be addressed. While we are all for streamlining at Federal Agencies and self-regulatory organizations, we believe that streamlining should be reasonable and should serve a purpose – I am not sure if there was a purpose to this, but I also have not read through the entire 619 page FINRA submission to the SEC.

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP and focuses his legal practice on the investment management industry. He can be reached directly at 415-868-5345.

Anecdotal Evidence of Strong Investor Appetite in 2017

Hedge funds to be attractive investments in new year?

By: Bart Mallon

Over the past couple of years hedge funds have seemingly taken a back seat to private equity, which has seen a significant amount of attention and inflows from institutional investors.  However, it is beginning to feel as though hedge funds are poised for a banner year – in the past two weeks we’ve received more investor due diligence inquires (confirmation of our law firm’s relationship with a manager) than we’ve had over the past six months.  Perhaps even more interesting is that investor demand is coming from all sources (fund of funds, institutional allocators, due diligence specialist firms and individual investors) and has been for potentially large subscription amounts.

Although our firm saw some managers receive major allocations from large pension funds and other investors in 2016, a high percentage of managers were seeing mild to poor interest in their products last year and it is no secret that fund launches were down significantly as well, continuing the trend of fewer fund launches over the last few years.  While to some extent investor appetite is driven by individual managers (right performance, right strategy, right time), it seems to us that we are seeing diligence inquiries that are not solely focused on the hot investment strategy du jour.  The inquiries also fall along various parts of the asset spectrum and can’t be solely classified as pertaining only to funds over say $250M AUM.

I did not expect this surge in inquiries, but I was not surprised it – in late November to early December (after the post-election market surge), we were hearing anecdotal evidence from some of our asset-raising friends that capital was ready to flow and that investors were inquiring about hedge fund products.  It seems the bullishness of late November and December has continued into this new year.  If this continues, we may see more launches in Q2 and Q3 of this year as portfolio managers decide to leave firms after bonus season, whether or not they have investors already lined up.  In any event, we hope we see both more launches in 2017 and more investment in those launches.

Here’s to the new year and my best wishes to all of you – managers, investors, allocators, compliance firms, service providers – for a fantastic 2017.

Bart Mallon
www.colefrieman.com/bart-mallon
415-868-5345

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Other related hedge fund law articles:

Cole-Frieman & Mallon LLP is a boutique hedge fund law firm and provides comprehensive formation and regulatory support for hedge fund managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Regulation A+ Deadline Passed by Congress

Part of JOBS Act Regulations to be Finalized by October 31, 2013

On Wednesday May 15, the House of Representatives passed H.R. 701 which requires the SEC to finalize regulations with respect to “Regulation A+” of the JOBS Act. Regulation A+ would allow companies to more effectively raise money from the public, increasing the current offering limit of $5 million over 12 months to a limit of $50 million over 12 months.

House Statement on Regulation A+

The House Financial Services Committee released a statement which includes the following:

Specifically, H.R. 701 requires the SEC to implement Title IV of the JOBS Act by October 31, 2013. Title IV requires the SEC to adopt or amend regulations to encourage capital formation without requiring an SEC registration statement. These exemptions, referred to as “Regulation A+,” create a new category of public offerings exempt from SEC registration of up to $50 million raised over a 12-month period through issuance of equity securities, debt securities or debt securities convertible or exchangeable to equity interests, including any guarantees of such securities. Under current law, Regulation A provides a similar exemption for public offerings up to $5 million over 12 months.

To protect investors, the JOBS Act requires companies that make offerings under Regulation A+ to file audited financial statements with the SEC on an annual basis and gives the SEC the ability to require these issuers to make periodic disclosures about their operations, financial condition, use of proceeds and other information it deems appropriate.

What this means for the hedge fund industry

Right now this means little to the hedge fund industry except perhaps that Congress is getting tired of the SEC dragging their feet with respect to implementing the JOBS Act. As we have discussed previously, the major provision for fund managers is going to be the lifting of the ban on general solicitation. Perhaps this action indicates that Congress is going to continue to push the SEC to finalize all of the provisions of the JOBS Act.

Additionally, depending on the final Regulation A+ regulations, fund managers may be more inclined to start using that exemption instead of Rule 506 Regulation D, which is the de facto safe harbor used by fund managers. Our guess is that we will not see any real action on this issue until after mid-year and so we cannot know how this particular regulation may or may not affect managers for a few months.

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Cole-Frieman & Mallon LLP provides legal advice to the hedge fund industry.  Bart Mallon can be reached directly at 415-868-5345.

SALT Conference 2013

Today the SALT conference starts in Las Vegas.  Continuing through the end of the week, the hedge fund industry will be descending upon the Bellagio for scheduled speakers, general information sessions and, of course, networking.  This year featured speakers include Nicolas Sarkozy, John Paulson and Coach K; other speakers include major players in the industry including my friend and law school classmate Omeed Malik who is head of the Emerging Manager Program at Bank of America Merrill Lynch.

For more information on the conference, see their website here.

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Cole-Frieman & Mallon LLP provides legal services to the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.

Outsourced Compliance Company – Sansome Strategies LLC

Clients, Friends and Readers:

We are pleased to announce the launch of Sansome Strategies LLC, a high-touch outsourced compliance company.  Sansome Strategies will focus on RIAs and hedge fund managers as well as those firms operating in the commodities/futures and derivatives spaces.

As we all know, increased regulatory oversight, through both the passage of laws and the promulgation of new regulations, have changed (and will continue to change) the operating landscape for investment managers.  This is no more true than in the derivatives space where managers have now found themselves subject to CFTC oversight.  Combined with the Dodd-Frank mandate requiring hedge fund and private equity fund managers to register as investment advisers, the demand for outsourced compliance consulting services has dramatically increased.

Sansome Strategies enters the consulting space at this important time and aims to provide both large and small managers with competent and practical consulting advice.

The press release announcing the launch is found below.  For more information, please see the Sansome Strategies website.

Please also visit the Sansome Strategies blog, ComplianceFocus.

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Sansome Strategies LLC Introduced as New Compliance Consulting Firm with Commodities Focus

San Francisco-Based Firm Specializes in Outsourced CCO Services

SAN FRANCISCO, CA – May 2, 2013 – Announced today is the launch of Sansome Strategies LLC, a compliance consulting firm specializing in high-touch, outsourced compliance services for firms in the investment management industry. Aiding hedge fund managers, commodity pool operators and CTAs, private equity firms, futures managers, and other investment managers, Sansome Strategies offers expertise in streamlining regulatory processes and tailoring compliance outsourcing arrangements to a business’ specific needs.

Sansome Strategies’ head of compliance operations is Jennifer Dickinson, who has extensive experience with private fund compliance, both with respect to investment adviser and futures regulation. Prior to joining Sansome Strategies, Dickinson was a Senior Compliance Consultant at Gordian Compliance Solutions, LLC. Dickinson has been a Chief Compliance Officer at several large investment managers, and worked at the law firms of Cole-Frieman & Mallon LLP and Pillsbury Winthrop Shaw Pittman LLP. “Sansome Strategies will be a perfect fit for those firms seeking one-off compliance solutions, as well as firms that need an institutional quality compliance consultant,” Dickinson said. Ghufran Rizvi, COO of Standard Pacific Capital, LLC in San Francisco agrees, “I have known Ms. Dickinson for many years. She is a great business partner and Sansome Strategies will be a valuable addition to the compliance consulting space.”

Sansome Strategies’ expertise with futures managers and commodity pool operators differentiates the firm in a crowded field and is unique in the compliance consulting industry. The firm is backed by Karl Cole-Frieman and Bart Mallon, partners and founders of Cole-Frieman & Mallon LLP, which has one of the largest private fund practices in California. “There is significant and increasing demand for a compliance firm that understands both registered investment advisers and CFTC registered firms,” according to Karl Cole-Frieman. “Changes in the CFTC’s registration and exemption requirements have forced more managers into registration,” Bart Mallon notes, “and we have not seen the existing compliance companies prepared to address this demand.”

With Sansome Strategies, clients can pick and choose from an array of options, including a completely or partially outsourced compliance program, or opt for advisory, educational, or training services only. Sansome Strategies collaborates with business management and staff to structure, implement, and maintain their compliance program. Sansome Strategies features a client-centric business model, putting a heavy focus on customized services and collaboration.

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About Sansome Strategies

Headquartered in San Francisco and with a nation-wide scope of services, Sansome Strategies is a compliance consulting firm specializing in high-touch, outsourced compliance services for businesses in the investment management industry. Serving investment advisers, futures managers, hedge funds, broker-dealers, private equity firms and businesses ranging from entrepreneurial start-ups to multi-billion dollar international institutions, Sansome Strategies prides itself on tailoring compliance management solutions to the unique needs of each client. Comprised of securities industry professionals with years of experience in the financial and regulatory industries, Sansome Strategies’ mission is to simplify the compliance process, minimize risk, and lower costs, with the core goal of helping clients focus on building and enhancing their business. The firm also publishes ComplianceFocus a compliance blog designed to be a practical and accessible resource to the investment management community. For more information please visit Sansome Strategies at: http://sansomestrategies.com.

For more information, please contact:

Jennifer Dickinson
Sansome Strategies LLC
415-762-8753

ERISA 408(b)(2) Disclosure Requirements

Disclosures Required From Service Providers to Certain Plans

On February 3, 2012, the Department of Labor (“DOL”) issued the long awaited final regulation requiring certain pension plan service providers to disclose information ab

out their compensation and potential conflicts of interest (the “Final Regulation”). The Final Regulation was established under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”). While ERISA generally prohibits the furnishing of goods, services, or facilities between a plan and a party in interest to the plan, Section 408(b)(2) provides relief from such prohibited transactions. It allows service contracts or arrangements if they are reasonable, the services are necessary for the establishment or operation of the plan, and no more than reasonable is paid for the services. The Final Regulation became effective on July 1, 2012.

Covered Service Providers and Covered Plans

The Final Regulation applies to the following covered service providers (“CSPs”) who expect to receive at least $1,000 in compensation for services to a covered plan:

• ERISA fiduciaries providing services directly to a covered plan (including fund managers).

• Federal or state law registered investment advisers.

• Record-keepers or brokers who make designated investment alternatives to the covered plan.

• Providers of one or more of the following services to the covered plan who also receive indirect compensation in connection with such services: accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services.

The Final Regulation applies to ERISA-covered defined benefit and defined contribution plan such as pension plans and 401(k) plans.

Final Regulation Disclosure Requirements

Covered service providers must provide responsible ERISA fiduciaries with the information they need to:

• Evaluate the reasonableness of total direct and indirect compensation received by the CSP, its affiliates, and/or subcontractors;

• Ascertain potential conflicts of interest; and

• Fulfill reporting and disclosure requirements under Title I of ERISA.

The required information must be furnished in writing reasonably in advance of the date any service contract or arrangement is entered into. Such writing must describe the provided services and all compensation to be received. CSPs who disclose indirect compensation must describe the arrangements between the payer and CSP pursuant to which such compensation is paid, identifying the sources of such compensation and the services to which it relates. Furthermore, CSPs must disclose whether they are providing recordkeeping services and the compensation attributable to such services.

Conclusion for Fund Managers

Fund managers with ERISA clients will need to begin drafting and providing these disclosures to such clients. This will be another requirement for start up fund managers to consider when deciding whether to take on ERISA clients. While ultimately the disclosures are not extremely onerous, they do add another to-do to a manager’s list.

Please contact us if you have questions or if you would like help drafting the disclosure required under 408(b)(2).

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Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm which provides legal services to the hedge fund industry. Bart can be reached directly at 415-868-5345.

 

JOBS Act Opportunities for Hedge Fund Managers

The JOBS Act has already sparked a number of interesting questions from hedge fund managers who want to begin more aggressive advertising campains under the new laws. We have generally been cautioning managers on starting any campaign until after the SEC has promulgated regulations. However, we do think that managers may want to start thinking about how they may implement a more robust marketing program as part of their overall capital raising plan. The article below, contributed by Meredith Jones and Joseph Pacello of Rothstein Kass, provides some insights into the opportunities available for fund managers post JOBS Act.

[HFLB Note: all links in the article below were not links in the original. The links in the article below are to other posts on this website and are not necessarily endorsed by the writers of the article.]

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JOBS Act Opens New Window of Opportunity for Hedge Fund Marketing

The Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama on April 5, offers hedge funds and other private investment vehicles more latitude for their marketing efforts. In this article, Meredith Jones and Joseph Pacello discuss some of the implications of the bill and issues that need to be on the agenda of savvy fund managers.

Since the launch of the first hedge funds in the 1940s, hedge funds have been subject to Securities and Exchange Commission (SEC) prohibitions on advertising and general solicitation. While “namebrand” funds with widespread name recognition and extensive investor relationships have generally not been impacted by these restrictions, the inability to solicit capital from accredited investors who were not previously known significantly curtailed the marketing and capital raising efforts of smaller funds. Over the last three years, in the wake of the global economic contraction of 2008, managers with less than $1 billion particularly chafed under these restrictions, as they chased scarce investors, often with fewer resources.

The JOBS Act potentially removes those prohibitions, pending formal rulemaking by the SEC, who will have final say on how the JOBS Act is implemented. Under the new rules, the SEC would eliminate the prohibition on general solicitation as it relates to hedge funds, provided that the only purchasers are accredited investors. As a result, accredited investors will no longer have to be previously known to the fund. In addition, the Act theoretically removes the prohibition on general advertising, giving funds greater opportunity to and options for communication with potential investors.

While managers with more than $1 billion under management appear to be taking the rule change in stride, for funds with less than $1 billion under management, this new freedom to communicate with investors presents a wealth of potential new capital raising avenues. Fully leveraging this opportunity, however, will require funds to become more sophisticated and strategic in their marketing efforts. Those that fail to do so risk being alsorans in what is sure to be a more competitive period ahead.

Frankly, the previous regulations made “hedge fund marketing” almost a contradiction in terms. Much of the capital raising success of a fund was predicated on the fund’s existing relationships, or their ability to develop new contacts through limited resources, such as hedge fund databases, conferences and networking events. While relationships—not to mention performance—will always be important, the JOBS Act should result in a greater emphasis on marketing strategy and execution in the capital-raising process.

The fact that all funds will be able to solicit all accredited investors means that more investors will be hearing from more funds. The increased volume of conversations means that funds will have to “rise above the noise” to succeed in capital raising. Firms that plan and communicate effectively will therefore have a strategic advantage over those who do not.

The implementation of changes to the existing solicitation and advertising restrictions will not occur before early July, the deadline by which the SEC must complete rulemaking for this section of the JOBS Act. To be clear, we have yet to see how the SEC will interpret this change. For example, fund-sponsored mailings or events could be permitted, but not without extensive records of investor qualification documents being collected in advance. Press releases could be more common, but there could be limitations on what can be discussed. As a result, in this interim period it is probably wise not to be overly aggressive with new marketing avenues or advertisements. However, this doesn’t mean that funds should sit back and wait for the SEC’s final rule to begin preparations.

Because the capital raising environment was already becoming more competitive, particularly at the smaller and emerging ends of the alternative investment spectrum, funds should use the next 90 days to carefully review the quality of their marketing materials. In particular, funds should examine their marketing through the eyes of a potential investor and ask:

Does the fund know its competition and can it differentiate itself with a clearly defined value proposition? This is particularly important if the fund operates in a highly saturated area, such as long-short equity, macro, futures trading and private equity.

Are the fund’s marketing materials clear and concise? It is a common mistake to assume length equals conviction. Indeed, most investors offer approximately one hour for an initial meeting and length can spell repetition of some facts, while having to omit others due to time constraints. A clearly defined value proposition often takes fewer words, not more.

Is there a well defined “story?” Although tempting, particularly for funds where the manager pulls double-duty as a marketer, it is not always advisable to assume the strategy and opportunity speaks for itself. It is vital that the documents and pitch communicate not just what you do, but who you are as a manager and a firm, including how you view risk and run a business.

Do the marketing materials have a sophisticated look and feel? While the content of the materials does the heavy lifting, their look and feel set the tone. Does your firm appear to be institutional? Are the slides dense or wellpaced? Do you have a consistent brand? Aim for crisp and clean layouts that help the reader through the material.

How strong is the fund’s marketing capability? Few hedge funds have the luxury of a full-time dedicated marketing (as opposed to fund-raising) professional on staff. Firms should consider bringing in an experienced outside consultant who can make high-value, targeted improvements.

In this evaluation process, it is also important to recognize that things like pitch books are more than mere props—they structure the conversation a fund has with its potential investors. A poor pitch book means that important points are likely to be skipped over (or blunted from repetition); a good pitch book amplifies the effectiveness of the presenters.

When revising communications materials, remember that anti-fraud regulations remain in place; a fund needs to be scrupulous in its representations and consistent in its themes. For some in the marketing world, “gilding the lily” is a common practice, however in the investment arena, it is one to be avoided. Explanatory notes, review by the firm’s legal counsel and truth in advertising will still be required under the new rules. Also note that as more materials are generated and sent to a wider audience, the ability to track communication will become more important as well. If the SEC audits your firm post JOBS Act, you will need to be able to present full documentation of your marketing efforts.

Regardless of the final interpretation of the JOBS Act by the SEC, funds also need to develop a marketing plan to guide their outreach to potential investors. Again, the competition for assets has gotten more, not less, fierce over the last three years. Putting a strategic marketing plan in place will curtail the impulse to cast the widest possible net and pursue every available audience. Because most funds have limited marketing resources, it is essential to allocate those resources strategically. This requires looking at three factors:

1. Capacity: Marketing efforts need to be scaled to how much capital needs to be raised. A stellar marketing campaign that results in turning away a significant number of investors represents wasted resources. A fund that is making steady progress toward being fully subscribed may in fact be able to meet its goals by continuing its current network-based outreach.

2. Manpower: Pursuing investors takes time, and for many firms, that means time away from other tasks, including investment management. Funds need to determine, given their capacity, which audiences are most likely to result in the largest return on their marketing investment and prioritize accordingly.

3. Money: A firm’s marketing spend needs to be allocated so that it is directed toward strategically valuable efforts and does not cannibalize other functions.

Certainly, the potential benefit of the JOBS Act is that funds, particularly those with less than $1 billion under management, will be able to leverage their capital raising efforts. Blogs, websites, email campaigns, advertisements, press releases and other marketing activities may allow funds to extend their reach, effectively providing a type of “air cover” for their one-on-one capital raising efforts. However, any decisions to engage in these activities should be evaluated in light of the restrictions above.

In conjunction with a review of marketing, funds should also examine their investor relations bandwidth. For 3(c)7 funds directed toward qualified purchasers, the JOBS Act raises the maximum number of holders of record from 499 to 1,999. This means that funds that are near their investor maximum could potentially make the decision to allow more investors (capacity of the strategy permitting), or consolidate existing 3(c)7 funds. It is unlikely that these changes will have a tremendous impact on all but the largest fund complexes at the present time. However, if a manager does decide to increase his investor headcount, then effective and proactive investor relations will undoubtedly become a greater concern, which we will address in a future article.

Rothstein Kass will be monitoring the SEC rulemaking in connection with the JOBS Act and its impact on private funds.

By Meredith Jones, Director and Joseph A. Pacello, CPA, JD, Principal

For more information on this article and for services offered by Rothstein Kass, please contact Meredith Jones, Director at 972.581.7066 or via e-mail at mjones@rkco.com.

Meredith Jones, Director

Meredith Jones is a director at Rothstein Kass responsible for generating research and content on the alternative investment industry by and on behalf of the firm. She also provides business advisory services to the firm’s clients. Meredith has more than 14 years of experience in the alternative investment industry, with extensive expertise in research, writing, consulting, marketing, business development, due diligence, index construction and asset allocation. Her research has been published in a number of books and journals and in the international press.

Prior to joining Rothstein Kass, Meredith was a director in the Barclays Capital Inc. Strategic Consulting Group, where she was responsible for producing thought leadership content on a variety of manager and investor focused topics, as well as leading consulting projects for BarCap clients. She previously served as a managing director at PerTrac Financial Solutions (PFS), a leading provider of investment analytics. At PFS, Meredith was responsible for research, marketing, investment data, and was a fixture on the international hedge fund conference circuit.

Meredith began her career in alternative investments at Van Hedge Fund Advisors International in 1998, where she became the senior vice president and director of research. Meredith led the team responsible for hedge fund due diligence, manager selection, portfolio construction, hedge fund data, index creation and industry research while at VAN.

Over the past 14 years, Meredith has presented her original research and insights to industry participants around the world and has had her findings published in books, journals, industry publications and major media outlets, including The Economist, The Wall Street Journal, The Journal of Investing, Alternative Investment Quarterly and the Financial Times.

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Cole-Frieman Mallon & Hunt LLP is a law firm to the investment management industry and runs the Hedge Fund Law Blog. Bart Mallon can be reached directly at 415-868-5345.

Announcing Cole-Frieman & Mallon LLP

Friends:

We are pleased to announce today the merger of our respective firms to form Cole-Frieman & Mallon LLP, a law firm focused on the hedge fund industry.  Below is our press release announcing the merger.  We look forward to continuing to provide top-tier legal services to both large and start-up managers and will continue to focus on bringing useful information to the hedge fund community through the Hedge Fund Law Blog.

Many thanks to everyone who has supported this website and our practices over the years.

– Karl Cole-Frieman & Bart Mallon

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Cole-Frieman LLP & Mallon P.C. merge to form 3rd largest hedge fund practice based in San Francisco

– Combined firm has over 200 hedge fund industry clients

San Francisco, July 27th, 2011 – Two fast-growing San Francisco based law firms, Cole-Frieman LLP and Mallon P.C., today announced an agreement to combine businesses. The combined firm, known as Cole- Frieman & Mallon LLP, will be a boutique generalist firm focusing on hedge fund managers and hedge fund investors. Karl Cole-Frieman and Bart Mallon will be Co-Managing Partners of the eight person firm, which is headquartered in San Francisco and has a satellite office in New York. With 215 clients in the hedge fund industry, the firm also managed over 100 hedge fund launches in the last two years.

Cole-Frieman & Mallon LLP provides advice on a broad range of corporate, regulatory and litigation matters including hedge fund formation, adviser registration, CFTC and NFA matters, ISDAs and counterparty documentation, loan trading and distressed debt transactions, seed deals, employment and compensation matters and regulatory inquiries.

The firm will also manage the widely read and highly influential Hedge Fund Law Blog (http://www.hedgefundlawblog.com), which focuses on legal issues that impact the hedge fund community.

“This merger will create an industry leading firm that provides a full suite of services to hedge funds and others in the alternative investment community,” says Karl Cole-Frieman. Mallon notes, “Many larger managers are opting to bifurcate their legal work between our firm and a large law firm. Whether the client needs start-up support or more tailored advice, we are able to provide high level, cost-effective services which consider the manager’s needs from a business as well as a legal perspective.”

“There are few firms that can provide an institutional quality product at a reasonable price point. With Cole-Frieman & Mallon LLP we get the benefit of top notch expertise, as well as the personalized service and attention of a boutique firm” said Dennis Carlton, General Counsel of WMD Asset Management, LLC.

Bruce Wilson at North Creek Advisors, LLC adds “Cole-Frieman & Mallon LLP bring to the table a deep understanding of the hedge fund business and hedge fund operations. They are business partners, as well as counselors, who engineer the solutions for their clients.”

About Cole-Frieman & Mallon LLP

Informed by significant in-house and private practice experience at some of the most prestigious Wall Street firms, hedge funds, and law firms Cole-Frieman & Mallon LLP has the business acumen and market knowledge to

provide legal solutions for a wide range of financial services matters. With offices in San Francisco and New York, Cole-Frieman & Mallon LLP has a nationwide practice that services both start-up managers as well as multi-billion dollar firms. Cole-Frieman & Mallon LLP provides a variety of services including: hedge fund formation, advisor registration and counterparty documentation, CFTC and NFA matters, seed deals, internal investigations, operational compliance, regulatory risk management, hedge fund due diligence, marketing and investor relations, employment and compensation matters, and routine business matters. For more information please visit us at: http://www.colefrieman.com/.

Karl Cole-Frieman can be reached at 415-352-2300.

Bart Mallon can be reached directly at 415-868-5345.

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Private Equity Fund Manager Registration Exemption Approved by House Committee

Small Business Capital Access and Job Preservation Act Moves Toward Vote

The SEC recently finalized the new investment adviser registration regulations and under those regulations private equity fund managers will be required to be registered with the SEC.  However, Congress has recently been taking steps that may ultimately mean that private equity fund managers will escape registration requirements.

The Small Business Capital Access and Job Preservation Act (the “Bill”) proposed in March, would amend the Investment Advisers Act to provide an exemption from registration for some private equity fund managers.  Recently the House Committee on Financial Services (“Committee”) amended and approved the Bill which will ultimately need to be passed by the full House and Senate before being presented to the President for signature. The amended text makes an exemption from registration available to advisers of private funds that have outstanding debt that is less than twice the amount investors have committed to the private funds (less than a 2-1 leverage ratio).

Proposed Requirements for Private Equity Fund Managers

The amended Bill would require the SEC to define “private equity fund” and to promulgate reporting and record-keeping requirements for those private equity fund managers who utilize the exemption. Specifically, the SEC would have to enact rules that require the managers “to maintain

such records and provide to the Commission such annual or other reports as the Commission taking into account fund size, governance, investment strategy, risk, and other factors, as the Commission determines necessary and appropriate in the public interest and for the protection of investors….”  The SEC will be required to issue any regulations within 6 months of the date the Bill is signed into law.

This means that while PE fund managers would be exempt from registration, there would still be fairly significant compliance responsibilities.  Essentially these managers would face a regulatory regime similar to exempt reporting advisers.

Support for the Bill

Supporters of the Bill essentially assert that because private equity funds neither caused nor contributed to the financial crisis, it would be unduly burdensome for these fund managers to register with the SEC. Specifically, supporters point to the costs associated with registration, the jobs created by the funds, and the general lack of systemic risk posed by the funds.

According to the Committee report, registration would be burdensome because:

“advisers to private equity funds will be required to calculate the value and performance of each of their funds on a monthly basis, which will in turn require advisers to private equity funds to calculate the value of each company in which the fund has invested on a monthly basis as well. Such valuations are time consuming and costly, and they divert much-needed capital and effort away from job creation and investment activities.”

The Committee received testimony stating:

“As of June 30, 2009, companies that received backing from private equity investment funds employed more than 6 million people. Studies show that the workforces of companies acquired by private equity firms increased by an average annual rate of 5.7 percent, compared to 1.1 percent for all U.S. companies. The Committee also received testimony about the costs of registering with the SEC, which some have estimated to be as high as $500 million industry-wide…”

The concerns were primarily that the burden imposed by the registration requirements could inhibit the creation of more jobs, with struggling or growing companies receiving less capital from such funds. The amended Bill would provide relief from registration for advisers to private equity funds that are levered by less than a 2-1 ratio.

Final Thoughts

Private equity fund managers should not stop beginning preparations to register as investment advisers with the SEC.

The Bill is a long way from being enacted into law – it still must be passed by the full House, the full Senate, and signed by the President. It will then take (at least) another 6 months for the SEC to issue final rules regarding record-keeping and reporting and to clarify the definition of “private equity fund.” Even with the Dodd-Frank registration deadline pushed back to March 30, 2012, waiting until the Bill and its accompanying rules and regulations are finalized would leave managers of these funds with little time to register in the event they ultimately do not fall within the exemption in its final form.

The Committee’s report is available here.

The full text of the Bill is available here.

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Cole-Frieman & Mallon LLP is a law firm which provides adviser registration, compliance and legal support to SEC registered fund managers.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.

SEC Rulemaking Agenda for Hedge Fund Registration

Timeline for Proposed & Final Manager Registration Rules Released

The Dodd-Frank bill requires the SEC and CFTC to propose and promulgate final rules with respect to a number of important areas for investment managers.   As we have seen, significant time has already been devoted to trying to develop a framework for OTC derivatives clearing.  Over the next couple of months, however, hedge fund and private equity fund managers will begin to see how the registration and hedge fund compliance process will proceed under the new laws and regulations.

The SEC has released a timeline for implementing the provisions under Dodd-Frank.  While the SEC discusses a number of the major rule making initiatives, below we have only reprinted the items relating to investment adviser registration.  We have also provided some of our thoughts on these items.  [Note: section numbers reference the Dodd-Frank act.]

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October

§409: Propose rules defining “family office”

This definition will be important because “family offices” are not required to register as investment advisers with the SEC.  Family offices which manage the assets of numerous families will need to pay special attention to the proposed rule because it is possible that the SEC may not provide such offices with an exemption or exclusion from the registration provisions.

See SEC Proposes “Family Office” Definition on Hedge Fund Law Blog

Novemeber – December 2010 (planned)

§§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds

Private equity fund advisers are going to be carefully reviewing this provision to see if there is any way to escape SEC registration.  Depending on the scope of the definition of “venture capital,” managers to private equity funds may be able to find a way to fall outside of registration.

§410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act

This will be an important provision for a number of managers who are currently registered with the SEC.  Both the SEC and the states want to see an easy and seemless transition from SEC to state registration and there will need to be significant coordination between the SEC, NASAA, the states and FINRA (which runs the investment adviser registration depository).

§418: Propose rules to adjust the threshold for “qualified client”

Changes to the definition of “qualified client” will require hedge fund managers to revise their fund offering documents.  Additionally, currently unregistered private equity fund managers should note that they will be subject to the qualified client regulations (i.e. performance fees or the carried interest may be charged only to an investors who fall within the definiton of qualified client).  Accordingly, private equity fund managers may need to start thinking about revising their offering documents and/or begin requesting more information from their investors with respect to net worth.

§413: Propose rules to revise the “accredited investor” standard

The SEC has already promulgated guidance with respect to the accredited investor standard which states that an investor’s equity in a primary residence does not count toward the net worth requirement.  It is likely that the proposed rules will mirror the guidance.

§926: Propose rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated

NASAA has lobbied hard to have the ability to have greater control over Regulation D offerings if the promoters of the offerings have previous been subject to certain regulatory or criminal proceedings.  Any proposed provision would likely limit the ability of such promoters to offer securities to investors without first going through a rigourous process with each of the states where the securities are sold.

§§404 and 406: Propose (jointly with the CFTC for dual-registered investment advisers) rules to implement reporting obligations on investment advisers related to the assessment of systemic risk

Investment managers with a large amount of AUM will likely be subject to increased reporting requirements to the SEC.  The SEC (and the CFTC) will likely use this information (potentially in conjunction with other government agencies) to determine the risk the manager poses to the financial system.  It is expect that most, if not all, of the information to be provided to the SEC and CFTC under this provision will not be available to the public, even under a FOIA request.

§913: Report to Congress regarding the study of the obligations of brokers, dealers and investment advisers

NASAA has been fighting for a uniform fiduciary standard for brokers and investment advisers.  After the Dodd-Frank act was signed into law, the SEC solicited comments from the public on whether there should be a uniform fiduciary standard.  The SEC has already received a large number of comments on this very important issue.

§914: Report to Congress regarding the need for enhanced resources for investment adviser examinations and enforcement

The SEC needs more resources.  Ultimately the lack of proper funding for this agency will likely lead to the creation of a self regulatory organization for investment managers similar to FINRA for broker-dealers.  This is a separate subject which we intend to discuss in future posts.

§919B: Complete study of ways to improve investor access to information about investment advisers and broker-dealers

It will be interesting to see what additional information that the SEC would like advisers to give investors.  The Form ADV and Part 2 are publicly available to investors through the SEC’s Advisor Search tool.  Additionally, the SEC recently changed the format of Part 2 to provide more information to investors about investment managers.

April – July 2011 (planned)

During this time the SEC will be adopting finalized rules (taking into account public comments on the proposed rules) with respect to the following matters:

  • reporting obligations on investment advisers related to the assessment of systemic risk
  • exemption from registration for advisers to venture capital firms
  • “family office” definition
  • transition of mid-sized investment buy cialis soft online advisers (between $25 and $100 million in assets under management) from SEC to State regulation
  • “qualified client” definition
  • “accredited investor” definition
  • disqualifying Regulation D offerings by certain felons

Additionally, the SEC may decide to propose rules during this time based on the §913 study conducted on the obligations of brokers, dealers and investment advisers

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Bart Mallon, Esq. runs the hedge fund law blog and provides 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.