Tag Archives: CPO

Cole Frieman & Mallon 2018 End of Year Update

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

****

December 15, 2017

Clients, Friends, Associates:

Holiday celebrations bring welcomed joy and excitement to the busiest time of year for most investment managers.  As we prepare for a new year, we also reflect on an eventful 2017 year that included the emergence of a new asset class, a steady upswing in the stock market, and proposed legislation to revise the United States tax code. Regardless of all of the changes to the investment management space, year-end administrative upkeep and 2018 planning are always particularly important, especially for General Counsels, Chief Compliance Officers (“CCO”), and key operations personnel. As we head into 2018, we have put together this checklist and update to help managers stay on top of the business and regulatory landscape for the coming year.

This update includes the following:

  • Cryptocurrency Leadership
  • Annual Compliance & Other Items
  • Annual Fund Matters
  • Annual Management Company Matters
  • Regulatory & Other Changes in 2016
  • Compliance Calendar

****

Cryptocurrency Leadership:

This year digital assets and cryptocurrencies have emerged in force as a separate and distinct asset class. An increased interest in this asset class from fund managers, financial institutions and various government leaders and regulators throughout the world has led to an exponential growth of cryptocurrency investments, the CFTC’s approval of two exchanges to trade Bitcoin futures contracts has increased attention on the asset class.

For SEC registered investment advisers who are adding cryptocurrencies to their fund investment programs and for cryptocurrency focused fund managers who may be relying on SEC exemptions from registration, the need to understand the regulatory implication of certain practices is of utmost importance. Specifically, managers face uncertainty regarding the application of the qualified custodian requirement under Rule 206(4)-2 (“Custody Rule”) under the Investment Advisers Act of 1940, as amended (“Advisers Act”).  Under the Custody Rule, if a registered investment adviser has custody of “client funds or securities”, then it must maintain those client assets with a qualified custodian (generally a bank, broker-dealer, FCM or other financial institution), subject to certain exceptions. Currently we know of only one qualified custodian capable of holding certain cryptocurrencies or digital assets. Our firm participated in a meeting with the SEC in November about custody issues for cryptocurrency managers and continues to engage with the SEC on this issue as well as work with the SEC and other service providers in this space to help lead the way to comply with SEC rules and regulations.

****

Annual Compliance & Other Items:

Annual Privacy Policy Notice. On an annual basis, registered investment advisers (“RIAs”) are required to provide natural person clients with a copy of the firm’s privacy policy if (i) the RIA has disclosed nonpublic personal information other than in the connection with servicing consumer accounts or administering financial products; or (ii) the firm’s privacy policy has changed.

Annual Compliance Review. On an annual basis, the CCO of an RIA must conduct a review of the adviser’s compliance policies and procedures. This annual compliance review should be in writing and presented to senior management. We recommend that firms discuss the annual review with their outside counsel or compliance firm, who can provide guidance about the review process as well as a template for the assessment and documentation. Advisers should be careful that sensitive conversations regarding the annual review are protected by attorney-client privilege. CCOs may also want to consider additions to the compliance program. Advisers that are not registered may still wish to review their procedures and/or implement a compliance program as a best practice.

Form ADV Annual Amendment. RIAs or managers filing as exempt reporting advisers (“ERAs”) with the SEC or a state securities authority, must file an annual amendment to Form ADV within 90 days of the end of their fiscal year. For most managers, the Form ADV amendment would be due on March 31, 2018. This year, because March 31st is a Saturday and March 30th is a market holiday, annual amendments to the Form ADV shall be filed no later than the business day following the 90-day deadline (April 2, 2018). RIAs must provide a copy of the updated Form ADV Part 2A brochure and Part 2B brochure supplement (or a summary of changes with an offer to provide the complete brochure) to each “client”. Note that for SEC-registered advisers to private investment vehicles, a “client” for purposes of this rule includes the vehicle(s) managed by the adviser, and not the underlying investors. State-registered advisers need to examine their state’s rules to determine who constitutes a “client”.

Switching to/from SEC Regulation.

SEC Registration. Managers who no longer qualify for SEC registration as of the time of filing the annual Form ADV amendment must withdraw from SEC registration within 180 days after the end of their fiscal year by filing Form ADV-W. Such managers should consult with their state securities authorities to determine whether they are required to register in the states in which they conduct business. Managers who are required to register with the SEC as of the date of their annual amendment must register with the SEC within 90 days of filing the annual amendment.

Exempt Reporting Advisers. Managers who no longer meet the definition of an ERA will need to submit a final report as an ERA and apply for registration with the SEC or the relevant state securities authority, if necessary, generally within 90 days after the filing of the annual amendment.

Custody Rule Annual Audit.

SEC Registered IA. SEC registered investment advisers (“SEC RIAs”) must comply with certain custody procedures, including (i) maintaining client funds and securities with a qualified custodian; (ii) having a reasonable basis to believe that the qualified custodian sends an account statement to each advisory client at least quarterly; and (iii) undergoing an annual surprise examination conducted by an independent public accountant.

SEC RIAs to pooled investment vehicles may avoid both the quarterly statement and surprise examination requirements by having audited financial statements prepared for each pooled investment vehicle in accordance with generally accepted accounting principles by an independent public accountant registered with the Public Company Accounting Oversight Board (“PCAOB”). Statements must be sent to the fund or, in certain cases, investors in the fund, within 120 days after the fund’s fiscal year-end. Managers should review their custody procedures to ensure compliance with the rules.

California Registered IA. California registered investment advisers (“CA RIAs”) that manage pooled investment vehicles and are deemed to have custody of client assets must, among other things, (i) provide notice of such custody on the Form ADV; (ii) maintain client assets with a qualified custodian; (iii) engage an independent party to act in the best interest of investors to review fees, expenses, and withdrawals; and (iv) retain an independent certified public accountant to conduct surprise examinations of assets. CA RIAs to pooled investment vehicles may avoid the independent party and surprise examinations requirements by having audited financial statements prepared by an independent public accountant registered with the PCAOB and distributing such audited financial statements to all limited partners (or members or other beneficial owners) of the pooled investment vehicle, and to the Commissioner of the California Department of Business Oversight (“DBO”).

Other State Registered IA. Advisers registered in other states should consult with legal counsel about those states’ custody requirements.

California Minimum Net Worth Requirement and Financial Reports.

RIAs with Custody. Every CA RIA that has custody of client funds or securities must maintain at all times a minimum net worth of $35,000. Notwithstanding the foregoing, the minimum net worth is $10,000 for a CA RIA (i) deemed to have custody solely because it acts as general partner of a limited partnership, or a comparable position for another type of pooled investment vehicle; and (ii) that otherwise complies with the California custody rule described above (such advisers, the “GP RIAs”).

RIAs with Discretion. Every CA RIA that has discretionary authority over client funds or securities, whether or not they have custody, must maintain at all times a minimum net worth of $10,000.

Financial Reports. Every CA RIA that either has custody of, or discretionary authority over, client funds or securities must file an annual financial report with the DBO within 90 days after the adviser’s fiscal year end. The annual financial report must contain a balance sheet, income statement, supporting schedule, and a verification form. These financial statements must be audited by an independent certified public accountant or independent public accountant if the adviser has custody and is not a GP RIA.

Annual Re-Certification of CFTC Exemptions. Commodity pool operators (“CPOs”) and commodity trading advisers (“CTAs”) currently relying on certain exemptions from registration with the CFTC are required to re-certify their eligibility within 60 days of the calendar year-end. CPOs and CTAs currently relying on relevant exemptions will need to evaluate whether they remain eligible to rely on such exemptions.

CPO and CTA Annual Updates. Registered CPOs and CTAs must prepare and file Annual Questionnaires and Annual Registration Updates with the NFA, as well as submit payment for annual maintenance fees and NFA membership dues. Registered CPOs must also prepare and file their fourth quarter report for each commodity pool on Form CPO-PQR, while CTAs must file their fourth quarter report on Form CTA-PR. Unless eligible to claim relief under Regulation 4.7, registered CPOs and CTAs must update their disclosure documents periodically, as they may not use any document dated more than 12 months prior to the date of its intended use. Disclosure documents that are materially inaccurate or incomplete must be corrected promptly, and the corrected version must be distributed promptly to pool participants.

Trade Errors. Managers should make sure that all trade errors are properly addressed pursuant to the manager’s trade errors policies by the end of the year. Documentation of trade errors should be finalized, and if the manager is required to reimburse any of its funds or other clients, it should do so by year-end.

Soft Dollars. Managers that participate in soft dollar programs should make sure that they have addressed any commission balances from the previous year.

Schedule 13G/D and Section 16 Filings. Managers who exercise investment discretion over accounts (including funds and separately managed accounts (“SMAs”)) that are beneficial owners of 5% or more of a registered voting equity security must report these positions on Schedule 13D or 13G. Passive investors are generally eligible to file the short form Schedule 13G, which is updated annually within 45 days of the end of the year. Schedule 13D is required when a manager is ineligible to file Schedule 13G and is due 10 days after acquisition of more than 5% beneficial ownership of a registered voting equity security. For managers who are also making Section 16 filings, this is an opportune time to review your filings to confirm compliance and anticipate needs for the first quarter.

Section 16 filings are required for “corporate insiders” (including beneficial owners of 10% or more of a registered voting equity security). An initial Form 3 is due within 10 days after becoming an “insider”; Form 4 reports ownership changes and is due by the end of the second business day after an ownership change; and Form 5 reports any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting and is due within 45 days after the end of each fiscal year.

Form 13F. A manager must file a Form 13F if it exercises investment discretion with respect to $100 million or more in certain “Section 13F securities” within 45 days after the end of the year in which the manager reaches the $100 million filing threshold. The SEC lists the securities subject to 13F reporting on its website.

Form 13H. Managers who meet the SEC’s large trader thresholds (in general, managers whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month) are required to file an initial Form 13H with the SEC within 10 days of crossing the threshold. Large traders also need to amend Form 13H annually within 45 days of the end of the year. In addition, changes to the information on Form 13H will require interim amendments following the calendar quarter in which the change occurred.

Form PF. Managers to private funds that are either registered with the SEC or required to be registered with the SEC and who have at least $150 million in regulatory assets under management (“RAUM”) must file Form PF. Smaller private advisers (fund managers with less than $1.5 billion in RAUM) must file Form PF annually within 120 days of their fiscal year-end. Larger private advisers (fund managers with $1.5 billion or more in RAUM) must file Form PF within 60 days of the end of each fiscal quarter.

SEC Form D. Form D filings for most funds need to be amended on an annual basis, on or before the anniversary of the most recently filed Form D. Copies of Form D is publicly available on the SEC’s EDGAR website.

Blue Sky Filings. On an annual basis, a manager should review its blue sky filings for each state to make sure it has met any renewal requirements. Several states impose late fees or reject late filings altogether. Accordingly, it is critical to stay on top of filing deadlines for both new investors and renewals. We also recommend that managers review blue sky filing submission requirements. Many states now permit blue sky filings to be filed electronically through the Electronic Filing Depository (“EFD”) system, and certain states will now only accept filings through EFD.

IARD Annual Fees. Preliminary annual renewal fees for state-registered and SEC-registered investment advisers are due on December 18, 2017. If you have not already done so, you should submit full payment into your Renewal Account by E-Bill, check or wire now.

Pay-to-Play and Lobbyist Rules. SEC rules disqualify investment advisers, their key personnel and placement agents acting on their behalf, from seeking to be engaged by a governmental client if they have made political contributions. State and local governments have similar rules, including California, which requires internal sales professionals who meet the definition of “placement agents” (people who act for compensation as finders, solicitors, marketers, consultants, brokers, or other intermediaries in connection with offering or selling investment advisory services to a state public retirement system in California) to register with the state as lobbyists and comply with California lobbyist reporting and regulatory requirements. Note that managers offering or selling investment advisory services to local government entities must register as lobbyists in the applicable cities and counties.

State laws on lobbyist registration differ widely, so we recommend reviewing your reporting requirements in the states in which you operate to make sure you are in compliance with the rules.

Annual Fund Matters:

New Issue Status. On an annual basis, managers need to confirm or reconfirm the eligibility of investors that participate in initial public offerings or new issues, pursuant to both FINRA Rules 5130 and 5131. Most managers reconfirm investor eligibility via negative consent (i.e. investors are informed of their status on file with the manager and are asked to inform the manager of any changes). A failure to respond by any investor operates as consent to the current status.

ERISA Status. Given the significant problems that can occur from not properly tracking ERISA investors in private funds, we recommend that managers confirm or reconfirm on an annual basis the ERISA status of their investors. This is particularly important for managers who may be deemed a fiduciary under the Department of Labor’s (“DOL”) Fiduciary Rule (as further discussed below).

Wash Sales. Managers should carefully manage wash sales for year-end. Failure to do so could result in embarrassing book/tax differences for investors. Certain dealers can provide managers with swap strategies to manage wash sales, including Basket Total Return Swaps and Split Strike Forward Conversion. These strategies should be considered carefully to make sure they are consistent with the investment objectives of the fund.

Redemption Management. Managers with significant redemptions at the end of the year should carefully manage unwinding positions so as to minimize transaction costs in the current year (that could impact performance) and prevent transaction costs from impacting remaining investors in the next year. When closing funds or managed accounts, managers should pay careful attention to the liquidation procedures in the fund constituent documents and the managed account agreement.

NAV Triggers and Waivers. Managers should promptly seek waivers of any applicable termination events set forth in a fund’s ISDA or other counterparty agreement that may be triggered by redemptions, performance, or a combination of both at the end of the year (NAV declines are common counterparty agreement termination events).

Fund Expenses. Managers should wrap up all fund expenses for 2017 if they have not already done so. In particular, managers should contact their outside legal counsel to obtain accurate and up to date information about legal expenses for inclusion in the NAV for year-end performance.

Electronic Schedule K-1s. The IRS authorizes partnerships and limited liability companies taxed as partnerships to issue Schedule K-1s to investors solely by electronic means, provided the partnership has received the investor’s affirmative consent. States may have different rules regarding electronic K-1s and partnerships should check with their counsel whether they may still be required to send state K-1s on paper. Partnerships must also provide each investor with specific disclosures that include a description of the hardware and software necessary to access the electronic K-1s, how long the consent is effective and the procedures for withdrawing the consent. If you would like to send K-1s to your investors electronically, you should discuss your options with your service providers.

“Bad Actor” Recertification Requirement. A security offering cannot rely on the Rule 506 safe harbor from SEC registration if the issuer or its “covered persons” are “bad actors”. Fund managers must determine whether they are subject to the bad actor disqualification any time they are offering or selling securities in reliance on Rule 506. The SEC has advised that an issuer may reasonably rely on a covered person’s agreement to provide notice of a potential or actual bad actor triggering event pursuant to contractual covenants, bylaw requirements or undertakings in a questionnaire or certification. If an offering is continuous, delayed or long-lived, however, issuers must update their factual inquiry periodically through bring-down of representations, questionnaires, and certifications, negative consent letters, periodic re-checking of public databases and other steps, depending on the circumstances. Fund managers should consult with counsel to determine how frequently such an update is required. As a matter of practice, most fund managers should perform such an update at least annually.

U.S. FATCA. Funds should monitor their compliance with U.S. Foreign Account Tax Compliance Act (“FATCA”) U.S. FATCA reports are due to the IRS on March 31, 2018 or September 30, 2018, depending on where the fund is domiciled. Reports may be required by an earlier date for jurisdictions that are parties to intergovernmental agreements (“IGAs”) with the U.S. Additionally, the U.S. may require that reports be submitted through the appropriate local tax authority in the applicable IGA jurisdiction, rather than the IRS. Given the varying U.S. FATCA requirements applicable to different jurisdictions, managers should review and confirm the specific U.S. FATCA reporting requirements that may apply. As a reminder for this year, we strongly encourage managers to file the required reports and notifications, even if they already missed previous deadlines. Applicable jurisdictions may be increasing enforcement and monitoring of FATCA reporting and imposing penalties for each day late.

CRS. Funds should also monitor their compliance with the Organisation for Economic Cooperation and Development’s Common Reporting Standard (“CRS”). All “Financial Institutions” in the Cayman Islands and British Virgin Islands are required to register with the respective jurisdiction’s Tax Information Authority and submit returns to the applicable CRS reporting system by May 31, 2018. Managers to funds domiciled in other jurisdictions should also confirm whether any CRS reporting will be required in such jurisdictions. CRS reporting must be completed with the CRS XML v1.0 or a manual entry form on the  Automatic Exchange of Information portal.  We recommend managers contact their tax advisors to stay on top of the U.S. FATCA and CRS requirements and avoid potential penalties.

Annual Management Company Matters:

Management Company Expenses. Managers who distribute profits on an annual basis should attempt to address management company expenses in the year they are incurred. If ownership or profit percentages are adjusted at the end of the year, a failure to manage expenses could significantly impact the economics of the partnership or the management company.

Employee Reviews. An effective annual review process is important to reduce the risk of employment-related litigation and protect the management company in the event of such litigation. Moreover, it is an opportunity to provide context for bonuses, compensation adjustments, employee goals and other employee-facing matters at the firm. It is not too late to put an annual review process in place.

Compensation Planning. In the fund industry, and the financial services industry in general, the end of the year is the appropriate time to make adjustments to compensation programs. Since much of a manager’s revenue is tied to annual income from incentive fees, any changes to the management company structure, affiliated partnerships, or any shadow equity programs should be effective on the first of the year. Make sure that partnership agreements and operating agreements are appropriately updated to reflect such changes.

Insurance. If a manager carries D&O insurance or other liability insurance, the policy should be reviewed on an annual basis to ensure that the manager has provided notice to the carrier of all claims and all potential claims. Newly launched funds should also be added to the policy as appropriate.

Other Tax Considerations. Fund managers should assess their overall tax position and consider several steps to optimize tax liability. Managers should also be aware of self-employment taxes, which can be minimized by structuring the investment manager as a limited partnership. Managers can take several steps to optimize their tax liability, including: (i) changing the incentive fee to an incentive allocation; (ii) use of stock-settled stock appreciation rights; (iii) if appropriate, terminating swaps and realizing net losses; (iv) making a Section 481(a) election under the Internal Revenue Code of 1986, as amended (the “Code”); (v) making a Section 475 election under the Code; and (vi) making charitable contributions. Managers should consult legal and tax professionals to evaluate these options.

Regulatory & Other Changes in 2017:

SEC Updates.

SEC Adopts Form ADV Amendments. On July 1, 2017, a technical amendment to Form ADV and ADV-W was implemented to reflect a new Wyoming Law that now requires investment advisers with $25 million to $100 million in RAUM and a principal place of business in Wyoming to register with the state as an investment adviser instead of the SEC.

On October 1, 2017, additional SEC amendments to Form ADV went into effect, which will apply to both RIAs and ERAs. 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 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 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 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 and did not confirm estimates provided by the Registrants’ CIO. It was established that the RAUM and number of advisory accounts reported on the Form ADV was greatly overstated. The SEC held that the outsourced CCO violated the 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. Outsourced compliance persons solely relying on internal estimates of RAUM and number of advisory contracts, without further confirmation, should be aware of the risk of filing false reports and potential SEC enforcement actions.

CFTC and NFA Updates.

CFTC Amendments to Recordkeeping Requirements. On August 28, 2017, amendments to Regulation 1.31 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).

Digital Asset Updates.

CFTC Grants Permission for Bitcoin Futures Trading. On December 1, 2017, the CFTC issued a statement granting permission to the Chicago Mercantile Exchange Inc. (“CME”) and the Chicago Board Options Exchange Inc. (“CBOE”) to list Bitcoin futures contracts on the respective exchanges. Less than two weeks after the release of CFTC’s statement, Bitcoin futures contracts trading began on the CBOE futures exchange on December 10, 2017. Early reports suggest a strong interest in Bitcoin futures contracts set to expire in early 2018. CME is set to begin Bitcoin futures contracts trading next week.

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. 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 offers physically-settled and day-ahead swaps on Bitcoin to U.S.-based eligible contract participants and has a fully-collateralized clearing model where customers must post collateral to cover maximum potential losses prior to trading.

Other Updates.

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” to apply to 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. 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. 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). 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. Managers with questions regarding the applicability of these exemptions should discuss with counsel.

Two New California Employment Laws Limit Inquiries into Certain Information During the Hiring Process. In October, California Governor Jerry Brown approved Assembly Bill No. 168 and Assembly Bill No. 1008, restricting certain information a California employer may inquire about and consider during its hiring process. Assembly Bill No. 168 restricts employers from requiring prospective employees to disclose salary history. An employer may not inquire or rely on such information when deciding whether to extend an offer to a job applicant or deciding an amount to offer to a job applicant. Assembly Bill No. 1008 restricts California employers with five or more employees from including, inquiring and considering information about an employee applicant’s criminal history until a conditional offer has been extended to a job applicant. Assembly Bill No. 1008 further provides certain requirements an employer must comply with after such information has been legally acquired and is taken into consideration when deciding whether to hire a job applicant, as well as certain procedures to comply with when deciding a job applicant is not suitable for the position. Both laws become effective January 1, 2018. With respect to California employees, you should review before year end, your job application, offer letter template, and compliance manual if they contain questions regarding salary or criminal history.

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 maintain a continuing education program in place for “covered persons”. 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 promote compliance with the firms record-keeping policies regarding the continuing education program. Municipal advisors will have until December 31, 2018 to comply with the new requirements.

SIPC and FINRA Adopt Streamlined Reporting Process. As of September 1, 2017, investment advisory firms who are members of both the Securities Investor Protection Corporation (“SIPC”) and the Financial Industry Regulatory Authority (“FINRA”) now 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.

SEC Provides Guidance to Address MiFID II. On October 26, 2017, the SEC issued three no-action relief letters to provide guidance on the Markets in Financial Instruments Directive II (“MiFID II”). Effective January 3, 2018, MiFID II most notably introduces the requirement for UK broker-dealers to “unbundle” investment research from trading commissions, requiring distinct pricing for each of the services rendered. The first no-action letter provides that for the first 30 months from when MiFID II becomes effective, U.S. broker-dealers will not be considered an investment adviser upon accepting payments from an investment manager. The second no-action letter states that broker-dealers may continue to rely on the safe harbor under Section 28(e) of the Securities and Exchange Act of 1934, as amended, for payments made from client assets made alongside payments for execution to an executing broker-dealer. The final no-action letter addresses MiFID II’s various payment arrangements surrounding research activities and provides that an investment adviser may aggregate client orders, although research payments may differ for each client.

Tax Cuts and Jobs Act Impact on Hedge Funds. In late 2017, the House Ways and Means Committee and the Senate Finance Committee passed companion legislation in an attempt to reform the US tax system. One of the proposed revisions included in H.R. 1 or the Tax Cut and Jobs Act (“Tax Act”) is a reduction in the tax rate for a pass-through entity’s “capital percentage” business income. The applicable tax rate would be 25%, with the non-professional services entity’s “capital percentage” business income capped at 30%, and the remaining amount of income characterized as “labor”.

Offshore Updates.

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 such an entity). Of interest to fund managers, the following types of funds are exempted from the scope of these amendments: funds that are regulated by the Cayman Islands Monetary Authority, 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 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.

U.K. Transitions from U.K. FATCA to CRS. The U.K. transitioned from U.K. FATCA to CRS on July 1, 2017, and now joins more than 85 countries, including the Cayman Islands and the BVI, in the automatic exchange of information between participating countries. The full list of signatory countries is available here. Similar to U.S. FATCA, CRS sets forth a standard by which signatory countries can more easily and automatically exchange certain reportable tax information. We recommend that managers consult their tax advisors to determine whether they are subject to any CRS reporting requirements.

Cayman Islands Introduces 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 be required 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.

New PRIIPs Disclosure Requirements for EEA Retail Investors. Regulation (EU) No 1286/2014 (“Regulation”), effective January 1, 2018, requires manufacturers of Packaged Retail and Insurance-based Investment Products (“PRIIPs”) to make available Key Information Documents (“KIDs”) to “retail investors” (generally any investor that does not meet the “professional client” status) in member states of the European Union and the Economic European Area (collectively, “EEA”). If a PRIIP manufacturer, such as a fund manager, accepts additional investments or a new investment from an EEA retail investor on or after January 1, 2018, it must comply with the Regulation’s technical requirements pertaining to KIDs. “Retail investors” under the Regulation can include investors such as high net worth individuals, who are not traditionally considered retail investors. Fund managers should consider the applicability of the Regulation given the types of EEA investors they may be marketing to, and managers who wish to forego complying with the Regulation should not accept investments from EEA retail investors and implement additional procedures to ensure such investors are not marketed to or admitted in the fund.  Fund managers with questions regarding the Regulation should discuss with counsel.

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

Deadline – Filing

  • December 18, 2017 –  IARD Preliminary Renewal Statement payments due (submit early to ensure processing by deadline)
  • December 26, 2017 – Last day to submit form filings via IARD prior to year-end
  • December 31, 2017 – Review RAUM to determine 2018 Form PF filing requirement
  • January 15, 2018 – Quarterly Form PF due for large liquidity fund advisers (if applicable)
  • January 31, 2018 – “Annex IV” AIFMD filing
  • February 15, 2018–  Form 13F due
  • February 15, 2018 – Annual Schedule 13G updates due
  • February 15, 2018 – Annual Form 13H updates due
  • February 28, 2018 – Deadline for re-certification of CFTC exemptions
  • March 1, 2018 – Quarterly Form PF due for larger hedge fund advisers (if applicable)
  • April 2, 2018 – Annual ADV amendments due (for December 31st fiscal year end)
  • April 2, 2018 – Annual Financial Reports due for CA RIAs (if applicable)
  • April 18, 2018 – FBAR deadline for certain individuals with signature authority over, but no financial interest in, one or more foreign financial accounts
  • April 29, 2018 – Annual Form PF due for all other advisers (other than large liquidity fund advisers and large hedge fund advisers)
  • Periodic – Form D and blue sky filings should be current
  • Periodic – Fund managers should perform “Bad Actor” certifications annually

****

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

NFA May Impose Capital Requirements, Other Restrictions on CPOs and CTAs

NFA Suggests New Rules, Solicits Comments from CPOs and CTAs

The NFA recently issued a Notice to Members that included a Request for Comments on a proposal to subject CPOs and CTAs to new rules. These rules, which include a minimum capital requirement for CPOs and CTAs, would be intended to protect customer funds and ensure that CPOs and CTAs have sufficient assets to operate as a going concern.

The NFA justified the need for these rules by citing 26 Member Responsibility Actions that were taken over the past 3 years, mostly against CPOs and CTAs for misuse of customer funds and/or misstatements of net asset values and performance information. Comments are due to the NFA by April 15, 2014.

Rules Under Consideration

The NFA did not propose any language for the rules in its Request for Comments, nor did the NFA suggest any details on how the rules might be drafted. Instead, the NFA implied what rules are under consideration by posing questions to CPOs and CTAs on the utility of certain rules, and on what standards should be applied to implement them.

CPOs and CTAs

• Capital Requirements. CPOs and CTAs may be required to maintain a minimum amount of capital, and to file periodic reports with the NFA to demonstrate compliance. However, the NFA’s Request for Comments indicates a degree of flexibility. For example, the NFA asked for members who oppose a capital requirement to suggest alternatives for ensuring that CPOs and CTAs have sufficient funds to operate as a going concern.

• Inactive NFA Members. NFA members that are not actively trading futures or commodity interests may have their NFA membership withdrawn, so that the NFA can stop expending regulatory resources on these firms.

CPOs Only

• Gatekeeper for Pool Disbursements. CPOs may need to retain an independent third party to approve pool disbursements (a “gatekeeper”).

• NAV Valuation and Reporting. An independent third party may be required to prepare or verify a CPO’s pool NAV valuations, and such valuations may need to be submitted periodically to the NFA.

• Performance Results. An independent third party may have to prepare or verify a CPO’s pool performance results.

• Verification of Pool Assets. CPOs and the entities actually holding pool assets may both be required to report pool asset amounts to the NFA, so that the NFA can cross-reference the reports for consistency. This could be similar to rules currently in place for futures commission merchants.

Conclusion

The new rules being considered are in the earliest stages of development, but it is clear that the NFA is concerned about the misuse of customer funds and the risks posed by undercapitalized CPOs and CTAs. Any CPOs or CTAs interested in commenting on the rules under consideration should submit their comments to the NFA via email to CPOandCTAfeedback@nfa.futures.org by April 15, 2014.

****

Cole-Frieman & Mallon LLP provides legal advice to the managed futures industry and works with FCMs, IBs, CPOs, and CTAs.  Bart Mallon can be reached directly at 415-868-5345.

NFA Notice to CPOs with Assets at PFG

Managers Required to Provide Information to NFA Immediately

As has been widely reported, futures FCM PFG has filed for bankruptcy and the CFTC has filed an action against the firm.

Below is a reprinted notice to NFA Members who are commodity pool operators. CPOs must inform the NFA about any accounts held at PFG including information on amount of assets held at PFG and most recent pool NAV. CPOs will need to provide this information to the NFA immediately and there is contact information in the notice below if a CPO has specific questions for the NFA.

If you are a CPO, CTA or IB with assets held at PFG, please contact our firm if you have questions with respect to next steps.

****

Notice to Members I-12-13

July 10, 2012

CPO RESPONSE REQUIRED

FOR COMMODITY POOL OPERATORS – A RESPONSE IS REQUIRED FROM CPO MEMBERS WITH ACCOUNTS AT PEREGRINE FINANCIAL GROUP INC.

On July 9, 2012, National Futures Association (NFA) took an emergency enforcement action against Peregrine Financial Group, Inc. (PFG) and Peregrine Asset Management, Inc. (PAM). NFA deemed this action necessary to protect customers because PFG is unable to demonstrate that it can meet its capital requirements and segregated funds requirements, and because NFA has reason to believe that PFG does not have sufficient assets to meet its obligations to its customers. The CFTC has also filed a complaint in the United States District Court for the Northern District of Illinois against PFG and its owner, Russell R. Wasendorf, Sr. alleging that PFG and Wasendorf committed fraud by misappropriating customer funds, violated customer fund segregation laws, and made false statements in financial statements filed with the Commission.

In light of these events, NFA is requiring all CPO Members with pool accounts held at PFG to provide NFA with a notice of the following information:

The name of each pool account held at PFG and its NFA Pool ID number;

  • The current dollar amount of pool assets held at PFG for each pool account and the corresponding date;
  • The most recent net asset value for each pool with funds at PFG and the date of the valuation;
  • Any withdrawal restrictions that the firm has implemented or plans to implement with respect to each pool.
  • CPO members must provide this information to NFA by sending an email to CPOInfo-PFG@nfa.futures.org within 48 hours of receiving this notice.

Any questions regarding this request should be directed to:

Tracey Hunt, Senior Manager, at (312) 781-1284 or at thunt@nfa.futures.org

Mary McHenry, Senior Manager, at (312) 781-1420 or at mmchenry@nfa.futures.org

You are receiving this message because you are either a Member of National Futures Association (NFA) or you subscribed to the email subscription list on NFA’s Website. To cancel or change your subscription at any time, visit the Email Subscriptions page on our Website at http://www.nfa.futures.org/news/subscribe.asp.

***

Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a focus on managed futures law and regulations. Bart can be reached directly at 415-868-5345.

NFA Provides Guidance re: MF Global

CPOs Must Provide Information to Fund Investors

Below is guidance just provided by the NFA regarding MF Global.  Commodity Pool Operators must provide investors with a disclosure regarding the fund’s assets held at MF Global.  Additionally, if the CPO is soliciting new investors for the fund, the CPO will need to amend their disclosure document and have the disclosure document reviewed by the NFA prior to first use.

Please contact us if you need help with respect to any of the items discussed in the NFA memo below.

****

November 1, 2011

Proposed Guidance for CPOs with Pool Funds Held at MF Global, Inc.

NFA recognizes the need for our CPO Members to keep their pool participants informed as to what has occurred with MF Global, Inc. (MF Global) and how it may affect future operations. In this regard, NFA, in consultation with the CFTC, is providing guidance on disclosures that CPO Members with pool funds held at MF Global must make to their participants. At a minimum, CPO Members must provide their pool participants with a disclosure statement that includes the disclosures summarized below. Members are also encouraged to provide any additional disclosures that are necessary given their specific business operations.

If you are a Member operating a pool that has pool funds held at MF Global, you must make the following disclosures:

  • On October 31, 2011, MF Global reported to the SEC and CFTC possible deficiencies in customer segregated accounts held at the firm. As a result, the SEC and CFTC determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets, and SIPC initiated the liquidation of MF Global under the Securities Investor Protection Act.
  • As of (insert date) approximately $XXX of (Name of Pool)’s assets were on deposit in an account(s) at MF Global. These assets represent XX% of the (Name of Pool)’s net asset value of $XXX.
  • The General Partner does/does not believe that these actions will have a material impact upon the operations of (Name of Pool) and its ability to:
    • Satisfy redemptions requests;
    • Adequately value redemption requests and the manner in which they will be handled;
    • Accept new subscriptions in (Name of Pool) and properly value the net asset value for new subscribers; and
    • Provide for accurate valuation in the (Name of Pool)’s account statements provided to participants.
  • Participants are cautioned that there can be no assurances:
    • That (Name of Pool) will have immediate access to any or all of its assets in accounts held at MF Global; and
    • As to the amount or value of those assets in the context of the bankruptcy.
  • Participants should also be aware that future actions involving MF Global may impact (Name of Pool)’s ability to value the portion of its assets held at MF Global and/or delay the payment of a participant’s pro-rata share of such assets upon redemption.

The above disclosures must be provided to current pool participants through a separate written communication. In addition, Members who have a current disclosure document and plan to solicit new participants must ensure that they have updated their disclosure document to include these disclosures. In this regard, please remember that all amended disclosure documents must be submitted to NFA for review prior to use.

Further, with respect to the valuation of pool assets and redemptions, each Member is urged to consult with its CPA to ensure these items are reported in accordance with generally accepted accounting principles or international financial reporting standards, as applicable.

If you have any questions, please do not hesitate to contact the following individuals:

Mary McHenry at (312)781-1420 or at mmchenry@nfa.futures.org

Tracey Hunt at (312)781-1284 or thunt@nfa.futures.org

Todd Maines at (312)781-1560 or at tmaines@nfa.futures.org

****

Cole-Frieman & Mallon LLP is an investment management law firm which provides CPO registration and compliance services.  Bart Mallon can be reached directly at 415-868-5345.

CTA Expo 2011 Chicago

Ronnie Lott Keynote Speaker at CTA Conference

We are gearing up for the CTA Expo in Chicago next month. The CTA Expo, which is also held in New York and London, has become the go-to event for CTAs and others member of the managed futures industry. As always, the NIBA will be having its own conference the day before the CTA Expo and there will be a joint NIBA/CTA Cocktail Party.

The NIBA event will be September 12, 2011 and the agenda includes:

  • Rules, Regulations, Revenue: Round III with Moderator Steve Pherson from Schuyler Roche
  • Grow Your Business by Hiring the Right People by Pat Lunkes of Parkway Consulting Group
  • Marketing Strategy Makeover by Candyce Edelen & Phil Donaldson of Propel Growth
  • A Bubble in Commodities: What to Look for by Darin Newsom of Telvent DTN
  • Anatomy of an Online Marketing Campaign: Generating Leads Online by Shane Stiles of Gate 39 Media

The CTA Expo will be September 13, 2011 and the  agenda includes:

  • Welcoming Remarks by Bucky Isaacson and Frank Pusateri
  • Maximizing the Value of your Conference Attendance by Ron Suber of Merlin Securities
  • Successful Marketing in Asia by Rumi Morales of the CME Group
  • Reputation – Creating Power Through Personal Branding by Lida Citroen
  • Keynote Speach by Ronnie Lott of All Stars Helping Kids<

    /a> – Professional Sports and Business – Lessons Learned

  • Marketing Managed Futures in Europe –

    Tips from the Trenches by Simon Rostron of Rostron Parry

  • The Regulatory Environment in 2011 and Beyond by Dan Driscoll of the National Futures Association
  • The Role of Emerging Managers in a Portfolio by Joseph Schlater of Busara Advisors
  • Institutional Investors and What They Look For in a Manager by Keith Palzer of Bank of America Merrill Lynch
  • The Marketing Impact of a Professional Back Office by Dana Comolli of DMAXX
  • Promoting Managed Futures as an Investment by Mark Melin of High Performance Managed Futures

Cole-Frieman & Mallon LLP has been a sponsor of the CTA Expo since 2009 and this year we will be introducing Ron Suber of Merlin Securities on Tuesday morning.  For more information on the events, please see the CTA Expo program and NIBA Conference schedule.

****

Cole-Frieman & Mallon LLP provides legal advice to CTAs and CPOs, including NFA compliance and regulatory guidance.  For more information, please see our CTA and CPO Registration and Compliance Guide or call Bart Mallon directly at 415-868-5345.

zp8497586rq

Form CPO-PQR

Proposed Form CPO-PQR Released

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

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

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

****

Who is required to file Form CPO-PQR?

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

When do managers need to file Form CPO-PQR?

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

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

the end of the quarter.

What are the sections of Form CPO-PQR?

Form CPO-PQR has 3 major sections.  F

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

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

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

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

Details of the Schedules

Schedule A

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

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

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

Schedule B

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

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

Schedule C

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

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

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

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

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

****

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

Exemptive Relief from CPO Annual Audit Requirement

Managers starting a commodity fund at the end of the year may seek relief from annual audit requirement

CFTC Regulations 4.22(c) and (d) require that each registered CPO file a certified annual report with the CFTC and distribute copies to pool participants within 90 calendar days after the pool’s fiscal year (“audit requirement”).  The principal purpose of these requirements is to ensure that pool participants (fund investors) receive accurate, fair, and timely information on the overall trading performance and financial condition of the pool.  In a situation where a futures/commodities hedge fund was established only a few months or so before the end of the fiscal year, conducting a certified audit at the end of the fiscal year may not be desirable due to costs.  Relief may be available to managers in this situation.  The CPO can request an exemption from the audit requirement from the CFTC.

This article explains how a manager can go about requesting and obtaining an exemption.

Exemptions on a Case-by-Case Basis

The CFTC’s Division of Clearing and Intermediary Oversight (“DCIO”) will grant or deny exemptive relief from the audit requirement on a case-by-case basis, based on each individual CPO’s factual circumstances.  When we spoke informally to a staff member at DCIO, he said that there is no prescriptive list of conditions that will automatically result in exemptive relief but the main factors they seem to take into account are:

  1. the pool has only a handful of participants,
  2. the pool has only a nominal amount of capital contributed and a nominal amount of total net assets, and
  3. each of the participants in the pool has provided a written waiver consenting to the CPO’s exemption from the audit requirement.

In many cases where the exemption was granted, DCIO still placed the following conditions on the CPO:

  1. the CPO must distribute unaudited annual reports to each of the pool’s participants (these unaudited annual reports must otherwise comply with the provisions of CFTC Regulations 4.22(c) and (d)–reprinted in full below), and
  2. at the close of the following fiscal year, the CPO must file an audited annual report that includes the previous unaudited period.

Requesting the Exemption by Email or Letter

DCIO seems to grant exemptions from the audit requirement in response to email or letter  requests from CPOs.  In a 2009 DCIO letter granting exemptive relief, the CPO sent an email to DCIO requesting the exemption.  DCIO found that granting relief in the CPO’s situation was not contrary to Regulation 4.22 nor the public interest.  In particular, it focused on the following facts:

  • the pool began operations in September of 2008,
  • the pool only had 8 participants,
  • the pool had total capital contributions between $300,000-$400,000 as of December of 2008,
  • the pool’s net asset value was between $60,000-$70,000, and
  • the CPO attached waivers from the 8 participants indicating their consent to the exemption.

In a 2010 DCIO letter, DCIO granted the exemption after a CPO sent DCIO a letter requesting the relief and attaching the client waivers.  DCIO reviewed the facts and found granting the exemption was not contrary to Regulation 4.22 nor the public interest.

It is important to note that exemptive letters bind DCIO only with respect to the specific fact situation and persons addressed by the letter and third parties may not rely upon it.  For a full explanation of the CFTC’s exemptive letters, visit the CFTC’s discussion on this topic.  If you are interested in filing for such exemptive relief with respect to your commodity pool, please contact Mallon P.C.

****

Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides comprehensive hedge fund start up and regulatory support for commodity pool operators.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

CPO Quarterly Filing Reminder

NFA Rule 2-46 Filing Due Monday May 17th

NFA Rule 2-46 requires most registered CPOs to submit certain information to the NFA on a quarterly basis.  The filing is due within 45 days of the end of each quarter.  The filing date for CPOs which were active in the first quarter is Monday May 17th.

Mallon P.C. provides comprehensive services for CPO managers and can help with the quarterly Rule 2-46 filing.  Please contact us if you have any questions.

****

Other related hedge fund law blog posts include:

Cole-Frieman & Mallon LLP can provide CPOs with comprehensive support during the filing process.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

CFTC Regulation 4.8 for Commodity Pool Operators

CFTC Regulation 4.8 (“Rule 4.8”) is a little known regulation which allows CPOs to distribute disclosure documents and accept investor money prior to the NFA’s approval of the CPO’s disclosure document.  In order to take advantage of Rule 4.8, the CPO must make sure that pool interests are only offered or sold to accredited investors, in a Regulation D 506 offering.  The CPO will also need to initially file the disclosure document with the NFA prior to distribution to potential investors.  Rule 4.8 also applies to managers using the 4.12(b) exemption (futures/commodities trading is solely incidental to securities trading and margin does not exceed 10% of pool’s NAV).

Rule 4.8 should be used sparingly, if ever.  Managers should note that if Rule 4.8 is used prior to approval of the disclosure document the NFA will require the manager to provide investors in the fund with the approved disclosure document and an overview of the revisions which were made.  This creates a potentially awkward situation for both the manager and the investor and may, under certain circumstance, provide the investor with a right of rescission.  As with all maters in the securities industry, it is vital for a manager to provide the investor with all material information and the manager may not make any material omissions.

The full rule is reprinted below and can be found here.

Note: please see disclaimer.  Mallon P.C. is not providing legal advice through this post.

****

§ 4.8   Exemption from certain requirements of rule 4.26 with respect to pools offered or sold in certain offerings exempt from registration under the Securities Act.

(a) Notwithstanding paragraph (d) of §4.26 and subject to the conditions specified herein, the registered commodity pool operator of a pool offered or sold solely to “accredited investors” as defined in 17 CFR 230.501 in an offering exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D, 17 CFR 230.505 or 230.506, may solicit, accept and receive funds, securities and other property from prospective participants in that pool upon filing with the National Futures Association and providing to such participants the Disclosure Document for the pool.

(b) Notwithstanding paragraph (d) of §4.26 and subject to the conditions specified herein, the registered commodity pool operator of a pool offered or sold in an offering exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D, 17 CFR 230.505 or 230.506, that is operated in compliance with, and has filed the notice required by §4.12(b) may solicit, accept and receive funds, securities and other property from prospective participants in that pool upon filing with the National Futures Association and providing to such participants the Disclosure Document for the pool.

(c) The relief provided under §4.8 is not available if an enforcement proceeding brought by the Commission under the Act or the regulations is pending against the commodity pool operator or any of its principals or if the commodity pool operator or any of its principals is subject to any statutory disqualification under §§8a(2) or 8a(3) of the Act.

[57 FR 34865, Aug. 7, 1992; 57 FR 41173, Sept. 9, 1992, as amended at 60 FR 38182, July 25, 1995; 72 FR 1662, Jan. 16, 2007]

****

Other related hedge fund law blog posts include:

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

CPO Annual Financial Report Filing

Information on Filing Annual Report with NFA

Commodity Pool Operators (“CPOs”) are required to distribute an Annual Report, certified by an independent public accountant, to each participant in each pool it operates (i.e. the investors in the commodity/futures hedge fund) within 90 days after the pool’s fiscal year-end (normally December 31).  CPOs are also required under the Commodity Exchange Act and commission regulations to file this report electronically with the National Futures Association (“NFA”) through the NFA’s EasyFile system.  Alternate due dates exist for pools that are operated as a “fund of funds“.  CPOs can monitor their filings and review their due dates for each pool in the EasyFile system.  We have included an overview of the requirements and process below and Cole-Frieman & Mallon LLP would be able to help CPOs to make this filing as well.

Filing Overview

  • Who – all CPOs must file the annual financial report unless they are exempt under the CFTC Regulation 4.13.
  • What – a certified financial statement (PDF of the exact statement distributed to the pools limited partners) from an auditor needs to be filed with the NFA.  (Please note that CPOs who are exempt under the CFTC Regulation 4.7 does not need to have their statements audited.)
  • When – commodity pool annual reports must be distributed to pool participants and filed with the NFA within 90 calendar days of the pool’s fiscal year end.  (Mallon P.C. can also check the due date by logging into the EasyFile system on the Filing Index page.)
  • How – CPOs must submit annual reports to NFA electronically in accordance with NFA’s EasyFile electronic filing system and procedures.

NFA EasyFile System

Pool operators should have their NFA login and password to access the EasyFile system.  Submitting pool financial statements using EasyFile involves a three step process:

  1. The CPO (or compliance group) will upload a PDF of the identical pool financial statement provided to the pool’s limited partners, including the balance sheet, income statement, schedule of investments, footnotes, and the Independent Auditor’s Opinion, if applicable.
  2. The CPO (or compliance group) will then enter approximately 30 key financial balances into an electronic schedule. These balances will be pulled directly from the balance sheet, income statement and statement of changes in net asset value included in the pool’s PDF filing.
  3. The CPO (or compliance group) will finally submit the electronic filing, the system will run some basic edit checks. It will also prompt the CPO to read and agree to an electronic oath or affirmation. This oath or affirmation will apply to the information included in the PDF, as well as, the information entered into the schedule of key financial balances.

A common pitfall with this process include miscalculations with the key financial balances. In order to prevent this from occurring, the CPO should make sure the values/balances input into the system correspond with the PDF certified financial statement.  After submission, the CPO should ensure the updated status of the filing becomes “Received” by logging into Pool Index page the in the EasyFile system.  This status should show up within a few days after the filing has been submitted.

Conclusion

In addition to the various yearly compliance measures, such as the NFA Self-Examination Checklist, CPOs should be aware that they need to file their audited reports with the NFA.  This is especially important because the NFA has fined large firms for failing to file on time (see previous NFA Action).  If you need help with filing your annual financials, please contact Cole-Frieman & Mallon LLP for further information on our commodities and futures compliance services.

****

Other related NFA compliance articles include:

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