Category Archives: News and Commentary

Cole-Frieman & Mallon 2017 Third Quarter Update

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

****

October 26, 2017

Clients, Friends, Associates:

This summer saw many exciting developments in the digital assets space as well as case law evolution that may expand the liability of fund managers. We would like to provide you with a brief overview of those topics and a few noteworthy items as we move into the fourth quarter of 2017.

****

SEC Matters:

SEC Adopts Amendments to Form ADV and the Books and Records Rule. SEC amendments to Form ADV went into effect on October 1, 2017, which will apply to both registered investment advisers (“RIAs”) and exempt reporting advisers. Among other technical amendments, the new Form ADV requires investment advisers to provide detailed information with regard to their separately managed accounts (“SMAs”), including aggregate level reporting of asset types across an adviser’s SMAs and reporting of custodian information under certain circumstances. Investment advisers that utilize borrowing or derivatives on behalf of SMAs will also need to report the regulatory assets under management (“RAUM”) attributable to various levels of gross notional exposure and corresponding borrowings and derivatives exposure. The SEC noted that advisers may not need to report this SMA information until its annual amendment.

The SEC concurrently adopted an amendment to the books and records rule (Rule 204-2 under the Investment Advisers Act of 1940, as amended (“Advisers Act”)), requiring RIAs to keep records of documentation necessary to demonstrate the performance or rate of return calculation distributed to any person as well as all written performance-related communications received or sent by the RIA. Advisers who have questions on any changes to the new Form ADV should contact their compliance groups.

SEC Provides Observations from Cybersecurity Examinations. On August 7, 2017, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published observations from its “Cybersecurity 2 Initiative” where 75 SEC registered broker-dealers (“BDs”), RIAs and investment funds were examined to assess cybersecurity preparedness. OCIE observed that all BDs and funds, and nearly all RIAs, maintained cybersecurity-related policies and procedures addressing protection of client information. OCIE also noted an increase in cybersecurity preparedness since the “Cybersecurity 1 Initiative” conducted in 2014.

However, key findings from the examinations include:

  • policies and procedures were inadequate and lacking specificity in employee guidance;
  • failure by financial firms to adhere to or enforce their policies and procedures; and
  • Regulation S-P-related issues, including failure to address security vulnerabilities or install other operational safeguards to protect client nonpublic personal information.

OCIE will continue its examination of financial firms’ cybersecurity compliance systems and we will be on the lookout for further guidance in this growing area of concern.

SEC Risk Alert Discusses Most Frequent Advertising Rule Compliance Issues. On September 14, 2017, OCIE published a risk alert based on its recent examination of 70 RIAs related to Rule 206(4)-1 under the Advisers Act (the “Advertising Rule”). The Advertising Rule generally prohibits RIAs from distributing advertisements or other communications that contain untrue, false or misleading statements. The most common Advertising Rule deficiencies observed include: (i) misleading performance results, caused by lack of sufficient disclosures, (ii) misleading one-on-one presentations, (iii) misleading claims of compliance with voluntary performance standards, (iv) cherry-picked profitable stock selections, (v) misleading selection of recommendations, and (vi) failure to implement compliance policies and procedures designed to prevent non-compliant advertising practices. OCIE encourages RIAs to consider their advertising activities within the purview of the Advertising Rule and its prohibitions.

SEC Action Against Hedge Fund Adviser.  On August 21, 2017, the SEC reached a settlement with a hedge fund adviser for failing to establish, maintain, and enforce a compliance system to prevent the misuse of material, nonpublic information (“MNPI”). The settlement comes after the adviser’s analysts were charged with insider trading of MNPI relating to government plans to cut Medicare reimbursement rates. The SEC alleged that analysts received tips from a third-party political intelligence analyst who had a source within the Centers for Medicare and Medicaid Services, and that the adviser then used those tips to generate trading profits. The $4.6 million settlement included a penalty of $3.9 million and a disgorgement of compensation.

CFTC Matters:

CFTC Grants SEF and DCO Registration to LedgerX.  The CFTC granted LedgerX registration status as both a swap execution facility (“SEF”) and a derivative clearing organization (“DCO”). Now that the exchange is live, LedgerX is the first CFTC-approved exchange to facilitate and clear options on digital assets. Previously, the CFTC granted SEF registration to TeraExchange, which offers forwards and swaps on Bitcoin. LedgerX plans to initially offer physically-settled and day-ahead swaps on Bitcoin to U.S.-based eligible contract participants (“ECPs”) and has a fully-collateralized clearing model where customers must post collateral to cover maximum potential losses prior to trading.

Digital Asset Matters:

CBOE Partners with Gemini to Launch Bitcoin Futures Exchange.  On the heels of the CFTC’s LedgerX announcement, the Chicago Board Options Exchange (“CBOE”) announced that it has partnered with Gemini, a digital assets exchange and custodian, to launch the first U.S.-regulated Bitcoin futures exchange. Gemini was founded by the Winklevoss twins, whose proposed “Winklevoss Bitcoin Trust” ETF was rejected by the SEC this past spring. Gemini granted to CBOE an exclusive license to use Gemini’s Bitcoin market data that will allow CBOE to create derivative products, including indices, to trade on a CBOE-created exchange. Although CBOE has not requested approval from the CFTC to form such an exchange, it plans to offer Bitcoin futures by the end of 2017 or early 2018. We will keep managers apprised of ongoing developments.

House Introduces Virtual Currency Tax Act.  In September, The Cryptocurrency Tax Fairness Act of 2017 was introduced in the House of Representatives. The bill was introduced by co-chairs of the Congressional Blockchain Caucus, Jared Polis (D-Co) and David Schweikert (R-Az), and calls for a de minimis exception from gross income for gains related to virtual currency transactions under $600. Such an exception could serve to incentivize small, day-to-day transactions. The bill also calls upon the Treasury Department to issue guidance on whether a gain or loss should be recognized in virtual currency transactions. If approved, the bill will apply to virtual currency transactions beginning January 1, 2018.

SEC Implicates Two ICOs in Alleged Fraud.  On September 29, 2017, the SEC charged a businessman who was allegedly running two fraudulent initial coin offering (“ICO”) schemes by selling unregistered securities in the form of digital tokens that did not exist. The REcoin ICO was marketed as the first token backed by real estate investments and allegedly misrepresented to investors the company’s expertise and the amount of capital raised. The second ICO was marketed similarly but with respect to the diamond industry. In July, the SEC issued an investor alert warning about the risk of ICOs. The SEC is seeking to bar the businessman from participating in any offering of digital securities in the future.

ICOs Banned in China and South Korea. The People’s Bank of China (“PBoC”), China’s central bank and financial regulator, announced an immediate ban of ICOs within China. The announcement sent shockwaves throughout the cryptocurrency industry, highlighted by declines across various token prices. Many see this ban as a temporary stop-gap measure to give PBoC time to develop industry oversight. South Korea’s Financial Services Commission made a similar announcement a few weeks later, stating that all ICO fundraising would be banned and that it would establish tighter anti-money laundering prevention policies for virtual currencies.

Other Items:

Department of Labor (“DOL”) Proposes Amendments to Fiduciary Rule Exemptions. The DOL Fiduciary Rule, discussed in our previous quarterly update, may face further delays before full implementation. Citing a concern that affected parties may incur undue expense in complying with a rule that may be further revised or repealed, the DOL submitted a proposal to the Office of Management and Budget (“OMB”) to extend the transition period from January 1, 2018 to July 1, 2019. The proposal included amendments to a few of the Fiduciary Rule exemptions, including the best interest contract exemption, which permits investment advisers to retail retirement clients to continue their current fee practices. The OMB approved the proposal and the DOL published its proposal on August 31, 2017. Proponents for the amendments point to the SEC’s commitment to work with the DOL to harmonize the Fiduciary Rule with SEC regulations, and that the delay will give the agencies time to develop clear regulations together. Critics claim that the delay will cause more uncertainty in the market during the extended transition period, and that the delay is the first step in an attempt by opponents of the rule to eliminate it completely.

The Cayman Islands Introduce New AML Regulations.  New Cayman Islands AML regulations came into effect on October 2, 2017. The new regulations expand AML/CFT (anti-money laundering/countering the financing of terrorism) obligations to unregulated investment entities and additional financial vehicles, which are seen to align more closely with the Financial Action Task Force (FATF) recommendations and global practice. In a shift to a risk-based approach to AML regulations, there will be two separate due diligence procedures depending on the risk assessment of investors. Certain investors that are deemed to be high-risk, such as politically exposed persons, will have to go through a more extensive verification process, while low-risk investors will be able to submit to a simplified due diligence process. If you have any questions, we recommend that you reach out to your administrator or offshore counsel.

U.S. Court of Appeals for the Second Circuit Clarifies Insider Trading Case.  In August 2017, in a long-awaited opinion, the Second Circuit upheld a former portfolio manager’s 2014 conviction for insider trading in U.S. v. Martoma, in reaction to the US Supreme Court’s intervening ruling in Salman v. United States, which we discussed in a previous update.  The Martoma Court rejected much of its earlier decision in U.S v. Newman by holding its previous requirement that there be a “meaningfully close personal relationship” between tipper and tippee was “no longer good law”.  Instead, the Martoma Court created a new standard requiring the government to prove that the tipper expected the tippee to trade on the information and the tip “resembled trading by the insider followed by a gift of the profits”.  By eliminating Newman’s “close personal relationship” requirement, the Martoma ruling has made it easier for the government to prosecute and win insider trading cases, however, it’s likely this area of law will continue to evolve.

“Group” Theory of Liability Expanded by U.S. District Court.  Continuing a trend of expanding the “group” theory of liability, the Northern District of California’s recent ruling in Sand v. Biotechnology Value Fund, L.P. may have far-reaching ramifications for managers of multiple funds. The defendants in the ongoing Sand case include a general partner and its two hedge funds (the “group funds”). The Court held that the group funds’ aggregate collective ownership of the subject security was directly relevant to the issue of beneficial ownership because the group funds shared the same general partner. Section 16 of the Securities and Exchange Act of 1934, as amended, requires corporate insiders and beneficial owners of 10% or more of a registered security to file statements with the SEC disclosing their ownership interest. Under the Sand Court’s theory of group liability, each of the group funds would be subject to the Section 16 reporting requirements if the group collectively owned 10% or more of the security, even if an individual group fund owned less than 10%, and each group fund could also be directly liable for any Section 16 violations. Given this evolution of Section 16 liability, managers of multiple funds that hold positions in the same security should carefully monitor beneficial ownership and evaluate whether a reporting obligation may exist for their funds.

SIPC and FINRA Adopt Streamlined Reporting Process.  Effective September 1, 2017, investment advisory firms who are members of both the Securities Investor Protection Corporation (“SIPC”) and the Financial Industry Regulatory Authority (“FINRA”) only need to file one annual report to both agencies through FINRA’s reporting portal. This will ease the reporting burden, as well as cut down on compliance costs for firms.

FCA Makes Final Policy Statement on MiFID II. The Financial Conduct Authority (“FCA”), which regulates the financial services industry in the UK, has published its final policy statement regarding the Markets in Financial Instruments Directive II (“MiFID II”). Effective January 1, 2018, MiFID II most notably introduces the requirement for UK BDs to “unbundle” investment research from trading commissions, requiring discrete pricing for each of the services rendered. This requirement is in contrast to the “soft dollar” safe harbor currently available in the U.S. and may have implications for U.S.-based investment advisers who engage UK BDs, as the new requirement could affect pricing of services.

Cayman and BVI Update Beneficial Ownership Regimes.  Amendments to the Cayman Islands beneficial ownership laws went into effect on July 1, 2017, which require certain entities, including exempted funds, to take reasonable steps to identify their beneficial owners (generally persons holding more than 25% interests in an entity). Of interest to fund managers, the amendments exempt from its scope: funds that are regulated by Cayman Islands Monetary Authority (“CIMA”), that employ a Cayman regulated administrator, or funds that are managed by an adviser regulated in an approved jurisdiction, such as a state or SEC RIA.  The British Virgin Islands (the “BVI”) also implemented amendments to its beneficial ownership regime effective July 1, 2017, which now requires registered agents of non-exempt BVI companies, such as unregulated private funds, to input beneficial ownership information into a platform called the BOSS (Beneficial Ownership Secure Search) System. The BOSS System is accessible only to select regulators and fulfills BVI commitments to the United Kingdom under the UK Exchange of Notes agreement.

MSRB to Hold Compliance Outreach Program. In a cross-agency announcement, the SEC is partnering with the Municipal Securities Rulemaking Board (“MSRB”) and FINRA to sponsor the 2017 Compliance Outreach Program for Municipal Advisors, a day-long compliance forum to allow industry professionals to discuss compliance practices with regulators and to promote a more effective compliance structure for municipal advisors. The program will be held on November 8, 2017, from 9am to 4pm ET, in the SEC’s Atlanta Regional Office and will be streamed live on the SEC website. The agenda for this event can be located here, and any advisors who are interested in attending can register here.

Compliance Calendar. As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

Deadline – Filing

  • October 1, 2017 – Revised Form ADV 1A goes into effect for all advisers
  • October 16, 2017 – Quarterly Form PF due for large liquidity fund advisers (if applicable).
  • November 14, 2017 – Form PR filings for registered Commodity Trading Advisors (“CTAs”) that must file for Q3 within 45 days of the end of Q3 2017.
  • November 29, 2017 – Form PF filings for Large Hedge Fund Advisers with December 31 fiscal year-ends filing for Q3 2017.
  • November 29, 2017 – Registered Commodity Pool Operators (“CPOs”) must submit a pool quarterly report (“PQR”).
  • December 31, 2017 – Cayman funds regulated by CIMA that intend to de-register (i.e. wind down or continue as an exempted fund) should do so before this date in order to avoid 2018 CIMA fees.
  • Periodic – Fund managers should perform “Bad Actor” certifications annually.
  • Periodic – Amendment due on or before anniversary date of prior Form D filing(s), or for material changes.
  • Periodic – CPO/CTA Annual Questionnaires must be submitted annually, and promptly upon material information changes.

****

Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Mr. Mallon can be reached directly at 415-868-5345.

Cole-Frieman & Mallon 2017 Second Quarter Update

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

****

August 23, 2017

Clients, Friends, Associates:

We hope you are enjoying the summer. Although the second quarter is typically not as busy as the first quarter from a regulatory/compliance standpoint, we saw many regulatory developments this quarter, as well as a surge in digital asset investment activity. Below is an overview of noteworthy items, as well as what to expect as we move into the third quarter.

****

SEC Matters:

Proposed SEC Amendment to Advisers Act for VC and Private Fund Advisors. On May 3, 2017, the SEC proposed a rule to amend the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”), that would amend the definition of a “venture capital fund” and the definition of “assets under management” with respect to the private fund adviser exemption. For purposes of the exemption for advisers to venture capital funds, small business investment companies (“SBIC”) would be included in the definition of a venture capital fund. This would expand exemption coverage for advisers solely relying on the SBIC adviser’s exemption. Eligible advisers would file as an “exempt reporting adviser,” reducing the extra costs and burdens of recordkeeping required of registered investment advisers. Additionally, with respect to the private fund adviser exemption, currently firms that advise solely private funds and that have less than $150 million of regulatory assets under management are exempt from registration with the SEC. The proposed rule would exclude SBIC assets from the calculation of private fund assets used to determine if the $150 million threshold has been crossed. The SEC closed requests for comment on the proposal on June 8, 2017.

SEC Seeks Input Regarding Department of Labor (“DOL”) Fiduciary Rule. SEC Chairman Jay Clayton issued a statement on June 1, 2017 welcoming public input to help the SEC formulate its assessment of the impact the DOL’s Fiduciary Rule (as discussed further below) may have on investors and entities regulated by the SEC. The statement was released in anticipation of a DOL request for information from the SEC to promote consistency and clarity with respect to implementation of the rule between the two agencies. Interested individuals can respond to SEC questions about the rule’s impact on investment advisers and broker-dealers via email or an online webform. Public submissions remain open and are currently available for review.

SEC Action Against Outsourced CCO.  On August 15, 2017, the SEC reached a settlement with an outsourced CCO and his consulting firm, which offered compliance consulting and outsourced CCO services to investment advisory firms. The outsourced CCO served as CCO for two registered investment advisers (collectively, “Registrants”). The SEC found the Registrants either filed their Form ADV annual amendments late or not at all, and the outsourced CCO relied on estimates provided by the Registrants’ CIO. It was established the AUM and number of advisory accounts reported on the Form ADV were greatly overstated, and the outsourced COO did not confirm the accuracy of the information. The SEC held the outsourced CCO violated the Investment Advisers Act by failing to amend the Form ADV annually and willfully submitting a false statement. The SEC suspended the outsourced CCO from association or affiliation with any investment advisers for one year and ordered him to pay a $30,000 civil penalty. The action indicates that outsourced compliance persons solely relying on internal estimates of AUM and number of advisory contracts, without further confirmation, are at risk of filing false reports and subject to enforcement with the SEC.

CFTC Matters:

CFTC Requests Input to Simplify and Modernize Commission Rules. In response to President Trump’s executive order to reform regulations to stimulate economic growth, the CFTC is requesting public input in an effort to simplify and modernize CFTC rules and make complex CFTC regulations more understandable for the public. Rather than rewrite or repeal existing rules, a primary goal of Project Keep it Simple Stupid (“Project KISS“) is to find simpler means of implementing existing rules. The CFTC will review rules with an ultimate goal of reducing regulatory burdens and costs for industry participants. The solicitation period for comments began on May 3, 2017 and will close on September 30, 2017. Comments can be submitted via the Project KISS portal on the CFTC’s website.

CFTC Approves Amendments to Strengthen Anti-Retaliation Whistleblower Protections. The CFTC unanimously approved new amendments to the “Whistleblower Incentives and Protection” section of the Commodity Exchange Act of 1936, as amended (the “CEA”) on May 22, 2017. The amendments provide for greater anti-retaliation measures against employers who attempt to retaliate against employees that report employer CEA violations. Further, the amendments help clarify the process of determining whistleblower awards. The amendments will become effective July 31, 2017.

CFTC Unanimously Approves Recordkeeping Amendment Requirements. On May 23, 2017, the CFTC unanimously approved amendments to Regulation 1.31 to clarify the rule and modernize the manner and form required for recordkeeping. Specifically, the amendment will allow the manner and form of recordkeeping to be technology-neutral (i.e. not requiring or endorsing any specific record retention system or technology, and not limiting retention to any format). The amendments do not expand or decrease any existing requirements pertaining to regulatory records covered by other CFTC regulations.

Digital Asset Matters:

CoinAlts Fund Symposium.  Cole-Frieman & Mallon LLP is pleased to announce that it is hosting, along with fellow symposium sponsors Arthur Bell CPAs, MG Stover & Co., and Harneys Westwood & Riegels, the CoinAlts Fund Symposium on Thursday, September 14, 2017, in San Francisco. This one-day symposium is for managers, investors and service providers in the cryptocurrency space and discussion points will include cryptocurrency investment, as well as legal and operational issues pertaining to this new asset class. The key-note speaker will be Olaf Carlson-Wee, Founder and CEO of Polychain Capital, and the symposium will include a number of other speakers representing the perspectives of investment management, fund administration, audit and tax, custody of funds, offshore fund formation and compliance. Early bird registration for investors, manager and students ends August 31st.

California Proposes a BitLicense via the Virtual Currency Act. Following in New York’s footsteps with its implementation of a BitLicense to regulate virtual currency activity in New York, California has proposed A.B. 1123 (or the “Virtual Currency Act”), its own version of a BitLicense. If passed, any persons involved in a “virtual currency business” must register with the California Commissioner of Business Oversight (the “Commissioner”). Under the Virtual Currency Act, a “virtual currency business” is defined as maintaining full custody or control of virtual currency in California on behalf of others. The application and registration process includes an extensive review of the business by the Commissioner, maintenance of a minimum capital amount, annual auditing, and an application fee of $5,000 with a $2,500 renewal. Currently aimed at those offering exchanges or wallet services we do not believe digital asset fund managers will need to obtain this licence. More information can be found here.

SEC Grants Review of Initial Rejection of Winklevoss Bitcoin Exchange-Traded Fund. In March, the SEC rejected a proposed rule change to list and trade shares of the Winklevoss Bitcoin Trust as commodity-based trust shares on the Bats BZX Exchange. In the disapproval order, the SEC claimed that the bitcoin market was too unregulated at the time, and the BZX Exchange would therefore lack the capability of entering into necessary surveillance-sharing agreements that are required of current commodity-trust exchange traded products. Bats BZX Exchange filed a petition for review of the disapproval order. The SEC granted the petition in April and has yet to release any further comments. As digital asset trading has increased over the past few months, many are looking at the review of the petition as a potential indicator of future cryptocurrency regulation to come.

SEC Petitioned for Proposed Rules and Regulation of Digital Assets and Blockchain Technology.  A broker-dealer operating an alternative trading system (“ATS”) for unregistered securities, petitioned the SEC for rulemaking regarding guidance on digital assets. The Petitioner argued that some digital assets should be considered securities, and that current regimes in the United Kingdom and Singapore can be modeled domestically to successfully facilitate the issuance and trading of digital assets. The model currently used by those countries is known as a “regulatory sandbox,” in which companies are allowed to operate without significant regulatory interference, so long as they do so within a set of established rules. As of today, the SEC has not responded to the petition, but we expect the frequency of petitions and requests for no-action letters to increase as this space continues to grow.

Other Items:

Department of Labor (“DOL”) ‘Implements’ Fiduciary Rule. On June 9, 2017, the DOL partially implemented its amended fiduciary rule (the “Fiduciary Rule”), which expands the definition of a “fiduciary” subject to important exemptions.  On August 9, 2017 the DOL submitted proposed amendments to these exemptions thereby delaying enforcement; and extending the transition period and uncertainty over the ultimate fate of the fiduciary rule by another eighteen months to July 1, 2019. Managers with questions regarding the applicability of these exemptions should discuss with counsel.

Generally, anyone that makes a “recommendation” as to the value, disposition or management of securities or other investment property for a fee or other compensation, to an employee benefit plan or a tax-favored retirement savings account such as an individual retirement account (“IRA”) (collectively “covered account”) will be deemed to be providing investment advice and, thus, a “fiduciary,” unless an exception applies. Many fund managers and other investment advisers may unintentionally be deemed to be fiduciaries to their retirement investors under the amended rule. Fund managers with investments from covered accounts or that wish to accept contributions from covered accounts will need to consider whether their current business activities and communications with investors could constitute a recommendation, including a suggestion that such investors invest in the fund. Under certain circumstances, fund managers may be deemed fiduciaries.  Notably, the Fiduciary Rule provides an exception for activity that would otherwise violate prohibited transaction rules which is applicable to investments made by plan investors who are represented by a qualified independent fiduciary acting on the investor’s behalf in an arms’ length transaction (typically for larger plans). For clients or investors that do not have an independent fiduciary, managers must evaluate whether they are fiduciaries and what actions must be taken to comply with ERISA’s fiduciary standards or the prohibited transaction rules.  The Fiduciary Rule also contemplates a Best Interest Contract (“BIC”) Exemption, which permits investment advisers to retail retirement investors to continue their current fee practices, including receiving variable compensation, without violating prohibited transactions rules, subject to certain safeguards.

We recommend that investment advisers contact their counsel regarding making any necessary updates to the applicable documents.

MSRB Establishes Continuing Education Requirements for Municipal Advisors. Beginning January 1, 2018, the Municipal Securities Rulemaking Board (“MSRB”) will implement amendments requiring municipal advisors to have a continuing education program in place for “covered persons” and require such persons to participate in continuing education training. The amendment will require an annual analysis to evaluate training needs, develop a written training plan, and implement training in response to the needs evaluated. The amendments also provide for record-keeping of the plans and analysis to promote compliance. Municipal advisors will have until December 31, 2018 to comply with the new requirements. To further clarify the requirements, the MSRB will be hosting an education webinar for municipal advisors on Thursday October 12, 2017, from 3:00 p.m. to 4:00 p.m. EDT.

Full Implementation of MSRB Series 50 Examination. The grace period for municipal advisor representatives and municipal advisor principals that have not passed the Series 50 examination to qualify as a municipal advisor representative or principal will be ending on September 12, 2017. Thereafter, all municipal advisor professionals who either engage in municipal advisory activities or engage in the management or supervision of municipal advisory activities will be required to pass the Series 50. The MSRB has a content outline which specifies eligibility, the structure of the exam, and the regulations to be tested.

Form ADV Technical Amendment Including Wyoming for Mid-Size Advisers. On July 1, 2017, a technical amendment to Form ADV was implemented to reflect a new Wyoming law that now requires investment advisers with $25 million to $100 million in AUM and a principal place of business in Wyoming to register with the state as an investment adviser instead of the SEC. The technical amendment will also appear on Form ADV-W.

Further Updated CRS Guidance Notes. The Cayman Islands Department for International Tax Cooperation (“DITC”) and the Cayman Islands Tax Information Authority (“TIA”) issued further guidance notes on April 13, 2017 for compliance with Automatic Exchange of Information (“AEOI”) obligations. Among some of the more important notes are the following:

  • US FATCA notification and reporting deadlines will now parallel the Common Reporting Standard (“CRS”) deadlines. The notification deadline was June 30, 2017, and the reporting deadline will be July 31, 2017.
  • The deadline for correcting any FATCA report errors for 2014 and for 2015 will be July 31, 2017.
  • CRS reporting must be completed with the CRS XML v1.0 or a manual entry form on the AEOI portal.

We recommend contacting your tax advisors to discuss any potential issues regarding the above updates and deadlines.

Compliance Calendar. As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

Deadline – Filing

  • July 15, 2017 – Quarterly Form PF due for large liquidity fund advisers (if applicable).
  • July 30, 2017 – Collect quarterly reports from access persons for their personal securities transactions.
  • August 14, 2017 – Form 13F filing (advisers managing $100 million in 13F Securities).
  • August 29, 2017 – Quarterly Form PF due for large hedge fund advisers (if applicable).
  • September 30, 2017 – Review transactions and assess whether Form 13H needs to be amended.
  • October 2017 – Revised Form ADV 1A goes into effect for advisers filing an initial ADV or an annual updating amendment.
  • October 16, 2017 – Quarterly Form PF due for large liquidity fund advisers (if applicable).
  • November 14, 2017 – Form 13F filing (advisers managing $100 million in 13F Securities).
  • November 29, 2017 – Quarterly Form PF due for large hedge fund advisers (if applicable).
  • Ongoing – Amendment due on or before anniversary date of prior Form D filing(s), or for material changes.
  • Ongoing – Due on or before anniversary date, and promptly when material information changes


Please contact us with any questions or for assistance with any compliance, registration or planning issues on any of the above topics.

Sincerely,
Karl Cole-Frieman, Bart Mallon & Lilly Palmer

****

Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Mr. Mallon can be reached directly at 415-868-5345.

Hedge Fund Bits and Pieces for June 16, 2017

We are a day late but hope you had a happy Friday.  As has been the trend, we are seeing a large focus on cryptocurrency assets and this update reflects that focus.

****

Speaking on Cryptocurrency Hedge Funds – I will be in New York next week to speak Thursday at the Blockchain, Accounting, Audit & Tax Conference.  The conference will have panels speaking throughout the day on various blockchain related issues.  I will be part of a panel entitled “Digital Asset Management and New Financial Products” where we will discuss current and future investment vehicles as well as how investors are (and should be) viewing these products.  More information on the event can be found here.

California BitLicense – continuing the trend toward increased regulation of digital assets, California has proposed (for a second time) a regulatory regime for certain exchanges dealing with bitcoin and other “virtual currency”.  This legislation comes on the heels of New York’s BitLicense requirement, along with other regulators beginning to look at blockchain based digital assets.  As described below, we believe the SEC will be addressing the industry soon with questions and comments regarding certain aspects of the FinTech industry.  For more on the California BitLicense requirement, please see here.

Industry asks SEC to Publish Concept Release on Regulation of Digital Assets – a FINRA registered broker-dealer recently petitioned the SEC to provide guidance with respect to the regulation of digital assets (to be called Regulation DA).  The broker-dealer asked that the SEC also consider adopting a regulatory sandbox for certain FinTech companies, similar to what is being employed in the UK and Singapore (the latter of which has seen a large influx of oversight/regulation of ICOs).  The broker-dealer also mentioned that the regulation of digital assets should be consistent with crowdfunding regulations given that digital assets (ICOs specifically) share many characteristics in common with the crowdfunding industry.  You can access the full petition here.

Financial CHOICE Act of 2017 – on June 8, the House of Representatives passed the Financial CHOICE Act which is aimed at rolling back many of the changes implemented by the Dodd-Frank Act.  There are a number of interesting things that this bill introduces, including: structural changes to the SEC, repeal of the Department of Labor’s (DOL’s) fiduciary rule, restructure the CFPB, and repeal the Volker Rule.  All of the above would affect the investment management industry in profound ways but it is unlikely we will see any movement on this bill in the Senate any time soon.  When and if we do, we will provide more analysis on the content of any legislation that is likely to pass and be implemented.  An executive summary of the bill can be found here. The full text can be found here.

****

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.

Hedge Fund Bits and Pieces for May 26, 2017

Happy Friday.  Best wishes for a happy and safe Memorial Day weekend!

****

Initial Coin Offerings – Bitcoin and other cryptocurrencies took center stage this weeks as new high prices were reached in volatile trading and euphoria around the Consensus Conference earlier this week. Initial coin offerings (or ICOs) were a major topic discussed and should be a major topic going forward.

Artificial Intelligence Hedge Funds – perhaps lost over the last couple of weeks in the discussion of cryptocurrencies has been the general movement in finance toward utilizing artificial intelligence in the investment process. We recently wrote about artificial intelligence hedge fund strategies and detailed the issues that managers should consider when launching a fund in this space.

DOL Rule Effective June 9 – the delay of the DOL rule was short lived.  The DOL recently published a news release announcing that initial implementation of the rule would begin on June 9 (as opposed to April 10, the originally scheduled implementation date) and that “advisers to retirement investors will be treated as fiduciaries and have an obligation to give advice that adheres to “impartial conduct standards” … [t]hese fiduciary standards require advisers to adhere to a best interest standard when making investment recommendations, charge no more than reasonable compensation for their services and refrain from making misleading statements.”

For hedge fund managers, life does not change to a large extent (managers will likely need to update their subscription documents and may need to obtain additional representations from IRA and ERISA investors for any new investment made after June 9, 2017).  SMA managers will need to be careful and should review their relationship with retirement investors.  More information on this will be forthcoming on this blog and in our client updates.

CFTC Focus on FinTech – the CFTC launched a LabCFTC Initiative which “aimed at promoting responsible FinTech innovation to improve the quality, resiliency, and competitiveness of the markets the CFTC oversees.”  The overall goal of the program is to promote innovation for new FinTech products while providing the sponsors of such products more insight into the potential regulatory oversight of those products.  Central to that goal will be GuidePoint which will act as “dedicated point of contact for FinTech innovators to engage with the CFTC, learn about the CFTC’s regulatory framework, and obtain feedback and information on the implementation of innovative technology ideas for the market.”  This sort of proactive approach to innovation by regulators should be a welcome sight to new product sponsors.

Other Items

Cooperman Insider Trading Settlement – Leon Cooperman settled his insider trading case with the SEC, which released an interesting statement on the settlement.  While the settlement allows Cooperman’s fund, Omega, to continue operating, Cooperman and Omega were subject to a $1.7M fine for insider trading.  More importantly, the firm must retain an onsite independent consultant for the next 5 years to guard against insider trading.  There were a couple of additional requirements of the settlement which, with the various fines and independent consultant requirement, have to make the SEC feel like they got a big win here.  It will be interesting to see how or if this settlement is used as precedent in future cases.

SEC Issues Cybersecurity Alert – on the heels of the WannaCry ransomeware attack, the SEC issued a Cybersecurity Alert.   The alert is geared more towards smaller broker-dealers and investment advisory firms and provides background and links to other SEC resources on this issue.

New York Employers Cannot Ask About Salary History – on May 4, New York Mayor de Blasio signed a bill making it illegal (and subject to fines) for an employer to ask questions about a candidate’s prior compensation.  Hedge fund managers located in New York will want to discuss this issue with their internal HR persons, as well as their outside counsel.  The bill is called “Intro. 1253” and  goes into effect 180 days after the signing. A cached version of the de Blasio press release can be found here.

****

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.

Hedge Fund Bits and Pieces for May 12, 2017

Happy Friday.

****

SEC New Chairman Jay Clayton Sworn In – last week Justice Anthony Kennedy swore in Jay Clayton as the new SEC Chairman.  Clayton has a long background working in the the securities industry at a large law firm and has acted as a law school professor with respect to various aspects of the securities industry.  Clayton begins the Chairmanship during rapidly changing times – technological innovation is changing both the products in the securities industry as well as how market participants interact with those products.  We are both excited and hopeful that he will be able to lead the SEC in this this environment to adequately protect investors while also encouraging innovation and growth within the industry.  More information on his background can be found in the SEC press release.

State Cybersecurity Workshop – we hear about cybersecurity threats on an almost daily basis now; last week introduced a phishing scam involving Google Docs.  As this issue continues to be a forefront issue, the regulators and states are trying to help industry participants become better prepared in this area.  As an example, Washington state just announced that it will hold a “Cyber Security Workshop for Small & Medium Businesses”  in Washington state in conjunction with the National Cyber Security Alliance (NCSA).  We anticipate we will see more initiatives like this for investment managers going forward and encourage all managers to continue their education in this area.

CFTC Reduces Burden for Swap CCOs – last week the CFTC published in the Federal Register amendments to regulations applicable to certain chief compliance officers of firms that engage in swaps.  We recognize that these CCOs have a very difficult job (especially as the products become more and more complex) and we applaud the CFTC for attempting to identify areas where regulatory burdens can be lifted.  We anticipate there will be a number of comments in this area, which are due by July 7, and we will provide updates as applicable.

Other Items

AI Trend Continues – we note that a number of the legal projects we are currently working on deal with Artificial Intelligence (AI) in some way.  A service provider to the investment management industry, Orbital Insight, showcase that AI is front and center on the minds of the industry when it announced a $50M Series C round.

State Carried Interest Tax Changes? – according to this update a number of states are contemplating changes to the manner in which carried interest is taxed.  It seems like it will be a bit of a waiting game until a Federal tax bill is proposed, but it is interesting to note that there seems to be some kind of momentum toward changing the manner of taxation.

CFTC Requests Public Input on Simplifying Rules – the CFTC announced that it is asking for input on how regulations should be modified to better address regulatory items and to reduce costs.  We think this is a step in the right direction and also mirrors the initiative by FINRA (which we reported on earlier).  We believe that investor protection is paramount, but we also believe that modifications to certain investment regulations can increase efficiency and reduce costs for market participants which would be a benefit for everyone.  For more information see the CFTC’s ProjectKiss site; comments are generally due by September 30.

****

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.

Hedge Fund Bits and Pieces for April 28, 2017

Happy last Friday of April.

****

Cole-Frieman & Mallon LLP 2017 1st Quarter Update – we were a little late for this first quarter but the update addresses a number of items including:

  • Trump and Dodd-Frank Reform
  • DOL Fiduciary Rule Delay
  • Bitcoin Regulatory Matters
  • California’s Public Investment Fund Disclosure Requirements
  • SEC No-Action Letter and Guidance Clarify Inadvertent Custody
  • SEC / FINRA 2017 Exam Priorities
  • Compliance Calendar

Trump Tax Plan & Financial Industry – while our quarterly update talked in part about potential future reform of the financial system, there is not really much to say yet about Trump’s one page tax plan.  We do know, obviously, that the details will be forthcoming, but this plan leaves a lot of open questions and (surprise) remains silent on the carried interest issue. One item to note is that the tax plan proposes to repeal the 3.8% Obamacare tax – this is important because many fund managers have established structures to minimize the impact of this tax to the manager.  As more information rolls out, we expect to hear from both accountants and tax planners about how any new tax plan would affect the private funds industry.

Blockchain / Cryptocurrency / Altcoin Items – there continues to be an onslaught of items dealing with blockchain technology in the financial services sector, and we included some discussion of these items in our quarterly update linked above.  On Wednesday of this week I attended EY’s Global Blockchain Summit in San Francisco (more on this coming soon). In addition, FINRA just announced a Blockchain Symposium which will be held in New York on July 13.  According to the announcement, the “half-day program is designed to bring together regulators and industry leaders to discuss the use of blockchain and related opportunities and challenges.”  It is important to note that blockchain appears to be an inevitable new structure/paradigm in business generally and investment management specifically – surprisingly, the regulators seem to be aware of this sea change and ready to work with the industry to implement appropriate regulatory structures to address investor protection concerns.

Other Items

Connecticut Hedge Fund Tax – there have been a few news articles about a potential tax on private fund managers in Connecticut.  I have not kept up on this issue in depth, but it should be interesting to see how this plays out and whether any other states will follow suit.

FINRA Insider Trading Information – FINRA has begun to take an active role in finding and dealing with insider trading.  Just recently they released an interesting video with Cam Funkhouser, Executive Vice President of FINRA’s Office of Fraud Detection and Market Intelligence (OFDMI), about insider trading and some “red flags” to look out for.

FINRA Bootcamps – FINRA announced three compliance boot camps for may – Dallas (May 11), Memphis (May 17) and Charolette (May 31).

****

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.

Cole-Frieman & Mallon 2017 First Quarter Update

Below is our quarterly update which went out via email today to our firm’s clients and friends.  Links coming soon.

****

April 27, 2017

Clients, Friends, Associates:

We hope that you are enjoying an auspicious start to 2017. The first quarter of the year is typically one of the busiest for fund managers from a regulatory standpoint. As a variety of filing deadlines have passed and audit work is completed (or will be soon), we enter the second quarter with a number of important regulatory issues on the horizon, as well as many other topics worthy of discussion. Below, we have prepared a short overview of some of these items.

****

Regulations and Proposed Regulations:

Trump Executive Order Could Reform Dodd-Frank. President Trump issued an executive order on February 3, 2017, setting out seven “Core Principles” which will serve as general guidelines for financial regulatory reform. The Core Principles include making regulation more efficient, effective and appropriately tailored, as well as rationalizing the Federal financial regulatory framework. The order appears implicitly targeted at reforming the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and decreasing many of the current financial regulations, but we note that any changes to the current regulatory landscape may not be as immediate as many initial reactions assumed. According to the order, the Treasury Secretary is to meet with the various agencies that oversee and implement Dodd-Frank (including the SEC), to discuss areas that may be amended. While a repeal of Dodd-Frank is unlikely, the coming months may bring a number of deregulatory changes. We will be following any resulting changes and will discuss significant impacts of such changes in future quarterly updates.

Department of Labor Delays Fiduciary Rule. On April 7, 2017, in response to a presidential memo from President Trump, the Department of Labor (“DOL”) issued a Final Rule delaying the applicability of the “Fiduciary Rule” until June 9, 2017, although full compliance with the Fiduciary Rule is still expected by January 1, 2018. We had previously discussed the Fiduciary Rule, which expanded the scope of who is considered a “fiduciary”, imposing fiduciary obligations on firms which were historically free from such obligations. While the DOL will use the delay to reexamine the Fiduciary Rule and consider modifications to it, if you have not already done so, we recommend that you review and speak with your counsel about whether you would be considered a fiduciary and what additional obligations and implementation processes will need to be incorporated into your business practices.

CFTC Regulation of Bitcoin and Virtual Currencies. There has been an increasing interest in investments in Bitcoin and other cryptocurrencies as the financial and technological landscape evolves, but determining the regulations applicable to such products is less clear. While the CFTC established that Bitcoin and other virtual currencies are “commodities” within the definition of the Commodity Exchange Act of 1936, as amended (“CEA”), under the CEA, only commodity interests (which include futures, options, derivatives and certain spot transactions) based on the commodity are within the scope of the CFTC’s jurisdiction. Recent enforcement actions brought by the CFTC have helped clarify whether a transaction is subject to CFTC regulation. In an Order issued against the Coinflip, Inc. platform (“Coinflip”), the CFTC imposed sanctions against Coinflip for operating a facility for trading Bitcoin derivatives without being registered as a futures exchange or swap execution facility. In a contrasting enforcement action brought against the Bitfinex platform (“Bitfinex”), which did not list or permit the trading of derivatives, the CFTC asserted its jurisdiction over Bitfinex on the basis that the platform dealt in “retail commodity transactions”— leveraged, margined or financed transactions involving a commodity that are offered to persons that are not “eligible contract participants” — without being registered as a futures commission merchant with the CFTC. Certain retail commodity transactions are exempt from CFTC jurisdiction if the seller “actually delivers” the commodity to the buyer within 28 days of the date the contract was entered into; the CFTC deemed that Bitfinex did not “actually deliver” the cryptocurrencies to buyers because among other reasons, Bitfinex held the private key controlling access to the wallet where the buyers’ cryptocurrencies were held.

Managers investing in Bitcoin or other virtual currencies should consider whether and to what extent the types of transactions may subject them to CFTC jurisdiction and potential registration as a CPO or CTA. In the current regulatory landscape, we believe managers who invest purely in virtual currencies and who do not employ virtual currency derivatives or leverage are outside the scope of the CFTC’s jurisdiction, and should not be required to register as a CPO or CTA. Although further regulation is expected, firms should speak with outside counsel to confirm their status in light of the current regulatory framework.

Other Regulation of Bitcoin and Virtual Currencies. While the CFTC has been the most active regulatory authority to address investments in cryptocurrencies, managers should be cognizant that states (including New York), the SEC, FINRA and FinCEN are also deliberating the question of appropriate regulatory oversight. We will continue to monitor regulatory developments and more information about certain regulatory aspects applicable to private funds can be found in our blog post on Bitcoin / Cryptocurrency Hedge Funds.

NFA Provides Guidance on Amended CPO Financial Report Requirements. In our previous 2016 End of Year Update we discussed the CFTC’s amendments providing relief from certain financial report requirements for commodity pool operators (“CPOs”), which became effective on December 27, 2016. The NFA released a Notice setting forth instructions regarding how CPOs can file the appropriate notices with the NFA to claim any of the relief provided for in the amendments. CPOs who are eligible for the amended regulations should contact counsel or compliance consultants, or review the Notice, to determine whether any further action may be warranted to claim the appropriate relief.

U.S. and Global Regulators Relax March 1st Deadline for Swap Variation Margin Compliance. The Federal Reserve and the International Organization of the Securities Commission have provided some flexibility for swap dealers facing a March 1, 2017, deadline to implement certain variation margin compliance requirements for uncleared swaps. The rules require swap dealers to collect and post variation margin with no credit threshold unless an exception applies. Further, covered counterparties would be required to enter into new or amended credit support documentation, limit the types of collateral that may be posted and prescribe minimum transfer amounts. Compliance with the requirements can be challenging for swap entities and their counterparties as they work to implement the necessary documentation and underlying operational processes. Except for transactions with financial end users that present “significant exposures,” the Federal Reserve’s guidance directs examiners of CFTC-registered swap dealers to focus on the dealer’s good faith efforts to comply as soon as possible but by no later than September 1, 2017.

BEA Makes Changes to Direct Investment Survey Reporting Requirements for Certain Private Funds. The Bureau of Economic Analysis’ (“BEA”) changes to its direct investment surveys went into effect on January 1, 2017. The reporting changes apply to investments by U.S. entities of a 10% or more voting interest in a private fund, and to investments by foreign entities of a 10% or more voting interest in a U.S. domiciled fund. Under these changes, any cross-border voting investments of 10% or more in, or by, private funds will be subject to BEA reporting only if such investments involve, directly or indirectly, a direct investment in an “operating company” that is not another private fund or a holding company. The changes will simplify reporting for private funds because certain direct investments in private funds will be re-characterized as portfolio investments depending on the nature of the private fund’s investments. Many hedge funds that were traditionally subject to BEA direct investment reporting because of cross-border voting interests will instead only be required to report on portfolio investments to the Treasury Department on Treasury International Capital (“TIC”) surveys. The BEA will notify any filers that may be potentially affected by these changes, but we recommend that advisers consult with counsel to determine what, if any, BEA and/or TIC reporting obligations they may have.

Treasury Department Proposes New Anti-Money Laundering Rules for Investment Advisers. The Treasury Department’s Financial Crimes Enforcement Network previously proposed extending the requirements of maintaining a formal anti-money-laundering (“AML”) program under the Bank Secrecy Act of 1970 to SEC-registered investment advisers (“RIAs”). The final rule is expected to be published soon, and would require SEC RIAs to establish a robust AML program with policies and procedures to identify questionable activity, periodic testing of the program and ongoing training of appropriate personnel.

Other Items:

California’s Public Investment Fund Disclosure Requirements Now Effective. In our third quarter update, we reported that California passed a bill requiring increased disclosure by private fund managers for funds with investments by California state and local public pension and retirement systems. The legislation went into effect on January 1, 2017. All public pension and retirement systems in California must require hedge funds, private equity funds, venture capital funds and any other alternative investment vehicles in which they invest to disclose certain information regarding the fund’s fees, expenses and performance. In addition to applying to new contracts entered into on or after January 1, 2017, and pre-existing contracts with new capital commitments made on or after January 1, 2017, the legislation requires that public pension and retirement systems make “reasonable” efforts to obtain the increased disclosure information for contracts entered into prior to January 1, 2017. Fund managers with California public plan investors should review the types of information that will need to be provided to such investors and prepare to provide the required information.

SEC No-Action Letter and Guidance Clarify Inadvertent Custody. On February 21, 2017, the SEC issued a no-action letter responding to a request for clarification from the Investment Advisers Association as to whether an investment adviser has custody of a client’s assets if the adviser acts pursuant to a standing letter of instruction or other similar arrangement established between the client and its custodian (“SLOA”), that grants the adviser limited authority to direct transfers of the client’s funds to one or more third parties. The SEC’s position is that an SLOA that authorizes the adviser to determine the amount and timing of payments, but not the payee’s identity, is sufficient authority to result in the adviser having custody of the assets. However, the SEC agreed that it would not recommend an enforcement action against an adviser that does not obtain a surprise examination, if the adviser acts pursuant to an SLOA under certain specific circumstances set forth in the SEC’s letter. The SEC also reaffirmed that advisers will not be deemed to have custody of client assets if the adviser is given limited authority to transfer client assets between the client’s accounts maintained at one or more custodians.

To further clarify its views on inadvertent custody, the SEC also issued a guidance update highlighting certain circumstances where an investment adviser may inadvertently have custody of client funds or securities. An adviser may have custody because of the wording or rights of custodial and advisory agreements, even if the adviser did not intend to have custody and was not aware it was granted the authority that resulted in its having custody. We urge advisers to separately managed accounts to review their client agreements and any SLOAs they have entered into to determine whether their specific arrangements may cause them to have custody, and to evaluate their policies and practices related to custody of client assets.

SEC Published Examination Priorities for 2017. The SEC announced its Examination Priorities for 2017, which focus on themes of examining matters of importance to retail investors, focusing on risks specific to elderly and retiring investors and assessing market-wide risks. Specifically, the SEC will focus on: (i) identifying initiatives designed to assess risk in the context of retail investors, including never-examined investment advisers and exchange-traded funds, and notably, robo-advisers and other automated, electronic investment advice platforms, including the investment advisers and broker-dealers that offer them; (ii) services provided to retirement accounts, such as variable insurance products and fixed-income cross-transactions, as well as investment advisers to pension plans and other large holders of U.S. investor retirement assets; and (iii) cybersecurity, and systems and technology procedures and controls.

FINRA Published Examination Priorities for 2017. Similar to the SEC, the Financial Industry Regulatory Authority, Inc. (“FINRA”) recently published its 2017 Regulatory and Examination Priorities Letter, outlining the organization’s enforcement priorities for the current year. FINRA’s specific focus areas for 2017 will include: (i) supervisory policies and compliance controls for high-risk and recidivist brokers; (ii) sales practices and product suitability for specific investors; (iii) firm liquidity management practices; and (iv) cybersecurity issues. We recommend that you speak with your firm’s outside counsel and service providers to learn more about these specific priorities and review your firm’s compliance with the applicable regulations.

Cayman Islands Extends CRS First Notification and Reporting Deadlines. The Cayman Islands Department for International Tax Cooperation (“DITC”) has issued an industry advisory stating that it is adopting a “soft opening” to the notification and return deadlines required for Financial Institutions’ (“FIs”) compliance with the Common Reporting Standard (“CRS”). All FIs in the Cayman Islands are required to register with the Cayman Islands Tax Information Authority (“TIA”) by April 30, 2017, and to submit returns to the TIA by May 31, 2017. With the DTIC’s adoption of a “soft opening,” FIs may submit CRS notifications on or before June 30, 2017, and file “accepted” CRS returns on or before July 31, 2017, without any compliance measures or penalties.

Ninth Circuit Rules Internal Reports Protected under Whistleblower Rules. On March 8, 2017, the Ninth Circuit followed a ruling by the Second Circuit in finding that an employee who makes a report internally, rather than to the SEC, is protected under Rule 21F-17 of the Securities Exchange Act of 1934, as amended (“Whistleblower Rule”) enacted under Dodd-Frank. In contrast, the Fifth Circuit previously ruled that the provisions of the Whistleblower Rule only apply when an employee makes disclosures directly to the SEC. The Ninth Circuit and Second Circuit rulings reflect a broad interpretation of the definition of a whistleblower, and signal a split among the circuit courts on who may be considered a whistleblower for purposes of protection under the Whistleblower Rule.

Regulatory Assets Under Management. We have observed that many managers have expressed confusion regarding the calculation of assets under management (“AUM”) for purposes of filing the Form ADV and determining when the manager may be subject to SEC registration. We thought it would be helpful to clarify that investment advisers must look to their “regulatory assets under management” (“RAUM”), a specific metric designed by the SEC, which is calculated differently from the more common and more traditionally understood calculation of AUM. In calculating RAUM, managers should include the value of all assets managed without deducting for any offsetting liabilities. Managers with questions about the calculation of specific assets or managers seeking further clarification of RAUM should speak with their firm’s outside counsel or compliance consultants.

Compliance Calendar. As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

Deadline – Filing

  • March 31, 2017 – Deadline to update and file Form ADV Parts 1, 2A & 2B
  • April 10, 2107 – Amendment to Form 13H due if necessary
  • April 15, 2107 – 1st Quarter 2017 Form PF filing for quarterly filers (Large Liquidity Fund Advisers)
  • April 28, 2107 – Collect quarterly reports from access persons for their personal securities transactions
  • April 28, 2107 – Distribute code of ethics and compliance manuals to employees. Require acknowledgement form to be executed in connection with such delivery
  • April 28, 2107 – Annual Privacy Notice sent to all clients or fund investors (for Advisers with Fiscal Year ending December 31)
  • April 28, 2107 – Distribute audited financial statements to investors (most private fund managers, including SEC, state and CFTC registrants)
  • April 28, 2107 – Distribute Form ADV Part 2 to clients
  • April 30, 2107 – Quarterly NAV Report (registered commodity pool operators claiming the 4.7 exemption)
  • May 1, 2107 – 2016 Annual Form PF due date for annual filers (Large Private Equity Fund Advisers and Smaller Private Fund Advisers)
  • May 15, 2017 – Quarterly Commodity Trading Advisor Form PR filing
  • May 15, 2017 – File Form 13F for first quarter 2017
  • May 31, 2017 – First deadline for Cayman Islands Financial Institutions to submit their CRS returns to the Cayman Islands Tax Authority
  • May 31, 2017 – Third reporting deadline (full reporting) for Cayman Islands Financial Institutions with reporting obligations under the Cayman FATCA regulatory framework to report their U.S. Reportable Accounts to the Cayman Islands Tax Authority
  • June 30, 2017 – Distribute audited financial statements to investors (private fund managers to funds of funds, including SEC, state and CFTC registrants)

Variable

  • Distribute copies of K-1 to fund investors
  • Ongoing All Limited Non-U.S. Financial Institutions and limited branches that seek to continue such status during the 2017 calendar year must edit and resubmit their registrations after December 31, 2015, on the FATCA registration website; SEC form D must be filed within 15 days of first sale of securities

Please contact us with any questions or for assistance with any compliance, registration or planning issues on any of the above topics.

Sincerely,
Karl Cole-Frieman, Bart Mallon & Lilly Palmer

Hedge Fund Bits and Pieces for April 14, 2017

Happy Friday.  Markets are closed today for the holiday and it is tax day this Tuesday.  Enjoy the weekend!

****

SEC Brings Actions Against Authors on Investment Article Platforms – platforms like Seeking Alpha and SumZero have been popular places for investment managers to post articles about their investment ideas.  Managers post for a number of reasons including to hone their own investment thesis, hear counterarguments and to generally be part of a community actively involved in the discussion of ideas.  We routinely work with managers who are posting articles on these platforms and help them think about the compliance obligations they have with respect to any postings.

The SEC just announced a major series of enforcement actions against 27 individuals for posting fake and fraudulent articles on these platforms.  Settlements have already ranged from $2,200 to almost $3 million.  While the standard hedge fund manager we deal with is unlikely to be involved in the creation of fake or fraudulent articles (or using these platforms to manipulate positions), these enforcement actions show that the SEC is actively looking at information posted on the internet as a way to find persons involved in securities violations.   Most registered managers will already have social media policies in place that should deal with situations like this, including how to document the posting, but we also recommend that managers discuss articles with their attorneys or compliance personnel before posting.  We believe that (to the extent it has not already happened) the SEC will be closely scrutinizing internet postings during routine manager examinations and that managers need to make sure any such actions are not manipulating the markets (in addition to making sure there is no appearance of manipulation).

FINRA 360 Announced – FINRA just announced a new initiative to “evaluate various aspects of its operations and programs to identify opportunities to more effectively further its mission.”  The initiative is was announced as FINRA 360 in Regulatory Notice 17-14 and focuses on the following, in addition to other FINRA rules: CAB Rules, Funding Portal Rules, Numerous FINRA rules and the Trading Activity Fee.  The goal of FINRA 360 is to ”increase efficiency and reduce unnecessary burdens on the capital-raising process without compromising important protections for issuers and investors” which we think is a step in the right direction.  However, we have previously discussed two FINRA initiatives (here re CABs and here re scrapping the 7) as perhaps a bit misguided.  In any event, we think FINRA is taking a great step here and we also believe that this provides an opportunity for the industry to provide FINRA with meaningful feedback and ideas.  All are encouraged to comment and comments are due by May 30, 2017.

Greyline Solutions Expands Compliance Offering to Broker-Dealers – the regulatory compliance consulting company Greyline Solutions (editors note: I am a minority owner in this business) announced the upcoming acquisition of Vista Compliance which will add significant broker-dealer expertise to its RIA offerings.  For more information, please see the press release.

****

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.

Hedge Fund Bits and Pieces for March 31, 2017

Happy Friday and congrats to everyone on making it though the first quarter!  Our firm will be sending out a 2017 first quarter update sometime in the next couple of weeks – if you are not on the distribution list and would like to be, please contact us.  We will also post the update to this blog.

****

Annual ADV Updatedue TODAY by 11pm ET (when IARD system shuts down).  The ADV annual updates are due today.  Most firms have submitted their updates by now but if you have not done so, please call your legal or compliance professional immediately.  Additionally, fund managers generally will have their audits completed by today and those should be sent to investors as per the firm’s compliance procedures.

Another Bitcoin Trust Rejected by SEC – on Tuesday the SEC rejected an application by NYSE Arca to list shares of SolidX Bitcoin Trust.  The trust was set to a publicly traded vehicle designed to track the price of bitcoins as measured by an index of unregulated bitcoin exchanges (Bitfinex, Bitstamp, GDAX, itBit, and OKCoin International).  In rejecting the application, the SEC stated that it believes that the bitcoin markets are unregulated.  This is the second rejected listing of a bitcoin product for retail investors (see earlier post discussing the rejection of the Winklevoss bitcoin ETF).

SEC Focus on FinTech – it is abundantly clear that technology is beginning to change the capital markets in profound ways.  As practitioners, we are working with our clients to figure out how new ways of investing fit within the current regulatory structures applicable to both products and managers.  As these changes take deeper root, there will be growing pains and the SEC realizes this – below are recent remarks made on Monday in Washington by acting SEC Chairman Michael Piwowar about the FinTech industry and how the SEC will be working in the space in the future.  The full speech, made at the beginning of the SEC’s 27th Annual International Institute for Securities Market Growth and Development, can be found here.

Financial technology (“FinTech”) is also revolutionizing our industry. FinTech can bring tremendous benefits – streamlined market operations and more affordable ways to raise capital and advise clients.  Fifty-nine percent of all adults in developing nations do not have a bank account – but this is changing fast. With cell phones now in the pockets of many individuals in even the poorest of nations, mobile technology has greatly cut down on barriers to accessing capital. In Kenya, for example, I saw firsthand the transformative power of FinTech. Sixty-eight percent of Kenyan adults use their mobile phones for monetary transactions. In 2013, over 25% of the Kenyan GNP was transferred via M-PESA, the leading mobile money transfer service in the country. Services like M-PESA are not only for the transfer of money, but also can be used to take out micro-loans that would have been previously unavailable to small businesses.  The question for us regulators is how can we encourage this innovation and all the potential benefits that it promises, while also managing the risks? At the SEC, we started a FinTech working group. Not surprisingly, FinTech firms report that their greatest struggle is navigating a complex regulatory environment. The SEC, and other securities regulators, should take the leading role in working with the FinTech community to adapt longstanding laws and regulations to newfangled technology. (footnotes omitted)

Other Items:

  • CFTC Announces Committee Meeting on Cybersecurity – the CFTC just announced that the Market Risk Advisory Committee (MRAC) will meet on April 25, 2017 to discuss a number of important issues related to the futures and commodities markets.  A central focus of this meeting will be focused on cybersecurity trends in the futures markets.  The discussion will also cover “how well the derivatives markets are currently functioning, including the impact and implications of the evolving structure of these markets on the movement of risk across market participants” – we anticipate that some part of the discussion will focus on certain new instruments like cryptocurrencies and the emerging derivate products linked to such instruments.  The MRAC’s meeting will be public and be held at the CFTC’s Washington, DC, headquarters.
  • Adidas Trademark Issue – while not directly related to the investment management industry, this blog post (produced by our Of Counsel trademark attorney Bill Samuels) highlights the technical nature of the enforcement of trademarks.  It also highlights the strength of a registered mark (the sale of only two hats, which contain a trademarked phrase, are enough to implicate interstate commerce and allow a trademarked phrase to be protected under the trademark laws).  It is important for managers with questions on their trademarks and other intellectual property to discuss these matters with counsel.

****

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.

Hedge Fund Bits and Pieces for March 17, 2017

Happy Friday. This week’s updates below.

****

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.

****

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.