Monthly Archives: March 2010

CFA Exam and CFA Charterholder Membership

CFA Exam Overview

The Chartered Financial Analyst (CFA) designation is a widely recognizable professional title for financial analysts in the investment management industry.  In order to earn the CFA Designation and become a CFA Charterholder, you must first enroll in the CFA Program at the CFA Institute and then pass the CFA exam.  The CFA exam is an important and difficult test that measures a candidate’s comprehension of the CBOK – the Candidate Body of Knowledge curriculum that is created by the CFA Institute.  A candidate will receive the CBOK curriculum upon registration so that studying can begin immediately.

Candidates will need to pass three distinct “levels” and will also need to have certain industry experience in order to receive the designation.  In order to take any level of the exam, a candidate must have a bachelor’s degree (or be enrolled in the final year of your bachelor’s program) or four years of related work and/or college experience.  This article will detail the requirements for each level and discuss other aspects of the designation.

Level I

The Level I is the first exam in the series and is the only exam that is offered twice a year (June and December).  The exam is multiple choice and has 10 main topics, with a slightly more concentrated focus on Ethical and Professional Standards, Investment Tools, and Asset Classes.

Major Items:

  • Test time: about 6 hours
  • December 2009 passing rate: 34%
  • June 2009 passing rate: 46%
  • Cost: Price varies depending on when you register –

9 months prior: $1020

4 months prior: $1110

3 months prior: $1435

  • When to take: June and December
  • Where to take: There is a list of CFA Exam locations on the CFA Institute website

Major Topics:

  • Ethical and Professional Standards
  • Quantitative Methods
  • Economics
  • Financial Reporting and Analysis
  • Corporate Finance
  • Investment Tools
  • Equity Investments
  • Fixed Income
  • Derivatives
  • Alternative Investments
  • Asset Classes
  • Portfolio Management and Wealth Planning

Level II

The Level II is the second exam in the series.  It consists of item-set questions and emphasizes the application of concepts that are introduced in Level I.  It tends to focus more on Investment Tools, Equity Investments, and Asset Classes.  Additionally, the exam presents ten hypothetical cases that include a series of multiple-choice questions to answer afterward.  In order to take this exam, you must have earned a passing grade on the Level I.

Major Items:

  • Test time: about 6 hours
  • June 2009 passing rate: 41%
  • Cost: Price varies depending on when you register:

9 months prior: $1020

4 months prior: $1110

3 months prior: $1435

  • When to take: June
  • Where to take: There is a list of CFA Exam locations on the CFA Institute website

Major Topics:

  • Ethical and Professional Standards
  • Quantitative Methods
  • Economics
  • Financial Reporting and Analysis
  • Corporate Finance
  • Investment Tools
  • Equity Investments
  • Fixed Income
  • Derivatives
  • Alternative Investments
  • Asset Classes
  • Portfolio Management and Wealth Planning

Level III

The Level III is the final exam in the series.  It consists of item-set questions and an essay, and tests a candidate on all concepts and applications introduced in each previous exam.  The exam’s predominant focus is on Portfolio Management and Asset Classes.   In order to take this exam, you must have earned a passing grade on the Level II.

Major Items:

  • Test time: about 6 hours
  • June 2009 passing rate: 49%
  • Cost: Price varies depending on when you register:

9 months prior: $1020

4 months prior: $1110

3 months prior: $1435

  • When to take: June
  • Where to take: There is a list of CFA Exam locations on the CFA Institute website

Major Topics:

  • Ethical and Professional Standards
  • Equity Investments
  • Fixed Income
  • Derivatives
  • Alternative Investments
  • Asset Classes
  • Portfolio Management and Wealth Planning

Grading and Exam Day

The exams are reported as “pass” or “fail” within 90 days after the exam is taken and the scores are only available online.  There is no minimum passing score for any of the exams.  Instead, the CFA determines the passing level each year after all exam scores are processed.  The CFA Institute suggests that successful candidates spend at least six months and 300 hours preparing for the exam, which had a combined average passing rate of 42.5% for 2009. However, the Institute also acknowledges that a significantly greater amount of preparation time may be required depending on each individual candidate.  The duration of the exam lasts around six hours, with a typical exam day beginning around 8 a.m. and ending around 5 p.m.  The day is broken up by morning and afternoon sessions and includes a lunch break in the afternoon.

Membership – Experience & Dues

In order to maintain your CFA charterholder membership after passing all three exams, you must have accrued at least 48 months of acceptable professional work experience either before or during the program, or after you have passed the exam.  This experience must be in a full-time position and 50 percent of the work must include direct involvement in the investment-decision making process and engagement in responsibilities and/or producing a work product that informs or adds value to that process.  Unacceptable work experience includes summer, part-time, and internship positions, and work that involves managing your own investments.  You can view sample work experience descriptions and titles on the CFA Institute website:

In addition, you must also submit an annual Professional Conduct Statement and pay annual membership dues of $225.  The Professional Conduct Statement must be signed by all members and must disclose any professional-related litigation or arbitration, customer complaints, and/or disciplinary proceedings.  It can be signed online when you pay your membership dues.  As a member, you are also required to comply with the policies and procedures outlined in the Articles of Incorporation and Bylaws, Code of Ethics and Standards of Professional Conduct, Rules of Procedure for Proceedings Related to Professional Conduct, and any other conditions or requirements established by the Institute.  These policies can also be found on the CFA Institute’s website:


While the preparation for the exam may be rigorous and the exam itself may be challenging, there are a number of benefits for earning the title of CFA Charterholder.  The CFA Institute cites the global networking opportunities that come with earning the CFA designation, as well as the mark of expertise and professionalism that will allow clients and colleagues to hold you in a higher regard.  Although the exams are suggested to be completed over a course of three years, there is no maximum length of time to complete all three levels.  Each exam can also be taken an unlimited number of times in the event that you do not pass.  There is also an extensive amount of study guide and review opportunities offered in print or online to ensure that you are well-prepared for the exam.


Please contact us if you have a question on this article or if you interested in starting a hedge fund.  Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

Cleantech: A Viable Option for Hedge Funds and Investors?

By Bart Mallon (

100 Women in Hedge Funds Hosts Panel of Cleantech Industry Professionals to Discuss the Future of Cleantech Investments

On March 24, 2010, 100 Women in Hedge Funds, a global association of investment management professionals, presented “Is the Grass Really Greener? The Case for Investing in Cleantech”, a networking and educational event focused on the clean technology (“cleantech”) movement and the push for venture capitalists and hedge funds to invest in cleantech technologies. The event, which took place at the Pillsbury Winthrop Shaw Pittman law offices in San Francisco, was host to 100 or so investment management and cleantech professionals from the San Francisco Bay Area who were all noticeably enthusiastic about the evening’s topic.

Kim Tomsen Budinger (of KTB Counsel), who is part of the 100 Women’s Northern California Steering Committee and who co-organized the event with Marianne O (of Lumen Advisors, LLC), introduced the moderator Scott Jacobs, a consultant at McKinsey & Company, and welcomed the following panelists:

  • Richard Bookbinder, Founder of New York-based hedge fund TerraVerde Capital Management LLC
  • Thomas Toy, Co-Founder and Managing Director of Menlo Park-based venture capital firm PacRim Venture Partners
  • Garvin Jabusch, Co-Founder and CIO of Boulder- and Silicon Valley-based investment advisors Green Alpha Advisors, LLC

What is Cleantech?

The discussion started with each of the panelists providing their own definition of cleantech – while each stated that the term is hard to define, it was noted that sectors like water, agriculture, and clean energy fall into the category of cleantech. The panelists also noted that varying definitions of “cleantech” can lead to investor confusion so managers will tend to define “cleantech” through examples of individual companies for instance.* [This confusion actually led to the creation of indicies focused on the sector.]

Despite the challenges of coming to an agreement on a definition, the panelists did express strong optimism about the potential financial growth – cleantech is expected to have revenues of approximately $3 trillion by 2030.  The panelists also discussed cleantech becoming its own sector and reference was made to a November 2009 report by Bank of America/Merrill Lynch entitled “A Stock Analyst’s View of Renewable Energy Technologies”.  The report says that cleantech will be the “sixth technology revolution” (i.e Industrial Revolution, Age of Information and Telecommunications), meaning that the next type of technology the world will operate on will be clean technology from natural resources.

* Cleantech Group LLC, an organization that advises investors and corporations interested in cleantech investing, provides a good overview of cleantech here.

Cleantech Hedge Funds

At a few points during the panel, the discussion went to cleantech hedge funds even though the panelists admitted there are not many cleantech focused hedge funds. Out of a potential universe of say 15,000 global hedge funds, the panelists had only identified around 120 funds focusing on the space. Many of these funds are part of larger hedge fund structures.  For instance, a manager may have a multi-billion dollar flagship fund and then create smaller funds focused on separate strategies or sectors such as cleantech. For many of these managers there is either a personal commitment to renewable energy or demand from mission-based investors (mostly on the high net worth side) for these products.

Of the funds that do focus on cleantech, most will be smaller ($50MM to $200MM) or very small ($10MM to $50MM).  Most of these funds will be either long/short or long only funds. The panel noted that while the cleantech “asset class” is relatively small right now, it is likely to become a larger part of the investing mandate going forward, so we are likely to see an increase (gradually, for right now) in the amount of funds focused on this space.

Challenges for Cleantech – Capital, Management, Government/Regulation

An overriding theme of the discussion was that, as an infant industry in the U.S., Cleantech faces a number various challenges including high capital requirements, relatively inexperienced management teams, and the lack of strong regulatory support.  Together these challenges help to explain why Cleantech in the U.S. is not as developed in other nations like China and Germany.

Perhaps the most difficult issue that the U.S. cleantech industry faces is an ambivalence from Washington and the states.  While some individual states are creating programs aimed to foster investments into cleantech and other earth friendly initiatives (see cap and trade below), at the federal level there are still massively unequal subsidies which are going to older poluting technologies.  In fact, the moderator asked whether the panelists believed that national legislation is “anti-cleantech” (i.e. subsidies to non-cleantech industries show bias toward legacy technologies), but the panelists disagreed.

Obviously consumers will be a driving force toward the allocation of more resources (tax breaks and tax dollars) to the industry even though it is not currently a high priority legislative issue for most Congressmen.  The fact is, however, that the U.S. is lagging other world leaders in cleantech – at several points in the discussion, the panelists made reference to the progress that China and Germany have made in the cleantech in comparison to the U.S. “We [the U.S.] are not at the top of the list”, one panelist said. “The gap is widening between the U.S. and China and Germany. Capital and technology is moving from the US to other countries.” It was noted that the cleantech industry needs to be concentrated domestically but should still have global outreach.

Cleantech Opportunities

Cleantech and institutional demand

One panelist pointed out that there are a number of attractive opportunities and that investors need to be poised to take advantage of these opportunities. Despite the drop in VC investment in the sector in recent years, cleantech remains the number one sector which VCs are allocating to.  (See page 16 of the Bank of America/Merrill Lynch report which contains statistics on venture capital investments in cleantech:

While the panelists were optimistic about the future of cleantech, the uncomfortable issue of risk-reward characteristics of investment in the sector was a predominant theme.  Essentially the sector returns (probably) do not justify investment right now because of the numerous risks, as described briefly above.  While more benchmarks are likely to be produced in the future (to appropriately identify those managers who can generate alpha), that will only be the first in a series of metrics which will need to be developed in order to appropriately quantify whether investment in the sector and certain companies is appropriate for investors.  Once the sector is more developed managers are more likely to be able provide the appropriate risk-return metrics to institutional investos, who themselves have to balance risk-return on a portfolio allocation basis.

For some investors, however, risk-return is not part of the investment equation.  Mission-based investors will make investments in the cleantech space because of their belief in the mission of the companies.  These mission-based investors are the groups which are more likely to be the allocating to cleantech managers and VCs at this point in time.

Carbon/Cap and Trade

The panel spent relatively little time discussing carbon and cap and trade systems.  While different from cleantech, carbon emission reduction through a cap and trade system (or systems) may present possibilities for future economic growth and investing and also present attractive potential opportunities for mission-based investors. However, post Copenhagen, it is clear that the major nations will need more time until any kind of comprehensive multi-national treaty is debated and ratified.  Resistance in the U.S. to a federal cap and trade system is keeping the price of carbon extremely low (in the voluntary systems), however Europe has proven that a mandated cap and trade market can work.  Political complexities, both at the national and international level, are likely to stall the development of a U.S. cap and trade regime.  Voluntary markets like the Regional Greenhouse Gas Initiative (RGGI), the Chicago Climate Exchange, and the Western Climate Initiative show that there continues to be strong interest in the cap and trade system.


While the discussion itself was not confined to the subject areas described above, and while the issues surrounding cleantech seem to make it a risky sector to be investing in, the panel and the audience showed great enthusiasm for the subject and the professionals in attendance seemed to feel that this is a sector which is poised for great growth in the future.


About Cole-Frieman &  Mallon LLP

Cole-Frieman & Mallon LLP is a San Francisco based law firm focused on the investment management industry. The firm’s services include hedge fund formation, startup services, investment adviser registration, and hedge fund consulting. Additionally, Cole-Frieman & Mallon LLP works with groups in the cleantech and carbon trading space.

Cole-Frieman & Mallon LLP is able to provide the following legal services to both domestic and offshore hedge funds:

  • Offer investment advice to funds interested in the purchase of carbon offsets
  • Provide legal advice to clients in regards to carbon market regulations
  • Assist hedge funds with the creation of investment projects that generate credits and offsets
  • Advise on marketing strategies for those clients interested in selling their carbon offsets or promoting their renewable energy projects
  • Provide networking opportunities with other lawyers engaged in the carbon market field
  • Advise clients on the policies and risks involved with credit trading

For more information, please call Bart Mallon Esq. at 415-868-5345.  Many thanks to Kristina Maalouf for her help with this article.

Regulation D Annual & Interim Amendments

Form D Updating Requirements

Initial Filing Requirement

As discussed in our overview of Regulation D, hedge funds must file a Form D with the SEC within 15 days of the first subscription of hedge fund interests.  This filing is now done completely online through the SEC’s EDGAR filing system.  If you have any questions on your initial Form D filing requirements, please contact Cole-Frieman & Mallon LLP.

Annual Amendment Required

Hedge funds which are continuously offering their interests are required to file an amended electronic Form D on an annual basis (e.g. on or before the anniversary of the most recent amendment (or original filing)).  Real estate funds and private equity funds which have made a “final closing” will not be required to file an annual amendment unless one year lapses from the first sale date and the final closing date.  See generally Rule 503(a)(3)(iii).

Requirement to Correct Errors or Report Changes

Hedge funds must file amendments to Form D to correct material mistakes of fact or errors, and to report changes in information reported on previous Form D filings.  The amendment must be filed as soon as practicable.

Generally changes will require an amendment except for certain more administrative changes.  The changes which do not require instant amendment include:

  • The address or relationship to the issuer of a related person identified in Item 3 of Form D;
  • The fund’s revenues or aggregate net asset value;
  • The minimum investment amount, if the change is an increase, or if the change, together with all other changes in that amount since the previously filed notice of sales on Form D, does not result in a decrease of more than 10%;
  • Any address or state(s) of solicitation shown in response to Item 12 of Form D;
  • The total offering amount, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice of sales on Form D, does not result in an increase of more than 10%;
  • The amount of interests/securities sold in the offering or the amount remaining to be sold;
  • The number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35;
  • The total number of investors who have invested in the offering; or
  • The amount of sales commissions, finders’ fees or use of proceeds for payments to executive officers, directors or promoters, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice of sales on Form D, does not result in an increase of more than 10%.

The only time that changes to these items must be reported on an interim basis is when the issuer is otherwise filing a 503(a) amendment.

Rule 503(a)(4) requires that current information must be provided in response to all parts of the Form D, regardless of the reason for the filing.  Thus, even when filing an amendment to correct a small error, current information must be given for all parts of the form, even those items excepted under 503(a)(3)(ii).  Similarly, when filing to report changes in information that is not under the exception, current information must be provided for all parts of the Form D.  And, of course, when making an annual filing, all information must be current.


Please contact us if you have a question on this issue or if you would like to start a hedge fund.  Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

Cole-Frieman & Mallon LLP Comments on Proposed Retail Forex Regulations

Text of the Cole-Frieman & Mallon LLP comment is provided below.


[Footnotes ommitted]

March 22, 2010


Mr. David Stawick
Commodity Futures Trading Commission
1155 21st Street, NW
Washington, DC 20581

Re: Request for Comment on Proposed Regulation of Off-Exchange

Retail Foreign Exchange Transactions and Intermediaries

Dear Mr. Stawick:

This letter is in response to the request of the Commodity Futures Trading Commission (the “Commission”) in RIN 3038–AC61 (the “Release”)  for comment on certain proposed regulations (the “Proposed Regulations”) under the Commodity Exchange Act (“CEA”)  as amended by the CFTC Reauthorization Act of 2008 (the “CRA”).  The Proposed Regulations as drafted would establish requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital, and other operational standards with respect to retail off-exchange foreign currency (“forex”) transactions.

Cole-Frieman & Mallon LLP is a law firm which represents a substantial number of clients who are domestic forex market participants and who would be directly affected by the Proposed Regulations. We appreciate the opportunity to comment on the Proposed Regulations, especially considering that the regulations, if adopted as proposed, would significantly affect the business of many of our clients. While we have discussed these views with our clients, and they share many of the same views, the comments expressed in this letter are our own.

Overview of Proposed Retail Forex Regulations

The Proposed Regulations would, among other things, (i) require certain retail forex market participants to register with the Commission, (ii) require counterparties dealing in retail forex to increase the security deposit for forex transactions, (iii) establish certain net capital levels for forex counterparties, and (iv) require introducing brokers to retail forex transactions to operate pursuant to a guarantee agreement with only one forex counterparty.

The landscape in which the Proposed Regulations were developed is important. Prior to the CRA, the Commission did not have an explicit grant of jurisdiction over the off-exchange spot forex markets  and there was, accordingly, little regulatory oversight of certain market participants. Without a mandate to require registration of such market participants, run-of-the-mill common law fraud proliferated  as regulators were impotent to stop these scams. While state laws were able to address many of these cases after the fact, the Commission sought to regulate the industry as a proactive means to prevent fraud. At the same time, many legitimate domestic forex businesses sought ways to distinguish themselves from the fraudulent players in the industry by voluntarily registering with the Commission as commodity pool operators (“CPOs”), commodity trading advisers (“CTAs”), introducing brokers (“IBs”) and futures commission merchants (“FCMs”).  These businesses, like many of the firms and individuals who have responded to the Commission’s request for comments, fully appreciate the important role that regulatory bodies play in “cleaning up” the industry and making sure that bad actors do not continue to tarnish the names of hard working individuals who have helped to create a competitive and robust industry in the United States.

We agree with many of the Proposed Regulations and believe they serve important investor protection functions, however we are concerned that some of the Proposed Regulations will not protect investors and will have a deleterious effect on the United States forex industry. It is within this context, and with the goal of helping to create a considered regulatory regime that emphasizes both investor protection and the continued economic viability of the domestic retail forex industry, we make the following comments.

Registration of Forex Market Participants

Registration of Forex CPOs, CTAs and IBs

The Proposed Regulations require persons to register with the Commission as forex CPOs, forex CTAs, and forex IBs, as appropriate.  The Proposed Regulations also create a new registration category for retail foreign exchange dealers (“RFEDs”) and require RFEDs to register as such with the Commission.  Certain employees of the foregoing registrants would be required to register with the Commission as associated persons (“APs”), as appropriate.  The registered firms and APs would also be required to become members of a registered futures association.  In addition to registration, Proposed Regulation 5.4 would require certain disclosure, recordkeeping and reporting requirements for forex CPOs and CTAs.

We broadly believe that requiring forex CPOs, CTAs, and IBs to register with the Commission is reasonable.  It is clear that the standards to operate as a Commission registered firm and National Futures Association (“NFA”) Member Firm are high. In order to complete registration, each firm needs to designate at least one person as an AP/Principal, and that person needs to meet certain proficiency requirements,  background checks, and other investigations into the person’s fitness to provide services to customers.  Once registered, forex CPOs and CTAs are generally required to have their disclosure documents reviewed by the NFA prior to soliciting customers.  These measures provide both the Commission and the NFA with ample opportunity to review firms and individual applicants. Once registered, Member Firms will be required to implement recordkeeping and compliance programs under both Commission regulations and NFA Rules.  In addition to self-examination and compliance mandates, NFA Member Firms are subject to routine audit and the NFA has made it clear that it intends to heavily monitor Member Firms involved in the retail forex industry.  It is our belief the foregoing measures are sufficient to achieve the goal of investor protection while remaining within with the Commission’s statutory duty to utilize the least anti-competitive means possible.

Lower Leverage Requirement

The heavily criticized Proposed Regulation 5.9 requires RFEDs and FCMs engaging in retail forex transactions to collect from the retail customer a security deposit of ten percent of the notional value of the transaction. The regulation would also require the RFED or FCM to collect an additional security deposit or liquidate the position if the account value drops below the 10:1.  The Release cites a number of reasons for limiting leverage including: (i) extreme volatility of the forex markets; (ii) potential customer liability for losses if positions are not closed out; (iii) counterparty risk; and, (iv) current and proposed margin requirements by other regulatory bodies, including FINRA.  It is unknown if the Commission spoke with any industry participants such as FCMs or forex customers when considering this provision.

We strongly oppose Proposed Regulation 5.9. We believe that reducing leverage for retail forex transactions to 10:1 will not serve to protect customers and will likely, instead, harm the domestic forex industry. Many of the reasons cited by the Commission for the reduction of leverage are simply ill-founded and have previously been examined by the NFA.  We believe that the Commission should not pass the proposed regulation as written because the NFA’s current leverage requirement adequately protects investors and it is clear that there are serious anti-competition issues with the proposed regulation.

NFA Section 12 Provides Greater Leverage

Proposed Regulation 5.9 was promulgated notwithstanding that the NFA just recently implemented a rule, approved by the Commission on November 30, 2009, requiring leverage for Forex Dealer Members (“FDMs”) of 100:1 for major currencies and 25:1 for non-major currencies.  In proposing the rule change (in which the NFA actually increased the leverage allowances), the NFA took a considered approach to the issue. The NFA (i) researched then current FCM and FDM practices with respect to leverage, (ii) researched the practices of other industry groups, (iii) solicited comments from FDMs on proposed rules, (iv) discussed the issue with an FDM advisory committee, and (v) independently investigated the issue.  In proposing the leverage rule, the NFA stated that it “believes that the amendments [100:1 and 25:1 leverage] are the best way to address NFA’s customer protection concerns with certain FDMs’ use of leverage.”  The NFA further stated that:

Based on our experience with FDM practices, including that most FDMs use systems that liquidate customer positions before they reach a negative balance, NFA believes that the 1% and 4% security deposit requirement amounts remain sufficient at this time to protect against financial harm to FDMs and their customers even though they are significantly lower than margin requirements for on-exchange equivalents.  [emphasis added]

We strongly agree with the NFA’s current leverage requirements. We believe that the NFA took the appropriate time and care necessary to properly research this issue and that significant deference should be given to the NFA’s margin requirements for Commission registrants.

Unprecedented Industry Resistance to Lower Leverage

As of March 22, 2010, the Commission published on its website almost 9,000 comments. These comments were prepared and submitted by all types of participants within the retail forex industry including: forex investors, market participants such as forex CPOs, forex CTAs, forex IBs, FCMs, FDMs, and two newly formed coalitions – the Forex Exchange Dealers Coalition and the IB Coalition. The comments were overwhelmingly against leverage reduction and a majority have cited a number of reasons including: (i) liberty/freedom to contract; (ii) job loss from trading going overseas;  and, (iii) lack of protections to domestic investors in offshore jurisdictions.

We share the views expressed in many of the comments, especially with respect to the viability of the forex industry in the United States if lower leverage is required. As many comments noted, if lower leverage is instituted, customers will simply move their accounts to offshore brokers who provide leverage of 200:1 or more. It is common knowledge that these offshore brokers can be unreputable and may actually provide investors with fewer safeguards than domestic brokers who are (and will continue to be) subject to oversight by both the Commission and the NFA.

Net Capital Requirements

Proposed Regulation 5.7 requires each FCM engaged in retail forex transactions and each RFED to maintain a certain minimum net capital. The net capital requirement would require firms to maintain the greater of: $20 million; $20 million plus 5% of the total retail forex obligation in excess of $10 million; any amount required under Commission Regulation 1.17; or amounts required by a self regulatory organization of which the FCM or RFED is a member.  The purpose of these requirements is to protect retail customers in the absence of bankruptcy protection for segregated funds by making sure that FCMs and RFEDs will be able to remain solvent.

We believe that absent bankruptcy protection for segregated funds, high net capital requirements are the best way to protect the assets of retail investors. We do note, however, that high net capital requirements limit the groups who are able to participate as principals in these markets.

Introducing Broker Guarantee Agreement

Proposed Regulation 1.10 requires forex IBs to enter into a guarantee agreement with a RFED or FCM in connection with retail off-exchange forex transactions.  The Commission will prepare a new Part C guarantee agreement to the Form 1-FR-IB which, according to the Release, will make FCMs and RFEDs jointly and severally liable for all obligations of the IB with respect to the solicitation of, and transactions involving, all retail forex customer accounts of the IB entered into on or after the effective date of the guarantee agreement. The Commission believes that the guarantee requirement serves the public’s interest by creating a marketplace where improper practices by IBs are discouraged while still permitting FCMs and RFEDs to make use of outside salespeople.

We strongly disagree with Proposed Regulation 1.10. We believe it will effectively eliminate almost all forex IBs and put a number of honest and ethical forex IBs out of business. While it would be true that RFEDs and FCMs would still be able to utilize outside sales agents, in practice RFEDs or FCMs are not going to take on the risk of guaranteeing forex IBs.

We also cannot support this proposal because we believe that there is strong oversight of forex IBs and that registration will further weed out unscrupulous players. As we discussed above, the NFA is tasked with significant oversight responsibilities and does not take this mandate lightly. While a forex CPO or CTA may be able to become initially registered within a matter of weeks (assuming the firm and principals have clean regulatory histories), a forex IB application may take three to six months or longer to be approved. Also, unlike forex CPOs and CTAs, the NFA requires forex IBs to have robust Anti-Money Laundering procedures, Business Continuity Plans and other compliance policies and procedures in place prior to registration. During the IB registration process the NFA examiners thoroughly review an applicant’s background and operating procedures. Additionally, the NFA requires independent IBs to maintain a $45,000 net capital requirement and to submit financial information on a semi-annual basis.  In our opinion this existing regulatory framework of review procedures and net capital rules is more than sufficient to ensure investor protection.

Furthermore, we concur with a number of commenters who have noted that there are fairness concerns vis-a-vis introducing brokers to on-exchange traders. We believe that the Commission can achieve its goal of investor protection through less anti-competitive means.

Grandfathering Provision Should be Added

In the event the Commission adopts the proposed regulation as drafted, we believe the Commission should provide a grandfathering provision for current forex IBs who would be put out of business if the proposed regulation was passed as currently written. Additionally, the Commission should clarify the manner in which independent IBs are treated if they make introductions to both exchange traded futures products in addition to retail forex.

Other Issues

Technical Revisions

The Proposed Regulations include a number of revisions to current Commission regulations which are necessary from a technical perspective to ensure the new regulations are properly implemented within the Commission’s statutory framework. We agree that technical adjustments to current rules are necessary and applaud the Commission for trying to streamline regulation as much as possible.  Certain technical aspects of the rules, however, should be revised with appropriate industry input.  Additionally, any adopted leverage regulation will likely necessitate a change to certain provisions which currently reference the NFA leverage rule.

Disclosure Document Risk Statements

Proposed Regulations 4.24 and 4.34 provide certain risk disclosure statements which must be included at the beginning of forex CPO and CTA disclosure documents. We completely understand the purpose of this requirement and we also understand that this practice would mirror the current requirements for CPOs and CTAs. However, we do not believe that consumers actually read long paragraphs of legal disclaimers in large capital letters. In the future, the Commission should consider a succinct bullet point list. We believe that consumers are more likely to read and understand information in such format.

Regulation 5.5(e)

Proposed Regulation 5.5 would require FCMs, RFEDs and forex IBs to provide retail forex customers with a risk disclosure statement similar to the statement currently required for customers engaging in on-exchange trading. Proposed Regulation 5.5(e) would additionally require these firms to disclose additional information which is not required to be disclosed for on-exchange trading.  We believe that Proposed Regulation 5.5(e) should not be deleted because it would not further any true investor protection and would likely be anti-competitive.


The proposed rules seek to develop a comprehensive regulatory structure for the off-exchange retail forex industry. We have provided the Commission with these comments in the hope of helping to create a robust but appropriate regulatory environment while preserving the industry’s ability to succeed in a global forex marketplace. We appreciate the opportunity to comment on the Release. If you have any questions regarding this letter, please contact the undersigned at 415-868-5345.

Very truly yours,

Cole-Frieman & Mallon LLP

Bart Mallon

Health Care and Hedge Funds

Obama Health Care Bill Increases Capital Gains Rate to 23.8%

According the this story by Bloomberg, the tax on dividends and long term capital gains under the Obama Health Care Bill will spike to 23.8% when the tax increases are fully implemented.  The article states:

Obama’s budget proposes to allow the existing 15 percent tax rate on dividends and capital gains to rise to 20 percent in 2011 for the same high-earners. Layering a 3.8 percent Medicare tax on top of that would mean a new top rate on dividends and capital gains of 23.8 percent. The top tax rates on interest and rental income would rise to as high as about 44 percent, assuming other Obama tax increases on high-earners are enacted.

It will be interesting to see how the investment management industry will react to this 50% increase in taxes on dividends and capital gains.

NFA CPO/CTA Regulatory Seminar Recap

by Bart Mallon, Esq. of Cole-Frieman & Mallon LLP

On March 2, 2010 the NFA held an all-day seminar at the UBS Conference Center in Chicago for the futures and commodities communities.  With limited exceptions, the seminar provided useful information and allowed the audience to interact with the regulators directly through Q&A opportunities or by networking during the break periods.  This overview will provide a quick summary of the major items discussed and the notes I took during the day.  Full supporting materials for each session have been posted on the NFA’s website and the NFA will provide an audio CD of the seminar upon request.

Session One: The Current State of CPO/CTA Regulation

This session may have been mis-named as it focused solely on the potential changes with respect to the broader financial system.  Accordingly, much attention was (needlessly) focused on some of the proposed bills pending in the House and Senate (which may or may not ever become law).  After discussing the proposed bills in general, the panel moved to the proposed legislation with respect to the OTC derivatives markets (see CFTC thoughts on OTC derivatives regulation and Chairman Gensler’s Recent OTC regulation remarks).  Brief mention was also made regarding the CFTC proposal to limit energy positions.  A large part of the session was also devoted to issues dealing with harmonization between the CFTC and the SEC, which naturally included a discussion of the OTC derivites markets.

What did any of this have to do with CPO/CTA regulation as the title of the seminar indicates?

Not a lot, but the session did give the NFA a chance to frame some of the issues for the day and show that the mandate of the CFTC and NFA is broad.  Surprisingly, the panel did not even mention one of the major proposed regulations which would affect a large number of CPOs/CTAs (and bring many more firms under the CFTC’s jurisdiction) – that issue was the proposed retail forex regulations.

When the panel was asked about the proposed forex regulations the NFA’s Dan Driscol mentioned a couple of interesting things.  First, the NFA has been proceeding under the assumption that the forex registration rules will pass and that a large number of forex managers will need to be registered with the CFTC.  Accorindingly, the NFA has been building out its systems and apparently there is some sort of way for the NFA to earmark which firms are forex firms (perhaps for greater oversight).  The NFA also believes that during the registration process there is going to be a lot of hand holding, but also a lot of enforecment actions.

With respect other parts of the proposal, especially with respect to the increased margin requirements (100:1 leverage will move to 10:1 leverage under the proposed regulations), the NFA indicated that it will be providing the CFTC with a comment letter addressing its thoughts (see NFA Indicates Support for Greater Leverage).  Specifically the NFA indicated that they believe margin requirements should be based on the volatility of the underlying instrument (here, the major currencies).  While the NFA is not going to take a hard stance, the NFA is expected to provide the CFTC with more information on its experiences with respect to the margin requirements.  The comment period for the retail forex proposal ends on March 22 so we will report on the NFA’s comments when they are available.  [Note: Cole-Frieman & Mallon LLP will be providing comments on the proposed rules.]

Session Two: Disclosure Document and Performance Reporting

As all CTAs and CPOs probably have experienced, having a disclosure document reviewed and approved by the NFA can be an aggravating experience.  Notwithstanding my own opinions on this issue, the panel started by discusing the 4.13 exemptions.  The panel noted that the CFTC’s Part 4 regulations require very specific items from disclosure documents.  Generally most CTAs and CPOs are familiar with the more important parts – risk disclosures and risk factors, conflict of interests and fee information.

The lawyer on the panel made the case for overdisclosure – the framework which managers should use when thinking about the disclosure documents is that of an opposing counsel in the future.  In the event that something would go wrong in the future, what in your disclosure documents would opposing counsel point to?  Is there anything which you would be embarrassed about if it was brought before the jury?  Is there anything that is simply misstated or omitted?  These are the types of things that opposing lawyers would point to during a lawsuit and therefor all managers (whether registered or not) should always make sure anything they give to investors is accurate and discloses all material information.

The panel began in earnest by talking about common comments on disclosure documents.

Common comments

  • Forex. Under principal risk factors many forex managers have risk factors which have been modified from futures disclosure documents.  However, the futures and forex industries operate different therefore there is not the issue with clearing.  Also forex transactions are structured different than for futures transactions and therefore the cost structure is different.  [New NFA Rule 2-41.  Forex risk disclosure statement needs to be exactly as stated in the rule.]
  • Litigation statement. The litigiation needs to be up to date.  Many FCMs will continually update their litigation disclosure statement and if the most recent statement is not in the disclosure documents the NFA will check and will let you know in the deficiency letter that it needs to be updated.
  • Bios/manager background. It is a requirement for the managers bios to be included and the manager must include the dates of all employment (including unemployment or schooling) for the preceeding five years.  This means both month and date needs to be included.  Managers need to make sure the dates in the bio match with the dates in the Form 8R.

Litigation Statements

CTAs and CPOs are required to provide the litigation history for the firm and, more importantly, for the FCM and IB.  These litigation disclosures are dense paragraphs of legalese which is designed to inform the investor of the potential legal issues with the FCM or IB.  In practice these disclosures end up being pages long and, in my experience, are practically unreadable which brings up the question of their utility and if such disclosures really protect investors.

Notwithstanding the above, it is a requirement and CTAs and CPOs need to make sure that the ligitation statement is complete, accurate and up to date.  Firms should also realize that the litigation statement may change during the review process which is what happened recently to one of my clients.  The disclosure document received no comments from NFA staff except that the litigation statement for the firm’s FCM had just changed days earlier and would need to be updated.  This needlessly added weeks to client’s start date.

CTA and CPO Documents “Not Boilerplate”

The attorney on the panel stressed that disclosure documents are not boilerplate, no matter how similar they may appear.  He went on to note that there is a lot of detail in the documents and that it is essentially a manager’s contract with the investors.  He stressed that managers should know and understand every detail of their documents.  I completely agree.

One of the employees of a large CFTC registered firm noted that the manager needs to make sure that the disclosure document accurately reflects the way that business is conducted in the firm.  Managers should ask operational personnel to review the document to make sure the language captures the manner in which the firm operates – if there are discrepencies between the document and operational procedures, the document should be amended or revised.

Performance Capsules

There are a number of issues which arise in the context of performance capsules and therefore a firm must take care to make sure that the capsule mirrors the NFA requirements exactly.

Break-Even Analysis

Every CTA or CPO disclosure document needs to include a break-even analysis.  Generally this analysis will show a prospective investor or client the amount of gains necessary in order to break-even on the investment.  Naturally the break-even analysis is an inexact science and, therefore, it is arguably of little value.  For instance, the numbers in the table (at least for a newly registered CTA or CPO) are based on assumptions with respect to both level of assets as well as expected trading volume.

While there was no single or common issue discussed with regard to the break-even analysis, the NFA noted that for those managers which allocate or invest in underlying CTAs or CPOs, then the break-even analysis would also need to include the incentive fees payable at the underlying level.  The NFA went through the calculations involved with determining such expense.

Timing and Section 4.8

During the question and answer period, I asked the panel whether they often times see groups using the CFTC Regulation 4.8 exemption during the approval process.  I think that literally two or three of the representatives from the NFA said that they did not know what Regulation 4.8 was – I noticed that the attorney on the panel might have something to say and so I asked him if his clients had used it.  He explained Regulation 4.8 and noted that he did not recommend clients use it because it is awkward to go back to pool investors and explain the issue.

The NFA took the opportunity to say that managers should allow plenty of time to go through the registration process.

Session Three: Pool Financial Reporting

There were essentially two parts to this presentation: a discussion of the new reporting requirements for the NFA and a discussion on fair value and derivatives.

For the first part, Tracey Hunt of the NFA provided information on some of the new reporting changes for CFTC registered firms.  These include issues devoted to series funds, relaxed rules regarding liquidation statements, an extension for fund of fund filers.

Perhaps more importantly for many of the groups at the conference was the discussion of new NFA Rule 2-46 and a presentation of the reporting systems for the rule.  Rule 2-46 essentially requires certain operators who have reporting requirements under CFTC Regulation 4.22 to make a quarterly filing through the NFA’s EasyFile system.  CPOs will need to provide the NFA with the following information within 45 days of the end of the calendar quarter:

  1. Key Relationships – pool administrators, carrying brokers, trading managers, custodians
  2. Statement of Changes in NAV
  3. Monthly Rates of Return
  4. Schedule of Investments – all pool investments greater than 10% of fund NAV need to be disclosed (even if the positions are not futures/commodities)

We were provided with screen shots of the new filing system and it seemed both robust and complicated.  The NFA has noted that they have spent a lot of time to update their EasyFile system to accomodate the filers.  Even so, we believe their are likely to be bugs in the system and so we recommend that groups begin the EasyFile system as soon as possible to avoid missing the deadline because of technical issues. The system will have functionality to allow for many of the fields to populate automatically based on previous submissions.  There are also some specialized issues with respect to master-feeder and fund of fund structures – generally the system will require you to keep drilling down until you reach the actual investments, no matter how many organizational layers are in the structure.

The second part of the discussion included a powerpoint slide from Deloitte discussing new issues with financial reporting.  Essentially differences between level 2 and level 3 assets.

Keynote Speech from CFTC Commissioner Dunn

During lunch, which was actually quite nice, CFTC Commissioner Dunn delivered the keynote speech.  As all speakers from government agencies do, he noted that his comments were his own and not of the CFTC.  He spoke generally about the challenges facing the CFTC and that the issues are more complex than the issues the CFTC had to deal with in the past.  Additionally, with greater financial regulation looming, the CFTC’s job (in conjunction with the SEC in certain circumstances) has become even more important.

He also talked to varying degrees on the following issues:

  • The historic two day meeting between the SEC and the CFTC regarding harmonization
  • A potential uniform fiduciary duty for all investment advisers (or other groups under SEC and CFTC jurisdiction)
  • Potential future regulation of the OTC derivitatives markets – he noted his support of OTC derivitatives regulation and Chairman Gensler.  He did note, however, that there are many issues that would need to be worked out with any proposed legislation or regulation.  He also discussed the proposed position limits on certain energy contracts.
  • Retail forex and the large amount of comments which have been received.

Session Four: Sales Practices

Perhaps the most entertaining of the panel discussions was on sales practices.  The discussion was led by John J. Lothian who is well-known in the futures industry and created MarketsWiki.  John did a fantastic job of including all of the panelists which included Natalie Peters of DigiLog Capital LLC, and Dorothy Bobak and Alexandra Shipovskikh, both from the NFA.

Common Deficiencies

The NFA discussed the following common deficiencies:

  • websites often have many deficiencies including with the general disclaimer and ommissions –  it was stressed that the Member must be able to support all material statements of fact on the webiste
  • opinions should be clearly labeled as such
  • past trading performance will generllay have a lot of issues
  • general issue with stuff on third party websites – if you see something that is not correct, even if you did not place it there, you should ask the webmaster to revise or take it down.  a member may have some oversight responsibilities

Links from a Member’s Website

Generally a firm should have superviosry procedures in place for linking from a proprietary website to another unaffiliated website (note: Cole-Frieman & Mallon LLP generally recommends to clients that they do not link out to unrelated websites)

  • Members should make sure that outbound links adhere to requirements of NFA Rule 2-9 and NFA Rule 2-29
  • Member need to monitor outbound links through periodic review
  • With respect to reporting sites (i.e. AutumGold, Barclays) you need to make sure all of the information is accurate and all descriptions of the pool or trading program are complete.

Social Media

The NFA just recently amended Rule 2-29(h) and released a social media interpretive notice.  The new notice solidifies many of the principles of 2-9 and 2-29 but also deals with specific issues with sites like YouTube, Twitter, LinkedIn, Facebook, blogs, etc.  Interestingly, the NFA announced that it has a Facebook page which is used for recruiting new staff members.

With respect to the new rule and different media, the following was discussed:

  • Twitter. How do you comply with 2-29 (disclaimer rule) within 140 characters?  The media is necessarily different than a trditional website with a disclaimer.  One way might be to format your Twitter page with a prominent disclaimer.  You will need to make sure that all of the material you tweet is balanced pursuant to the promotional materials rule.  There is always a potential problem with re-tweets.  With respect to re-tweets, a Member may have an affirmative duty to ask another person to take down the re-tweet (which request itself, presumably, would be subject to record keeping requirements).  Suggestion: use software to complie an archive of tweets.  If you remove a tweet, you still need to keep a record of that tweet.  The software should be able to provide a record of this.  A firm should have a policy regard re-tweets (both by the Member or of the Member’s content).
  • Facebook. Many groups have a Facebook page.  The question was whether a simple Facebook page with basic information would constitute “promotional material” – the NFA said maybe.  The next question would be whether the firm was “soliciting” by having a Facebook page. Suggestion: a firm should institute the same oversight policies and procedures for a Facebook page as they would for other promotional materials.
  • YouTube. As both an audio and a video platform, a YouTube video will generally be subject to NFA Rule 2-29(h).  Generally this will require that any audio or video advertisement be submitted to the NFA prior to use.  If a member has something that was on YouTube prior to Febuary  1 then the member should take it down immediately and submit the media to the NFA for review – this material is not grandfathered into the amended rule.  It sounded like the NFA will be looking at YouTube in the future to catch violations.
  • Other Mediums. Podcasts, blogs, forums, public wikis, and other forms of media all have medium specific issues which managers should discuss with counsel prior to displaying material which might be considered promotional material.

A firm which uses any of the mediums described above should have policies regarding education of employees on rules and responsibilities and appropriate oversight of the employees.  If you firm needs to implement such policies and procedures, Cole-Frieman & Mallon LLP can provide guidance.

How to submit materials

In the event that a firm is subject to Rule 2-29(h) and therefore required to pre-file advertising materials, those materials can be submitted to the NFA in any format including CD, email, zip files, etc.  In the context of live feeds, webinars, and seminars – the Member firm should submit an outline of what will be discussed prior to the live performance then submit an recording of the performance after it has happened.  Such procedures are generally what you would do if an associated person or principal appeared on live television like CNBC or Bloomberg TV.

Session Five: The NFA Audit Process

Maybe one of the most important things that a firm should be ready for is an NFA audit.  For many firms this is a painful process which causes anxiety, but for other firms, it might be an opportunity to get an outside review of back end business operations for “free.”  Regardless of how a group views an audit, the discussion was helpful in identifying areas where managers can focus their attention in order to make the audit go as quickly as possible.

Who gets audited by the NFA?

There are no good answer with respect to when a member firm may expect to be audited by the NFA.  In general FCMs and very large managers are likely to face NFA audits on a more regular basis.  Forex firms can also expect to be audited more regularly than traditional futures only firms.  Traditional CTAs and CPOs are under no timeline requirement so these groups might not see an audit for up to three years or longer.

Audit Process

Generally the NFA will alert a member firm 2-3 weeks prior to the exam.  This gives the firm plenty of time to gether the inital records and other items requested by the NFA prior to their arrival.  While the amount of information requested might seem to be enormous, a firm should attempt to comply with each item as this will decrease the amount of time the NFA will spend at your place of business.

The actual audit may take place over a day or be 2-3 days long.  Larger firms can expect the NFA to be on site for a week or longer.  The amount of time obviously depends on a number of factors including the size of the member firm and complexity of operations.  During the audit there will likely be a lot of interaction between the compliance officer and the auditor.  At the end of the audit they will provide the firm with a request list.

One of the most important items to keep in mind during the process is to keep open communication with the auditor.  If you believe that the NFA findings are incorrect, you should discuss the issue with the auditor – at times they may see your point of view and side with you.

NFA Self-Exam Checklist

The most import item for Member firms to complete on yearly basis is their annual self-exam.  Cole-Frieman & Mallon LLP has provided easy to use NFA self-examination checklists.  Generally firms will need to take time to complete these lists on an annual basis and will need to keep a record of these actions pursuant to the firm’s recordkeeping policies.

Focus Areas

  • General. General issues which often are reviewed include proper registration, review of promotional material, performance reporting, trading (make sure recommendations appropriate), supervision, etc.
  • Valuation. If there are level 2 or level 3 assets there is likely to be greater review; principals need to make sure they sign off on level 2 or level 3 valuations.
  • Side Letters. This is a new focus area and the focus here will be to make sure the manager is doing what he says he will do in the side letter
  • Side pockets. Valuation of assets is going to be a focus area.

Common Audit Deficiencies

  • Promotional material. Issues include ridiculous performance numbers, withholding information from previous accounts, inaccurate numbers, etc.
  • Bylaw 1101. Requires that, as a NFA Member Firm, you only do business with other NFA Member Firms or firms that do not need to be registered; firms should have procedures in place to make sure other firms are either registered or not required to be registered (especially in the fund of funds context).
  • Inconsistencies. Your disclosure documents and compliance manual/ policies and procedures should be an accurate reflection of your firm’s actual operations.
  • Bunched orders. If a CTA firm bunches client orders, the CTA must conduct a quarterly review to make sure allocations to client accounts are done in a non-preferential manner.
  • NFA Rule 2-45. No loans from the pool to the manager for own personal use (ex. manager taking money out of pool to pay off mortgage)

Other items

  • Firms should remember that they need to distribute a privacy policy to customers on a yearly basis (perhaps send it out with December statement).
  • Disaster recovery plan (DRP) should be reviewed at least annually.  The DRP should be resonable based on operations.  This is an area where the auditors do not pay as much attention to.
  • Firm need to have ethics training procedures.  Many of these procedures are boilerplate.  Firms should make sure they follow their internal procedures.
  • Creating folders, filing and other systems on the front end will help the firm to remain organized and will help to keep the audit moving as quickly as possible.

Future Seminars

If you are interested in other seminars and conferences, I recommend the New York CTA Expo on April 21 which Cole-Frieman & Mallon LLP is sponsoring.  Also, the NFA is having another CPO/CTA conference in New York on April 22.  If you are in the San Francisco Bay area, we would also like to extend an invitation to the San Francisco Futures Professionals group which meets every couple of months to discuss issues relevant to members.


Other related hedge fund law blog posts include:

Cole-Frieman & Mallon LLP ( provides comprehensive legal and compliance services to commodity trading advisors and pool operators.  You can reach Bart Mallon, Esq. directly at 415-868-5345.

NFA Announces Effective Date of New CPO Reporting Rule 2-46

First CPO Quarterly Report Due May 17, 2010

As we recently discussed in an earlier article on NFA Compliance Rule 2-46, the NFA has adopted a new compliance rule which will require commodity pool operators to provide certain information to the NFA on a quarterly basis.  In general CPOs will need to provide the NFA with the following information about their pool: the names of certain service providers/ counterparties, change in NAV over the quarter, monthly ROR for the fund, and information on large investments (greater than 10% of the fund’s NAV).

The NFA will be holding a webinar so that members can see how to complete the quarterly filing through the EasyFile system.

The announcement is reprinted in full below and can be found here.


Notice I-10-10

March 17, 2010

Effective Date of NFA Compliance Rule 2-46: CPO Quarterly Reporting Requirements

NFA Compliance Rule 2-46: CPO Quarterly Reporting Requirements will become effective on March 31, 2010. Rule 2-46 requires each CPO Member to report on a quarterly basis to NFA specific information on certain pools that it operates within 45 days after the end of each quarterly reporting period. The CPO must provide the information for each pool that it operates that has a reporting requirement under CFTC regulation 4.22 (which includes exempt pools under CFTC Regulation 4.7). Using a new web-based system that was specifically designed for this rule, the CPO must enter the following information:

(a) the identity of the pool’s administrator, carry broker(s), trading manager(s) and custodian(s);

(b) a statement of changes in net asset value for the quarterly reporting period;

(c) monthly performance for the three months comprising the quarterly reporting period; and

(d) a schedule of investments identifying any investment that exceeds 10% of the pool’s net asset value at the end of the quarterly reporting period.

The first quarterly report will be due by May 17, 2010 for the quarter ended March 31, 2010 and must be filed electronically using NFA’s EasyFile System. In order to ensure that CPO Members understand the new requirements, NFA will host a webinar on April 13, 2010 at 12:00 p.m. (Eastern Time), which will outline the new reporting requirements and how to file using the new system. Click here to register for the webinar. NFA staff will also provide detailed information on the new requirements and filing instructions at NFA’s CPO/CTA Regulatory Seminar being held on April 22, 2010 in New York. Click here to register for the seminar.

More information about NFA Compliance Rule 2-46 can be found in NFA’s August 25, 2009 Submission Letter to the CFTC. Questions concerning the reporting requirements should be directed to Tracey Hunt, Senior Manager, Compliance ([email protected] or 312-781-1284) or Mary McHenry, Senior Manager, Compliance ([email protected] or 312-781-1420).


Other related hedge fund law blog posts include:

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

NFA Adopts CPO Quarterly Reporting Rule

The NFA recently adopted new Rule 2-46 which will require commodity pool operators to make a quarterly report to the NFA.  This quarterly reporting requirement is in addition to the annual audit financial statement filing requirement and must be completed through the NFA’s online filing system.

We have provided an overview of the major requirements of the new rule and have posted the complete text of the new rule below.

Overview of NFA Rule 2-46

Who has to file?

Generally all registered CPOs will need to file the report with respect to the pools which they manage.  This includes CPOs to both 4.7 and 4.12 funds.  Operators of 4.13 funds will not need to file.

What needs to be filed?

The CPO will need to make a filing which includes the following information:

  1. Key Relationships – pool administrators, carrying brokers, trading managers, custodians
  2. Statement of Changes in NAV
  3. Monthly Rates of Return
  4. Schedule of Investments – all pool investments greater than 10% of fund NAV need to be disclosed (even if the positions are not futures/commodities)

When do quarterly reports need to be filed?

The filing must be made within 45 days of the end of each quarter.  The rule is now effective and as such the first filing will be due within 45 days after March 31, 2010.

Where do CPOs file the reports?

The CPO must file on the NFA’s EasyFile system.

Why the new rule?

The NFA wants more information on the trading which is going on, especially with respect to Regulation 4.7 pools which are not required to submit disclosure documents to the NFA.  In the adopting release, the NFA stated:

NFA recently developed a new risk management system designed to assess risks, identify trends and assign audit priorities. NFA is concerned, however, that the current information that we have relating to commodity pools – particularly CFTC Regulation 4.7 exempt pools – may not provide sufficient information for NFA to fully utilize the risk system’s capabilities. The additional limited performance and operational data NFA desires to collect is necessary so that the new risk system can provide an optimal benefit.

The full rule can be found here.

The notice of adoption of the new rule can be found here.


Rule 2-46. CPO Quarterly Reporting Requirements

Each CPO Member must report on a quarterly basis to NFA, for each pool that it operates and for which it has any reporting requirement under CFTC Regulation 4.22, the following information in a form and manner prescribed by NFA within 45 days after the end of each quarterly reporting period:

(a) The identity of the pool’s administrator, carrying broker(s), trading manager(s); and custodian(s);

(b) A statement of changes in net asset value for the quarterly reporting period;

(c) Monthly performance for the three months comprising the quarterly reporting period;

(d) A schedule of investments identifying any investment that exceeds 10% of the pool’s net asset value at the end of the quarterly reporting period.


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.

New Connecticut Hedge Fund Laws Proposed

Wants Greater Disclosure & Transparency

A bill was recently introduced into the Connecticut General Assembly which would require investment advisers to hedge funds to provide an overview of any conflicts of interests of such investment adviser with respect to its duties to the fund (or its investors).  This new bill comes about a year after another bill was proposed (but not passed) in Connecticut (see New Connecticut Hedge Fund Laws Proposed).

The text of bill is below and can also be found here.


General Assembly

Raised Bill No. 5053

February Session, 2010

LCO No. 540


Referred to Committee on Banks

Introduced by: (BA)


Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective October 1, 2010) (a) As used in this section, “hedge fund” means any investment company, as defined in Section 3(a)(1) of the Investment Company Act of 1940, located in this state (1) that claims an exemption under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940; (2) whose offering of securities is exempt under the private offering safe harbor criteria in Rule 506 of Regulation D of the Securities Act; and (3) that meets any other criteria as may be established by the Banking Commissioner in regulations adopted under subsection (c) of this section. A hedge fund is located in this state if such fund has an office in this state where employees regularly conduct business on behalf of the hedge fund.

(b) Any investment adviser to a hedge fund shall disclose to each investor or prospective investor in such hedge fund, not later than thirty days before any such investment, any financial or other interests the investment adviser may have that conflict with or are likely to impair the investment adviser’s duties and responsibilities to the fund or its investors.

(c) The Banking Commissioner may adopt regulations, in accordance with chapter 54 of the general statutes, to implement the provisions of this section.

This act shall take effect as follows and shall amend the following sections:

Section 1

October 1, 2010

New section

Statement of Purpose:

To ensure transparency by requiring investment advisers to a hedge fund to disclose any potential conflicts of interest or interests that are likely to impair the investment adviser’s duties and responsibilities to the fund or its investors.

[Proposed deletions are enclosed in brackets. Proposed additions are indicated by underline, except that when the entire text of a bill or resolution or a section of a bill or resolution is new, it is not underlined.]


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.

San Francisco Futures Professionals March Meeting | March 16, 2010

NFA Regulations and Capital Raising on Agenda

The San Francisco Futures Professionals Group (LinkedIn Group) will be meeting next week to discuss the most recent NFA Regulatory Seminar.  Bart Mallon of Cole-Frieman & Mallon LLP will be providing an overview of the major regulatory items discussed at the seminar including the new NFA rule on social media, issues with disclosure documents and performance reporting, and perhaps most, importantly, how to prepare for and deal with an NFA audit.

In addition to Mr. Mallon’s discussion, Bill Grayson has offered to join the group to discuss strategy and capital raising for emerging managers.

The meeting will take place at Mr. Mallon’s office suite (1 Ferry Building, Suite 255) on March 16th at 4pm.  After the discussion the futures professionals group will move to the Slanted Door for continued discussion, drinks and networking.

All bay area futures professionals are invited to attend (please RSVP).  Additionally, Cole-Frieman & Mallon LLP would like to welcome any bay area forex professionals to attend.  Many forex professionals will need to become NFA members after the CFTC’s proposed forex registration rules are adopted and we recommend that such forex professionals begin preparing for registration.  All bay area forex professionals are encouraged to join the San Francisco Forex Professionals LinkedIn group as well.


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.