Monthly Archives: September 2010

Recap of San Francisco CFA Hedge Fund Event

SF Managers Talk About Starting a Hedge Fund

On September 16, members of the San Francisco investment management community gathered at the Ritz-Carlton to listen to four hedge fund managers talk about their experiences starting a hedge fund.  The event was sponsored by the San Francisco CFA society.  The event sold out prior to the event and the attendees seemed to be mostly CFA charterholders and other future hedge fund managers.  The moderaters, two CFA charterholders, asked pre-prepared questions to the managers and opened the panel up to questions from the audience at the end.

The following are some of my notes from the event.  Each bullet point is a talking point from an individual manager who I have chosen not to identify as I do not have their direct permission.  Since these are notes, I am paraphrasing the thoughts of the managers and I may have modified the comments slightly so they make sense in the context of this post.  Many of the points below are quite good and focus on the business and operational matters of running a fund which are very important.


Is there a certain background that is helpful to be a hedge fund manager?

  • MBA and CFA charterholder are good designations to have, but it is also about experience and attitude – being able to jump into a new and difficult situation is important.
  • Being a manager is about differentiation and having a distinct strategegy.  Whatever is different in your background is what you should emphasize (e.g. Ph.D).  You should put out your qualifications and background.
  • A CFA is not a necessity, but you should differentiate yourself because there are so many funds out there.
  • A manager does not need to have a cookie-cutter background.  Managers should emphasize what will help them to outperform other managers.

It is common for successful hedge fund managers to start at a large firm, build a reputation and then start a fund – what are your thoughts?

  • It does help to go that route because investors know the manager and have worked with the manager previously.
  • Most people who are very successful do come from large firms.  However, launching a hedge fund now is different than it was in the 90s post market crash and Madoff.

What motivated you to start your own hedge fund?  Was it the glamour, money, challenge?

  • Professional challenge – liked the work but thought that “I could do better.”  It is also fun to run a company and be an entrepreneur.  Glamour is irrelevant.
  • Glamour is irrelevant.  The personal challenge is a central part.  Being able to make your own schedule and be your own boss is important.  Being able to determine the course that the fund will take is important.
  • There is no glamor in being a start-up fund manager.  Motivation came from knowing that you can offer something to investors that they can’t get from other groups.
  • The motivation was that it is intellectually challenging and it is rewarding to run your own business.

How do you transition from being an employee to being an employer?

  • For one manager, it was easy because they cam from a small firm (6-7 people).  The key is that you need to be the master of everything – trading, researching, marketing, etc.
  • For another manager who came from a larger firm, he had a range of duties at the previous firm so it was a relatively easy transition.

What is your investment process, edge and benchmark?

  • Long/short absolute returns.  Don’t benchmark.
  • Benchmark against the HFR Long-short equity index.  However, the index is not always a good indicator because of survivorship bias.  The HFR is also usually long-biased.
  • Benchmarks usually provide an idea of what would be a low-cost beta for investors.  For the particular stategy, it would be the Goldman Commodities Index.

Did you go it alone as a manager or do you have a team?

  • It really depends on your situation.  For us (team with 2 principals), we worked together for 10 years and liked working together so it was natural to start the fund together.  We started as two persons at my house planning things out.  We slowly started hiring people we knew previously and gradually built out the team.  We needed help on the business and operations side.
  • I went alone by choice.  Other people didn’t have the capital to go 2-3 years without a salary.  You need to know if you can afford to be in a start-up.
  • I went out on my own because of the investment process – it is systematic so there is not a need to have other people.  About 9 months in, I had to hire someone to do marketing and investor relations.
  • I stated on my own and then hired people.  You have to hire people you like and want to work with.  Other hires came later and for various reasons.

With respect to compensation – how do you divide profits with the team?

  • There is a certain percentage which is devoted to profit-share with the employees.  Profits outside of that are divided by the two principals of the management company 50/50.
  • It is difficult to figure out the compensation because the principal is the one who really puts everything on the line.  Generally you would give a small portion of the management company to employees and then let that grow over time.
  • Compensation depends on the facts of the situation.  Each negotiation is different.

Did you invest your own capital in your fund?

  • Yes
  • Yes.  Also had investments in the beginning from the father and father-in-law.
  • Most start-up manager have their own capital invested in the fund in addition to family and friends.
  • Yes – about 70% of non-retirement assets in the fund.

Who do you get to invest in your fund at the beginning?

  • Friends and family; those who know you well and trust you are more likely to invest.  Also, people in the industry who know you and your background are usually good groups to help.
  • People who you have worked with in the past.  Also, talk to everyone including capital raisers.

How do you get high net worth investors to invest in your fund?

  • There are two routes – (1) find large institutions to invest large amounts or (2) be really good at shaking hands and developing personal relationships.  If you can develop good personal relationships this is great because the money is usually sticky.  Institutions are tough – you’re checking boxes, on phone calls, etc.  Also, the people who work at institutions move from allocator to allocator so you can get into the situation where you are talking to an institution for a while and then you essentially get dropped because your point person moves jobs.  One reason LinkedIn is such a good tool is that you can always keep up with where a person goes.

How do you get in front of investors?

  • Beg, plead, try to get others to vouch for you, cold call.

Follow-up:  what is the batting average for cold calls?

  • Very low – 1 out of 50.  If you do get money, it is a process.  My two biggest clients came from short meetings with the right people.  It was serendipitous, but perseverance is key.

How much time do you spend trying to raise assets?

  • 30 to 35% of the time.
  • It is tough to do everything.  Portfolio management takes say 60%, sales and marketing takes 60% of your time.  Now I hired a marketer to take weight off.  There are a ton of investors out there – probably 100 people in Silicon Valley with a million or more – but not all will invest…
  • Maybe 20% of the time is devoted to fundraising.

What about 3rd party marketers?

  • You should be aware of the selling agreement.  You want to be careful with respect to scope – you don’t want them to send you a phone book of potential investors.
  • 3rd party marketers are good because they are doing something that I cannot do or do not have the time to do.
  • With respect to how much you pay these groups, it will usually be 20% of all revenues that are attributable to the assets they bring in – it is better to get 80% of something instead of 100% of nothing.
  • I’ve had both good and bad experiences with these groups.

The common statement is that if an investor doesn’t bite in 2 days then they won’t invest – is this true?

  • No, I’ve had a group that has been receiving my monthly statements for a long time but eventually they invested.
  • Some institutional investment cycles take years.  If you are a new firm they are not just going to invest right away.  It is worth it to keep up the communications with these groups.
  • Sometimes you have investors who say they will invest and then get sidelined.  Sometimes you have someone who pops up out of the blue.

What is the length of the investment cycle for a high net worth investor versus an institutional investor?

  • Yes, high net worth investors will likely invest sooner.  RFP (request for proposal) – if you don’t know what this means – learn it.
  • With respect to institutions, they look not only at return risks, but the persons who make the investment decisions are also concerned about losing their job.  There is an asymmetrical risk-reward system for these people.  No one gets fired for buying IBM and this is why some managers will continue to get money (e.g. the guys from LTCM and Brian Hunter).

Dedicated sales person?

  • I am not a good salesperson so I needed someone who could do this for me – I took it too personally.

Do you have thoughts on seed money?

  • We thought about it and in this environment, it is helpful.  Right now you are competing for capital with funds which are now open (and which have traditionally been closed to new capital).  Having a seed investor allows you to get on the radar and the seeder can be a reference, provide credibility and also do initial due diligence (which will also be completed by institutional investors).  It is similar to ventural capital where it is worth giving up some economics for a change in the trajectory of your group.  With respect to fees, it will really depends on the facts of your situation and there are no standard terms.  Some seed deals range from 20-30% of revenue.
  • Different seeders have different economics.
  • Generally a good rule of thumb will be 1% (of the management company equity) for each million they invest in the fund, but again it depends.
  • The market is in the seeder’s favor, not the manager’s.

What is the hardest question you’ve been asked when raising money?

  • The big issue that many managers have when raising money is that their presentation is too long – manager’s need to sharpen their focus.

Where are you domiciled, what are your fees?

  • Standard fee structure and organizational structure.
  • Started with a stepped or graduated performance fee where the investors benefit, but it was too complicated.  The investor actually wanted something standard.
  • We went with a standard fee structure and have a Cayman master-feeder.  Terms are standard.  Managers sometimes spend too much time with structure – just go with the standard.
  • In addition to a fairly standard structure, the manager also does separately managed accounts (SMAs) for investors who want increased liquidity and transparency.  The common saying is that the manager will charge what the market can bear.

Audience Questions

Would you be affected if Congress changes the tax rate on the carried interest?

  • For us it is not a big deal because we do not have long term capital gains in our structure.
  • For our program (futures/commodities), there is 60/40 taxation so tax on the carried interest is not really an issue.

With respect to due diligence, has it changed recently?

  • People take due diligence seriously and it can take a long time to complete.
  • Watch out for the “toxic allocator” that asks for way too much information.  Be careful with your time and ask yourself if what is being requested is reasonable or just wasting your time.
  • The allocators who say that they “meet with everyone” are probably not worth your time.  Many institutions require the person who is making investment decisions to meet with a certain amount of managers – many times these persons know who they are going to allocate to, but need to meet their meeting quota.
  • One good issue that was discussed during the due diligence process was the succession plan.  For a one-man management company, having a succession plan in place makes good business sense and makes investors comfortable.

What is the minimum amount you take in a separately managed account?

  • 5 million.  You’ve got to take into account the hassle associated with SMAs and your bandwidth.  Other institutions will also ask you how many SMAs you are managing.
  • Smaller amount, but that is because economics and business are different.


Other related hedge fund law articles:

Cole-Frieman & Mallon LLP, a hedge fund law firm, sponsors the Hedge Fund Law Blog.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Hedge Fund Law Blog Nominated for the LexisNexis Top 25 Business Law Blogs

We are happy to announce that the Hedge Fund Law Blog has been nominated for the LexisNexis Top 25 Business Law Blogs of 2010.  We thank our audience for reading and being engaged in the discussion, and of course for the nomination.

Call to Action!

We are not yet a Top 25 Business Law Blog – the next step is to submit a comment to LexisNexis to let them know about Hedge Fund Law Blog.  After the public best viagra and popular in uk comment period and voting ends (October 8th), the LexisNexis board of editors will select the Top 25 based in part on the public comments.  The final announcement is expected to be made on October 31.

To vote for the Hedge Fund Law Blog, please go here and fill out a comment.

Other Blogs

There are a number of very good blogs which are also nominated.  The blogs that I actively read include:

Other blogs that are in my RSS reader and which I think highly of:

Many thanks again for reading.

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

CTA Expo 2010 | November 3, 2010

Bart Mallon Speaking at Chicago CTA buy anabolic steroids Expo

This year’s Chicago CTA Expo will again be held the same week as the FIA Expo and it will be a day after the NIBA Sales and Marketing Conference.  Bart Mallon of Mallon P.C. will be a speaker at the event.  The full line up of speakers can be found below.


CTA EXPO 2010, for the first time, had conferences in New York, April 21 and now Chicago, November 3.  CTA EXPO Chicago will continue to focus on the needs of the CTA community.

November 2, 2010

  • 4:30 – 6:00 – Joint NIBA/CTA EXPO Cocktail Party (Sponsored by Telvent DTN)

November 3, 2010

  • 8:00 – 9:00 – Continental Breakfast (Sponsored by DMAXX)
  • 8:45 – 9:00 – Welcoming Remarks (Sponsored by Barclay Hedge Ltd.)
    • Frank Pusateri (Adriondack Portfolio Management, Inc)
    • Bucky Isaacson (Future Funding Consultants)
  • 9:00 – 9:30 – Marketing in Europe (Sponsored by Horizon Cash Management, LLC)
    • Cecilia Mortimore (Credit-Suisse Securities (USA) LLC)
  • 9:30 – 10:00 – Institutional Marketing (Sponsored by Mallon P.C.)
    • Laurie Posner (PNC Capital Advisors)
  • 10:00 – 10:30 – Coffee Break (Sponsored by Firm 58)
  • 10:30 – 11:00Manager Selection and Portfolio Creation at a Fund of Funds (Sponsored by Ruddy Law Office, PLLC)
    • Speaker To Be Confirmed (The Kenmar Group)
  • 11:00 – 12:00Innovations in Investment Products and Marketing Exchange Traded Funds (Sponsored by Michael Coglianese CPA, PC)
    • Tim Pickering (Auspice Capital Advisors Ltd)
  • 11:00 – 12:00 – Product Structuring and Marketing to The Broker Dealer Community (Sponsored by Michael Coglianese CPA, PC)
    • Michael Tannenbaum (Tannenbaum Helpern Syracuse and Hirschtritt)
    • Others: To Be Confirmed
    • Moderator: Mark Omens (CME Group)
  • 12:00 – 12:45 – Lunch (Sponsored by ICE)
  • 12:45 – 1:30 – Keynote Speaker (Sponsored by Dorman Trading)
    • Suk Kim (Samsung Asset Management Company LTD)
  • 1:30 – 2:00Marketing Emerging CTAs (Sponsored by eSignal)
    • Brad Cole (Cole Partners)
  • 2:00 – 2:30Generate a Positive Impact with Your Marketing Materials (Sponsored by TraderView)
    • Kristin Fox (FoxInspires LLC)
  • 2:30 – 3:00 – Coffee Break
  • 3:00 – 3:30 – Internet Social Networking (Sponsored by Arthur Bell, Certified Public Accountants)
    • Bart Mallon (Mallon P.C.)
  • 3:30 – 4:00Internet Publishing and Marketing (Sponsored by CCS Financial Services, Inc.)
    • John Lothian (John Lothian Newsletter)
  • 4:00 – 4:30Managed Futures – Yesterday and Today (Sponsored by Woodfield Fund Administration LLC)
    • Leon and Joy Rose
  • 4:30 – 6:00Cocktail Party


Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides CTA registration and compliance services.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Bay Area Hedge Fund Event | September 29, 2010

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


The Bay Area Hedge Fund Roundtable presents:

A Conversation About Global Investing Trends – One Year Later


John Burbank of Passport Capital

Patrick Wolff of Clarium Capital Management


Sens Restaurant at 4 Embarcadero Center, Promenade Level

Please RSVP to [email protected]

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


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

California Adopts New Part 2 of Form ADV

At the end of July, the SEC adopted amendments to Form ADV Part 2 and the related rules.  The amended Form ADV Part 2 will be used by SEC-registered advisers to meet their disclosure obligations and generally describe the adviser’s services, fees, and strategies.

On September 1, 2010, the California Department of Corporations followed suit and announced its adoption of the new Part 2 as well, effective October 12, 2010 (see California ADV Part 2 Announcement).  This effective date corresponds with the effective date of the SEC’s rule changes.  The Department’s decision will help bring consistency between state and SEC investment adviser registration requirements.

New ADV Part 2

The amended Form ADV Part 2 consists of three parts:

  • the “Firm Brochure” (Part 2A),
  • a Wrap Fee Program Brochure (Part 2A, Appendix 1), and
  • the “Brochure Supplement (Part 2B).

Every investment adviser must complete the Firm Brochure and the Brochure Supplement.  The Firm Brochure, which is filed electronically with the SEC on the IARD system, will include information about the adviser and its business. The Brochure Supplement, which is a brief disclosure document about certain personnel of the adviser, will be provided to clients but not filed with the SEC.

In addition, the new Part 2 will no longer be in the check-the-box format.  Instead, it will take the form of a narrative brochure written in plain English–the purpose of which is to provide clients with a more clear disclosure of the adviser’s business practices, conflicts of interest, and background.

Compliance Dates

Effective October 12, 2010,  for California registered investment advisers, the relevant compliance dates for the new ADV Part 2 are:

  • As of January 1, 2011 all new investment adviser applicants will have to file, through the IARD, the new Part 2 of Form ADV as part of their application.
  • As of January 1, 2011 all licensed investment advisers will need to incorporate the new Part 2 of Form ADV with their next filing of an amendment to Form ADV, or their annual updating amendment to Form ADV.
  • Between October 12, 2010 and January 1, 2011 applicants and current licensed investment advisers filing amendments to their Part II of Form ADV may use either the current Part II or the new Part 2.

With this change, investment advisers should review and become familiar with the new Part 2.  Advisers that are currently registered with the California Securities Regulation Division will have to incorporate the new Part 2 when they file amendments to Form ADV and also when they file the required annual update.  For most advisers with a December 31, 2010 year-end, the deadline for the annual update will be March 31, 2011.


Other related hedge fund law articles:

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

Series 66 Exam

This exam is required by certain states for an individual who wants to register as an investment adviser representative and securities agent.  Passing the Series 66 would be equivalent to passing both the Series 63 and Series 65 exams.  Additionally, individuals are required to pass the Series 7 exam as a prerequisite for taking the Series 66.  This post will provide an overview on the Series 66 exam and some thoughts on both taking and passing the exam.

The Series 66 Basics

What: The exam has a time limit of two hours and 30 minutes and a total of 110 questions, 10 of which are “pretest” questions and do not count in your final score.  The exam covers the following topics: Economic Factors and Business Information; Investment Vehicle Characteristics; Client Investment Recommendations and Strategies; and Laws, Regulations, and Guidelines, including Prohibition on Unethical Business Practices.  You must earn at least 75% to pass the exam.

Where: You can take the exam at most Pearson VUE or Prometric testing centers.

When: You should probably sign up for the exam at least a week prior to taking it, and you can choose the time and date on either the Pearson or Prometric website when you register.

Why: The exam is required for those individuals who want to become both securities agents (generally brokers) and investment adviser representatives.

How to sign up

You can register for the exam by submitting a Form U-4 or Form U-10 through the IARD system online.  Please not that, effective September 15, 2010, FINRA requires individuals to use either their CRD number or FINRA ID number in order to schedule an exam and no longer accepts social security numbers.  If you have any questions regarding registering for an exam, be sure to ask your law firm, compliance consultant, or feel free to contact us.

The cost to take the exam is $128.

How to study for the exam

It is recommended that you obtain a study guide and thoroughly read the entire guide.  NASAA (North American Securities Administration Association) provides a study guide available for download on their website.  Also, Kaplan provides a useful study guide that presents the study material in a simple and easy-to-understand way, and their practice questions are very similar to questions you are likely to see on the actual exam.

Take at least two to three practice exams prior to taking the test, possibly more.  Use memory refreshers such as note cards or other review materials.  Do not cram the morning of the test, as this will probably only make you more anxious.  In fact, it is recommended that you take the exam in the morning after a full night’s rest.

Day of exam

Arrive at the testing center at least 45 minutes prior to taking the exam to allow yourself time to review some of your notes beforehand.  The proctor will require you take off your jackets and place your belongings, including your study material, in a provided locker.  Be sure to have woken up early enough to eat breakfast beforehand and be fully alert during the test.

The exam

The exam is computer-based and will initially instruct you on how to properly answer and mark the following questions.  Note that the beginning of the exam will most likely include the easiest questions, and then the questions will get harder as you reach the middle.  Always attempt to make the most educated guess on questions you do not understand.

The length of the exam might require you to pause and use the restroom or take a break.  Allow yourself time to step away from the computer for a moment, take a drink, and gather your thoughts.  When you encounter difficult questions, you always have the option of marking the question for review.  Never spend an extended period of time on a question, as you will just waste time on answering other questions you might know better.

After you have completed the questions, you will have the option of changing any of your answers.  After completely answering everything, you will receive your score immediately.

If you don’t pass

A number of managers who take the exam do not pass or only come close to passing.  If this is the case, you will need to wait another 30 days before re-taking the exam.  If you do not pass the exam the second time, you will need to wait another 60 days before taking the exam.  If you do not pass either the third or fourth attempt, you will need to wait at least 180 days before taking the exam again.  There is no limit on the number of times allowed for taking a test.


Other related hedge fund law articles:

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

NFA Petitions CFTC to Amend Rule 4.5

Wants Managers of Commodity/Futures Mutual Funds to Register as CPOs

On August 18, 2010, the NFA filed a revised Petition for Rulemaking with the CFTC requesting that it amend CFTC Rule 4.5 with respect to managers to mutual funds which offer futures and commodities investment opportunities.  Generally, a manager operating a mutual fund that invests in futures and commodities would be a commodity pool operator and would need to register as such with the CFTC.  However, under current CFTC Rule 4.5, the manager could seek exclusion from such registration.  The NFA has become concerned about mutual funds that are not subject to the CFTC/NFA regulatory regime and that are marketed to retail customers as a way to invest in futures and commodities.  The NFA is requesting amendment of Rule 4.5 to restrict this kind of activity.


CFTC Rule 4.5 provides an exclusion from the definition of the term “commodity pool operator” for certain otherwise regulated persons in connection with their operation of specified trading vehicles, including investment companies registered under the Investment Company Act of 1940.

Prior to August 2003, mutual fund managers seeking eligibility for exclusion under Rule 4.5 were required to meet the following requirements:

  • they could not market participation in the mutual fund as participation in a commodity pool or a vehicle for trading commodities or futures;
  • they had to represent that commodity futures or options contracts entered into by the fund were for bona fide hedging purposes; and
  • they had to demonstrate that the aggregate initial margin and/or premiums for non-hedging positions did not exceed 5% of the liquidating value of the fund’s portfolio (after taking into account unrealized profits and losses).

In August 2003, the CFTC eliminated these requirements as a condition to be eligible under Rule 4.5.  The NFA is now petitioning for the CFTC to restore these conditions for eligibility.

NFA Petition for Rulemaking

The NFA’s Petition discusses the context for requesting this amendment.  In particular, the NFA has become aware of three mutual funds that recently filed for exclusions under Rule 4.5.  These funds are marketed as vehicles for commodity futures investment, with investments in derivatives and futures products made indirectly through their wholly-owned and controlled subsidiaries (for tax and mutual fund regulatory purposes).  In one case, a fund invests up to 25% of its total assets in a subsidiary that leverages assets at a 4:1 ratio–achieving a futures exposure of the full net value of the fund.

The NFA is concerned that such funds, which are active in the commodity futures industry, are not regulated as CPOs by the CFTC and NFA.  The futures mutual fund manager can file a notice with the NFA claiming the Rule 4.5 exclusion under the Commodity Exchange Act, as amended.  Accordingly, the fund is not subject to registration or regulation as a commodity pool.  Through its Petition, the NFA seeks to ensure that managers of registered investment companies that are marketed as a commodity pool or an investment vehicle for trading in commodity futures and options and whose funds engage in more than 5% of futures are subject to the appropriate oversight and regulatory requirements.

“No-Marketing” and the 5% Limitation

At the time the CFTC amended Rule 4.5, it also adopted Rule 4.13(a)(4) to provide an exemption to CPO registration if every natural person pool participant is a “qualified eligible person.”  The NFA argues that to the extent this exemption served as a reason to eliminate the “no marketing” and “5% trading test” from Rule 4.5, the CFTC should reexamine whether such reasoning is still valid.

When the CFTC amended these rules, it did so under the presumption that the qualifying entities, such as the mutual funds discussed in this article, were “otherwise regulated” and “may not need to be subject to any commodity interest trading criteria.”  But, the NFA is asserting that things have changed since the 2003 amendment and the rationale for the amendments is arguably no longer appropriate or valid.  Such registered investment companies that market themselves as a commodity pools or vehicles for trading in commodity futures or options to retail customers, who may be unsophisticated investors, or engage in more than 5% of non-hedging futures trading should be subject to the rules and regulations of the CFTC and NFA, the appropriate regulatory regime that protects customers participating in the commodity futures markets.

Comments by CFTC Commissioner

On September 1, 2010, CFTC Commissioner Scott O’Malia released a statement regarding the NFA petition which urged the CFTC to “expeditiously” move forward and adopt the NFA’s requested amendments.  The Commissioner stated:

Until the recent influx of new mutual funds specializing in futures trading, the use of the exclusion, in effect a form of regulatory arbitrage, was innocuous. However, continuing to allow FMFs to operate by evading CFTC oversight and its substantial disclosure obligations now poses increased risks to the market and to retail investors.


Without CFTC and NFA oversight, FMFs and other such funds that mimic CPOs, but do not abide by the same structure, will continue to avoid specific disclosures mandated for CPOs in the interest of consumer protection including: disclosures over fund risk exposure; performance returns; fee structures; and advisor conflict of interest information.

Future of Rule 4.5

It is clear that a new Rule 4.5 would be fiercely contested by current mutual fund managers who are investing in futures/commodities.  The big issue for managers will be an increase in start-up and compliance costs as well an increase in infrastructure requirements to comply with CFTC Regulations.  This will undoubtedly increase costs to mutual fund investors (and, the NFA argues, potentially increase investor protection).

However, nothing has happened yet.  Although the NFA asked the CFTC to amend the regulation, the CFTC will need to publish proposed amendments for public comment.  After receiving comments, the CFTC would be permitted to issue final regulations.  However, we do not think it is likely that the CFTC is going to focus its rule making (amending) efforts on issues that don’t fall under the Dodd-Frank act.  As the CFTC is under-resourced for this requirements of Dodd-Frank, it is unlikely to take up any outside initiatives over the next 9-12 months as they focus on other rule making efforts such as the OTC derivatives reform.

Other resources:


Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides comprehensive CFTC and NFA compliance and regulatory support for investment managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Hedge Funds Care Event – San Francisco | September 30, 2010

Hedge Funds Care Presents its West Coast Scotch Tasting Event

The Event

The event will take place at the Offices of Thomson Reuters in San Francisco on September 30, 2010 from 4:00 p.m. to 7:00 p.m.  The event will include Scotch tasting, appetizers and food, and socializing.  The event is hosted by Thomson Reuters and Skyy Spirits and the cost to attend is $200 per person.

Cole-Frieman & Mallon LLP will be attending this event.

For more information about the event including how to register, please click here.

About Hedge Funds Care

Founder Rob Davis established Hedge Funds Care in 1998 with the dream of helping to prevent and treat child abuse. With the encouragement and participation of his colleagues in the hedge fund industry, the first Open Your Heart to the Children Benefit took place in New York in February of 1999 and raised $542,000. What began as a single fundraiser has grown into an international nonprofit organization. Hedge Funds Care has distributed over $21 million through more than 600 grants. In 2010, annual benefits will take place in New York, San Francisco, Chicago, Atlanta, Boston, Denver, Toronto, London and the Cayman Islands. Through the ongoing generosity and commitment of hedge fund industry professionals, HFC continues its rapid expansion. We anticipate future growth to cities in the U.S. and abroad.


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

SEC Requires Municipal Advisors to Register

New Form MA-T Released

Under the Dodd-Frank FinReg bill, municipal advisors are required to register with the SEC by October 1, 2010.  Municipal advisors are firms or individuals who provide advice to state and local governments and other borrowers involved in the issuance of municipal securities.  The definition includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and certain swap advisors that provide municipal advisory services.

Interim Final Temporary Rule 15Ba2-6T

In the SEC’s adopting release, the

The Commission is adopting an interim final temporary rule, Rule 15Ba2-6T, in order to provide a method for municipal advisors to temporarily satisfy the statutory registration requirement of Section 15B(a)(1) of the Exchange Act (as amended by Section 975(a)(1) of the Dodd-Frank Act) until the Commission has promulgated a final permanent registration program. The interim final temporary rule will expire on December 31, 2011.

Form MA-T Requirements

Form MA-T is a short six page form which requires municipal advisors to provide the following information:

  • Identifying information (name, EIN, place of business, contact person, website, etc.)
  • Type of advisory services
  • Disciplinary information
  • Execution

Municipal advisors should take note that the above information will be publicly available on the SEC website.

The release can be found here.

Further information can be found here.

Adopting Release can be found here.

Please also see the complete Form MA-T


Bart Mallon, Esq. runs the hedge fund law blog and provides hedge fund registration and compliance services to hedge fund managers through Cole-Frieman & Mallon LLP, a hedge fund law firm.  He can be reached directly at 415-868-5345.

Hedge Fund Events September 2010

The following are various hedge fund events happening this month.  Please email us if you would like us to add your event to this list.


September 1-2

September 7-8

September 8-9

September 10

September 12

September 12

September 13-14

September 13-14

September 13-15

September 13-16

September 14

September 14

September 14

September 14-15

September 15

September 15-16

September 15-16

September 16

September 16

September 16

September 16-17

September 16-17

September 20-22

September 21

September 21

September 21-22

September 21-22

September 21-22

September 21-22

September 22

September 22-24

September 25

September 26-28

September 26-28

September 28-29

September 28

September 28

September 28

September 28-29

September 29

September 29


Bart Mallon, Esq. runs the hedge fund law blog and provides hedge fund registration and compliance services to hedge fund managers through Cole-Frieman & Mallon LLP, a leading hedge fund law firm.  He can be reached directly at 415-868-5345.