Monthly Archives: August 2011

Arizona IA Representative Documentation Requirement

Arizona Hedge Fund Manager Documentation Requirements Increase

In addition to

increased requirements under the Dodd-Frank Act, various states are increasing requirements for state registered investment advisers and their representatives.  Many regulations are going to be based on the prevailing political climate in a particular state and the new requirements for Arizona based advisers is no exception.  IA firms and representatives may have received communication from Arizona regarding a new documentation requirement for IARs – in essence IARs must show they are U.S. citizens or in the United States legally.  The documentation requirement went into effect last month and will be a new requirement for conducting an investment advisory business in Arizona.

Overview of Documentation Requirements

Under a Arizona regulation A.R.S. § 41-1080, effective as of July 20, 2011, certain investment adviser representatives (“IARs”) must provide documentation of lawful presence in the United States to the Arizona Securities Commission.  In general IARs in Arizona will need to provide documentation to the Commission if:

  • the IAR is an Arizona resident registering as an IA representative in Arizona for the first time
  • the IAR is a non-Arizona resident registering as an IA representative only in Arizona, and you are not registered as such in any other state
  • the IAR is currently an IA representative registered in Arizona, planning to renew registration for the coming year, 2012.  [Note: documentation must be submitted before the 2012 renewal.]

If the IAR is a non-Arizona resident registering in Arizona but is already registered as an IA representative in another state, the IAR will not be required to provide the documentation.

Approved Documentation & Submission Requirements

The following is a list of approved forms of documentation for submission to the Arizona Securities Commission:

  1. An Arizona driver license issued after 1996 or an Arizona non-operating identification license.
  2. A driver license issued by a state that verifies lawful presence in the United States.
  3. A birth certificate or delayed birth certificate issued in any state, territory, or possession of the United States.
  4. United States certificate of birth abroad.
  5. A United States passport.
  6. A foreign passport with a United States visa.An I-94 form with a photograph.
  7. A United States citizenship and immigration services employment authorization document or refugee travel document.
  8. A United States certificate of naturalization.
  9. A United States certificate of citizenship.
  10. A tribal certificate of Indian blood.
  11. A tribal or bureau of Indian affairs affidavit of birth.

Submitted documentation must include a photo of the IAR as well as the CRD number of the IAR.  Documentation may be submitted by mail or email to:

Registration and Compliance Section
Arizona Corporation Commission, Securities Division
1300 W. Washington St., 3rd Fl.
Phoenix, AZ 85007
Email: [email protected]

For more information, please visit the IA representative registration licensing section on the Arizona securities Division website or contact the Securities Division at 602-542-0326 with any questions.

A notice of the regulation can be found on the Arizona Securities Division website here.


Cole-Frieman & Mallon LLP provides legal and compliance services to state registered hedge fund managers.  Bart Mallon can be reached through our contact form or by phone directly at 415-868-5345.

Hedge Fund State and Local Business Requirements

Compliance Guide for New Hedge Fund Managers

Like any new business a hedge fund manager must comply with state and local ordinances, and make local business filings.  However, when launching a hedge fund, a manager may become so consumed with preparing launch documents, opening prime brokerage accounts and, most importantly, meeting with potential investors that these formalities might be overlooked.  In response to numerous questions from our clients, we prepared this guide for managers located in New York, San Francisco, and Chicago.  Please contact your attorney if you have questions about these or any other locations.

Because most manager entities are formed in Delaware, but are operating in another state, it is necessary to register them in their home state; this process is also known as qualifying the entity to conduct business, or applying for authority to conduct business, in the state where they are located.  Additional requirements typically include state and local taxes, payroll and other employment matters and city business licenses.

A checklist and quick reference table are provided as links at the bottom of this post.  All forms, procedures, fees, taxes or other requirements discussed below are subject to change by the state and local authorities; this guide is not intended to be an exhaustive list of all possible requirements in these locations.   Please confirm any requirements with your attorney or the authority in question before making any filings.

New York, New York

New York State Authority to Conduct Business.  Delaware limited liability companies (“LLCs”) and limited partnerships (“LPs”) must apply for authority to conduct business in New York State by filing an Application for Authority (“NY Application”) with the Department of State – Division of Corporations, along with a Certificate of Existence (called a Certificate of Good Standing in Delaware) from the state of formation (“COE”).   New York requires that the COE is dated within one year of the date the NY Application will be filed.

New York State Certificate of Publication.  Once the NY Application has been certified by the Department of State, the manager must publish in two newspapers a copy of the application for authority or a notice related to the qualification of the entity.  Publication must be done in the specific newspapers designated by the clerk of the county in which the manager is located.  After publication, the printer or publisher of each newspaper will provide an affidavit of publication.  A Certificate of Publication with the affidavits of publication of the newspapers attached must be submitted to the Department of State – Division of Corporations.  The publication process must be completed within 120 days after the filing of the NY Application.

Please also see our post on the New York Publication Requirement.

New York State Workers’ Compensation.  Any business operating in New York State must have workers’ compensation coverage for all employees.  Employers can obtain a workers’ compensation insurance policy with a private carrier, with the New York State Insurance fund or through self-insurance.  Failure to carry workers’ compensation insurance constitutes a misdemeanor or a felony punishable by a fine of $1,000 up to $50,000.  The level of offense depends upon whether an employer has five or more employees and whether the violation is a first or a repeated offense.  The Workers’ Compensation Board may also issue a stop work order to any business that fails to obtain a policy or owes a fine to the Board.  Failure to keep the required records is punishable by fines of $5,000 to $10,000 for a first-time violation.

New York State Disability Coverage.  Any business operating in New York State with employees must also provide disability benefits coverage.  The law provides for the payment of cash benefits to employees who have become disabled because of injuries or illnesses that have no connection to their employment, and for disabilities arising from pregnancies.  The law allows, but does not require, an employer to collect contributions from its employees to offset the cost to provide this benefit.  Employers may obtain coverage through a private carrier, the New York State Insurance fund or through self-insurance.  Failure to obtain disability benefits coverage constitutes a misdemeanor, punishable by a fine of $100 to $500 and/or imprisonment for not more than one year.  Additionally, an employer without coverage will be liable for any benefits due to an injured employee.

New York State Unemployment Insurance.  Employers must file a Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return with the New York State Department of Labor.  Generally, all employment performed for an employer is covered whether it is on a part-time, full-time, temporary, seasonal, or casual basis.  If all required parts of the return are not received by the due date, the return is considered delinquent.  The penalty for failure to file is the greater of $1,000 or $50 per employee listed on the latest quarterly return, up to a maximum fine of $10,000.

New York City Unincorporated Business Income Tax.  The Unincorporated Business Tax (the “UBT”) is imposed on partnerships and limited liability companies, which would include most hedge funds and investment managers.  The UBT is equal to four percent of taxable income allocable to New York City, but the net effective tax rate for hedge fund managers could be near two percent after tax credits and deductions.  This stems from the deductibility of local business tax payments on federal taxes, and a twenty-three percent credit for UBT taxes against New York City personal income liability.  At present, the New York City Administrative Code taxes fees earned by managers, but carried interest may be exempt.  To obtain some relief from this tax, managers located in New York City typically form a separate entity to serve as the general partner of their onshore funds, rather than having the manager serve as general partner.

New York City Commercial Rent Tax.  A business must file a Commercial Rent Tax Return if the occupied premises are located in Manhattan, south of 96th Street, and the annual or annualized gross rent paid for such location is at least $250,000.  This tax also applies to: (i) those who occupy space in buildings they themselves own, individually or jointly with another person other than a spouse; (ii) those who occupy space in buildings owned by corporations where they are an officer or holder of all or part of the corporation stock; (iii) a corporation, occupying space in a building that is owned by a subsidiary corporation or by a parent corporation; and (iv) a corporation, occupying a space in building owned by an officer or stockholder of the corporation.

New York City Waste Removal and Recycling.  A commercial business is required to dispose of its waste, including recyclable materials, through a private disposal company.  All businesses are required to recycle office paper, corrugated cardboard, magazines, catalogs, and newspapers.  Businesses must post signs notifying employees, and customers where relevant, about what and how to recycle and must place labeled recycling containers where waste is routinely discarded.  Usually the building management makes arrangements with a disposal company for removal of recycling and waste for the entire building.  Regardless of a building's recycling arrangements, every company is required by law to maintain separate labeled recycling bins for paper.  Fines will be levied for violations.

San Francisco, California

California Business Registration.  LLCs and LPs must qualify to transact business in California by filing an Application for Registration  (“CA Application”) and a COE with the California Secretary of State.   In addition, within 90 days after the CA Application has been filed, an LLC must file a Statement of Information (“SOI”) with the California Secretary of State.  Thereafter, the SOI is due every other year on or before the anniversary of the initial SOI filing. LPs are not subject to the SOI filing requirements.

California Franchise Tax Board.  Registered LLCs and LPs are subject to an $800 annual tax even if they conduct no business in California.  They may also be subject to an annual fee based upon total income from all sources derived or attributable to California.  Additionally, an entity that has members or partners who are not residents of California must file consents signed by the nonresident individuals and foreign entity members to show their consent to California’s jurisdiction to tax their distributive share of income attributable to California sources.  The LLC or LP must pay the tax for every nonresident member or partner who does not sign the consent.

California Withholding on Distributions.  LPs and LLCs must withhold 7% on distributions of California source income made to nonresident partners or members when distributions to a particular partner or member exceed $1,500 for the calendar year.  LPs and LLCs must withhold on allocations of California source income to foreign partners and members (payees) at the maximum applicable California tax rate.

California Payroll Taxes.  A business becomes subject to state payroll taxes upon paying wages over $100 in a calendar quarter to one or more employees.  Wages include cash payments, commissions, bonuses, and the reasonable cash value of noncash payments (such as meals or lodging) for services performed.  Once subject, an employer must complete and submit a registration form to the Employment Development Department (“EDD”) within 15 days.  After registering, a business will receive a State Employment Identification Number.  Employers must report wages paid, taxes withheld and pay unemployment insurance, state disability insurance and employment training tax on employee wages.

California Workers’ Compensation.  California Labor Code requires employers with at least one employee to carry workers’ compensation insurance.  Employers may finance liability for workers’ compensation through self-insurance, private insurance or through the California State Compensation Insurance Fund.  Failure to carry workers’ compensation coverage is a misdemeanor punishable by a fine up to $10,000 and/or one year in jail.  The Division of Labor Standards Enforcement can issue a stop order preventing an employer from using employee labor until coverage is obtained.

San Francisco Business Registration and Renewal.  Every person or entity doing business in the City and County of San Francisco must have a valid Business Registration Certificate (“SF Certificate”).  A certificate is required for businesses located outside of San Francisco that transact business or perform services within San Francisco.  The registration fee varies based on a business’s estimated annual payroll tax expense.

The SF Certificate is issued annually and must be renewed by February 28th of each year.  All businesses must report their taxable payroll tax expense, even if it was zero, as part of the Business Registration Renewal process.   Businesses meeting a specified payroll threshold (which may be adjusted each year) are required to submit an additional Payroll Expense Tax Statement.

San Francisco Payroll Expense Tax.  The tax amount is equal to 1.5% of a business’ annual San Francisco payroll expense.  The recently-passed Proposition Q raised the payroll tax exemption for small businesses whose payroll expense for the year is $250,000 or less and extended the applicability of payroll expense tax to include compensation for personal services paid to owners of LPs, LLCs and other entities.  If a business has at least four W-2 employees based in San Francisco, the amount of payroll included for each individual owner of a pass-through entity may be calculated under the “safe harbor provision” by adding to his or her base salary an amount equal to 200% of the average annual compensation paid to the W-2 employees of the pass-through entity whose compensation is in the top 25% of that entity's employees based in San Francisco.

Please also see our post on San Francisco Proposition Q.

San Francisco Assessor Tax.  A business entity’s property is reappraised annually.  This includes all property owned or leased by a business except licensed vehicles, business inventory, intangible assets or application software.  Businesses that receive a property statement from the Assessor’s Office or that own taxable property with a total cost of $100,000 or more must file a 571-L business property statement each year by April 1st.  The filing must detail the costs of all supplies, equipment, and fixtures, improvements, land improvements, and land and include other information requested on the form at each location.  The 2010 tax rate for business property was 1.159% of the value of assessable property.  Such value is determined based upon cost, tax, freight, installation and depreciation.

San Francisco Labor Laws.  Three San Francisco labor laws generally apply to all employers with employees performing work within the City of San Francisco.  First, the Health Care Security Ordinance requires for-profit businesses with twenty or more employees to spend a minimum amount on health care for each employee working eight or more hours per week in San Francisco.  The Paid Sick Leave Ordinance entitles all employees (no minimum) working in San Francisco to paid time off when they or family members are sick or need medical care.  It also sets a minimum rate of accrual for sick leave of 1 hour for every 30 hours worked; fractional accruals are not permitted.  Finally, San Francisco has a minimum wage of $9.79 per hour for all employees who work in San Francisco more than two hours per week.

Exemptions for Businesses Located within the Presidio.  The Presidio is an area in the city that is owned by the federal government.  The Presidio Trust Act explicitly gives the Presidio Trust immunity from state and local taxes, which extends to property interests of third parties under “leases, concessions, permits and other agreements associated with Trust properties.”  Under federal law only income and use taxes can be levied on federal enclaves.  Because the business registration fees and payroll taxes discussed above are not income or use taxes, businesses located in the Presidio are exempt from these requirements imposed on businesses located elsewhere in San Francisco.

Chicago, Illinois

Illinois Admission to Conduct Business.  An LLC must submit an Application for Admission to Transact Business and a COE authenticated within the last 60 days to the Illinois Secretary of State.  An LP must submit a similar “Application for Certificate of Authority” along with a COE authenticated within the last 30 days (either, the “IL Application”).

Illinois Department of Revenue Registration.  A business must register with the Illinois Department of Revenue to receive a Certificate of Registration and Illinois Business Tax number.  Registration must be completed before a business makes sales, or when it hires employees.  This certificate must be displayed in a prominent location

Illinois Unemployment Insurance.  If a business hires employees to work in Illinois, it must register with the Department of Employment Security (“IDES”) within 30 days of the date it starts doing business in the state to receive an Illinois Unemployment Account number.  On a quarterly basis, employers must file an “Employer’s Contribution and Wage Report” and pay contributions to IDES.  The penalty for failure to file the report is the lesser of $5 for each $10,000 or fraction thereof of the total wages for insured work during the period, or $2,500 for each month or part thereof of such failure to file the report.  The amount of the total fine is capped at the lesser of $5,000 or $10 for each $10,000 or fraction thereof of the total wages for insured work during the period.

Illinois Workers’ Compensation.  All employers must obtain workers’ compensation insurance, post a notice in the workplace listing the insurance carrier and workers’ rights, and keep records of work-related injuries.  Accidents involving more than three lost workdays must be reported to the Workers’ Compensation Commission.  Employers may be fined up to $500 for each day without insurance, with a minimum fine of $10,000.  The commission may issue a stop-work order for a knowing failure to carry insurance.  Corporate officers may be held personally liable and/or sent to prison.

City of Chicago Business License.  All persons who “conduct, engage in, maintain, operate, carry on or manage a business” in the City of Chicago must obtain a business license from the Department of Business Affairs and Consumer Protection (the “BACP”), unless exempted by state law or regulated by another license category.  Applicants must complete a Business Information Sheet listing the business name, a detailed business description,

square footage, address, ownership information, and Illinois and federal tax numbers.  Businesses operating in a properly zoned area will be automatically approved when applying; these businesses need only file a tax registration form with the city.

The business license must be posted in a conspicuous place.  In the event of a violation, the BACP may issue a notice, a cease and desist order and depending on the type of business, the BACP may also confiscate personal property or make an arrest.  Additionally, fines may be imposed ranging from $200 to $10,000 per day.

Chicago Employers’ Expense Tax.  Businesses that employ fifty or more full-time employees who perform 50% or more of their work per calendar quarter in the City of Chicago and who earn more than $900 in a calendar quarter must pay the Employers’ Expense Tax.  The tax is equal to $4.00 per employee per month.  In determining the number of employees, employees of a “unitary business group” will be combined, i.e., a group of people under common ownership or control, whose business activities are in the same general line and whose members are functionally integrated through centralized management.

To help managers keep track of the filings that they should complete we have created a checklist, please see Checklist for State and Local Business Filings.  For information on division contact persons that can help with information on how to complete the above filings, please see our Quick Reference and Contact Information guide.  If you have questions on any of the items in this post, please feel free to contact us.


Cole-Frieman & Mallon LLP provides a variety of legal services to hedge fund managers including entity formation, general business issues, legal advice with respect to hedge fund seeding, employment matters and matters related to hedge fund formation.  Karl Cole-Frieman can be reached at 415-352-2300; Bart Mallon can be reached directly at 415-868-5345.


Series 65 Exam Opinions Requested

Seeking Opinions on How to Pass to the Series 65 Exam

I am hoping readers of this blog would be able to provide some feedback on their experiences with the Series 65 exam. As a

little background, many of our firm's clients are managers who will be state registered investment advisers and therefor these groups will need to make sure certain individuals take the Series 65 exam in order to become registered in the state of principal residence.

The North American Securities Administrators Association (NASAA) is the group in charge of creating the Series 65 and the exam is administered by FINRA at any number of locations across the U.S. and in different countries. At the beginning of 2010 NASAA changed the grading of the Series 65 exam so that it was more difficult to pass. From that time forward we have anecdotally noticed that there were in fact less people who were passing the exam on the first try.  Accordingly, we are trying to gather information on the exam to help out those people who will be taking it in the future.

If you have taken the e

xam over the last year we are asking if you can provide us with a little information on your experiences and some thoughts on how you would prepare for the exam, given what you know now. For example, we think the following information would be helpful:

  • Date you took the exam (month, year)
  • Final score
  • Series 65 Exam prep / study guide(s) you used
  • Amount of time spent studying (approximate number of hours)
  • Number of practice exams you took? Scores on those exams?
  • Areas you did well on/ could have done better on
  • Overall impressions – was it similar to the practice exams?
  • How would you study for the exam differently?

If you have other comments or information that might be helpful, please feel free to post that as well.  Responses can be posted in the comment section below or you can contact us directly.


Cole-Frieman & Mallon LLP is a boutique law firm focused on the hedge fund industry.  We help fund managers with investment adviser registration and hedge fund formation matters.  Bart Mallon can be reached directly at 415-868-5345.


Bart Mallon Speaking at Financial Services Conference

Moss Adams Event on September 26, 2011

On September 26, 2011 Bart Mallon, co-managing partner of Cole-Frieman & Mallon LLP, is scheduled to speak on a panel with respect to recent regulatory issues affecting asset managers. The panel is entitled “Dodd-Frank and the Impact on the Asset Management Business” and also features David E. Tang, a partner at Sidley Austin LLP, and will be moderated by Bryan Cartwright of Moss Adams.

While we do not yet know the exact topics for the panel, there has been a number big picture issues which will affect fund managers over the next several months. Some of these issues include:

After the event we will

provide a review of the major items discussed during the panel.  An overview of the conference is reprinted below and more information can be found here.


9:00 a.m. – 5:00 p.m. PT
Hilton Hotel
San Francisco, CA

What’s happening in the investment community now, and where are asset management companies headed?

Join Moss Adams LLP, Arizona State University emeritus professor Dr. Stephen Happel, and US Bancorp former chief economist John Mitchell for an economic update. We’ll also discuss a range of issues and developments affecting broker-dealers, RIAs, hedge funds, and asset managers. Topics will include:

  • Impact of the Dodd-Frank Act
  • Retention and succession
  • Producing superior AUM growth
  • Transaction and advisory activity
  • Accounting and auditing roundup

Alongside our annual Community Banking Conference, this event will provide you an opportunity to network with banking professionals during lunch and at our joint reception.


Cole-Frieman & Mallon LLP is a hedge fund law firm which provides comprehensive formation and SEC/CFTC regulatory support to start-up and established hedge fund managers.  Please contact us if you have any questions.

Bart Mallon


Hedge Fund Subscription & Withdrawal Process

The hedge fund subscription process (i.e. placing investor money into the fund’s brokerage account for investment) is a basic process that may be slightly different for each fund based on a number of factors.  Managers should make sure they understand the subscription process because investors may ask questions about the process and how the subscription amounts ultimately get into the fund’s trading account.  This post will discuss the framework for how subscription amounts move from the investor to the fund’s bank and brokerage accounts.

Bank Accounts

We previously discussed items related to establishing bank accounts for a hedge fund structure.  In general bank accounts will be established for the fund as well as the management company.  Establishing a bank account for a fund will be required when a fund’s broker requires all subscriptions and withdrawals to come from/go to a “same name” bank account.  Some managers may choose not to establish a bank account for the fund and simply have the prime broker deal with subscriptions, redemptions and fund expenses if their prime broker does not have “same name” requirements.  For the purposes of this article we generally discuss the subscription process with respect to structures where there are bank accounts for each individual fund.

Fund Administrator

The subscription process will be different if the fund utilizes a full service administrator instead of a non-full service administrator.

Full Service Fund Administration

If a fund’s administrator deals with the subscription process as well as the general accounting and NAV calculations (usually referred to as “full service” administration), then the fund manager generally will not deal with the subscription process at all.  Many times the “full service” administrator will actually establish (or work with the manager to establish) the bank and brokerage accounts and will dictate to the manager the subscription process.  Usually in these circumstances the administrator will also act as a “second signer” to add a layer of protection to the assets.  [Note: the “second signer” process essentially involves the fund administrator reviewing and approving all movements of money from the fund’s bank accounts.  While this service has been around for a number of years, it has become more common post-Madoff.]

Non- Full Service Fund Administration

For fund’s which do not have full service fund administration, the manager will be generally responsible for accepting subscription amounts and then making sure the amounts are properly moved to the brokerage account.  Generally the attorney will work with the manager to help the manager establish the proper structure and processes but managers should also discuss the process with the administrator to make sure all parties understand how the movement of subscription proceeds affect the calculation of the NAV.

Subscription Process in General

Generally the investor will wire the subscription amount to the fund’s bank account.  In the case of individual investors, subscriptions may sometimes be made by check.  Once the subscription amount has been credited to the fund’s bank account, it may either be wired to the fund’s brokerage account or it may sit there until the first

day of the trading period.*  Either the manager or the administrator (as described above) will work with the bank and broker to make sure the subscriptions are correctly transferred.

* Note: there are a number of different issues which may arise at this point including situations where the subscription is placed in the brokerage account before or after the first day of the trading period, and whether the investor will receive interest on the subscription amounts prior to the amounts being transferred to the brokerage account.  These issues should be discussed between the fund manager, administrator and lawyer prior to the fund launch.

Single Fund Structure – Domestic or Offshore Hedge Fund

In a single fund structure, whether the fund is located in the U.S. or offshore, moving subscription amounts is straight-forward.  Investors will place assets in the fund’s bank account and then the subscription amounts will be wired to the fund’s brokerage account. Generally a withdrawal is processed by a wire from the fund’s brokerage account to the fund’s bank account and then by a wire from the bank account to the withdrawing investor.  Depending on the broker, subscriptions and redemptions may be able to be effected directly between the investor and broker for credit/debit directly to the fund’s brokerage account.

Single Fund Subscription Process: Single Fund Structure Org Chart – Investor Subscription Process

Offshore Master-Feeder Hedge Funds

Offshore master-feeder funds will have process similar to the single entity fund structure process.  The general master-feeder hedge fund will have domestic taxable investors invest into a domestic feeder fund and offshore and non-taxable U.S. investors invest into an offshore feeder.  Both feeder funds will then invest directly into the master fund which ultimately makes investments directly.  A typical investment process might be: investors wire funds to the appropriate feeder fund bank account, the feeder fund then wires the subscription to the master fund bank account and from there the subscription amount would be wired to the brokerage account.  As above, withdrawals would be processed in the reverse order.

Master-Feeder Subscription Process: Master Feeder Org Chart – Investor Subscription Process

Mini-Master Hedge Funds

Mini-master hedge funds are becoming more popular because of cost considerations.  Additionally these structures can be easier to deal with from an operational perspective.  In the basic mini-master structure there will be two fund entities – an offshore fund and a domestic fund.  Then, like the traditional master-feeder structure, offshore investors and non-taxable U.S. investors will place their assets in the offshore feeder and U.S. taxable investors will place their assets in the domestic feeder.  Domestic investors will subscribe to the domestic fund which will act as the “master” fund.  From there the offshore fund will invest its assets in the domestic “master” fund, becoming in-essence an investor in the domestic fund. [Note: separate post on mini-master hedge funds to be coming soon.]

Mini-Master Fund Subscription Process: Mini-Master Org Chart – Investor Subscription Process

Other Items

The above discussion is general – each fund structure is unique and there may be certain reasons why a specific fund may have a process which is different from the discussion above.  Indeed, in many cases the administrator and broker may be able to handle subscription amounts which bypass the bank accounts or the feeder funds in master-feeder structures.  In any event, the fund manager’s operational team should work closely with the administrator to develop processes to ensure that the subscription process is seamless.  We have specifically not discussed offshore segregated portfolio companies or series LLC structures because these structures are unique and subscription processes may vary widely.


Cole-Frieman & Mallon LLP is a hedge fund law firm which provides comprehensive formation and SEC/CFTC regulatory support to start-up and established hedge fund managers.  Please contact us if you have any questions.

Bart Mallon, Esq. can be reached directly at 415-868-5345.  Karl Cole-Frieman can be reached at 415-352-2300.

Karl Cole-Frieman Quoted on Expert Networks

Insider Trading Remains Popular Topic in Hedge Fund Regulation

Insider trading by hedge funds and the use of expert networks has been a hot compliance topic in 2010 and 2011. The topic remains in the spotlight as Massachusetts recently passed new expert network regulations. Under the new regulations, registered investment advisers in Massachusetts will be required to maintain certain records with respect to transactions with expert network firms. [Note: we will be detailing these and other regulations recently adopted by Massachusetts which will become effective as of December 1, 2011.]

Karl Cole-Frieman was quoted by in an article on the new Massachusetts expert network regulations (subscription required). In the article Karl is attributed with providing information on the effect the regulations may have on expert networking firms, how expert networking firms may respond to the Massachusetts regulations and how hedge fund managers may modify their compliance programs to adhere to Massachusetts (and potentially other state) regulations.

We expect to see more states come out with similar laws and we will provide updates and more information as appropriate.


Karl Cole-Frieman is a managing partner at Cole-Frieman & Mallon LLP and he provides advice to fund managers with respect to insider trading and the use of expert network firms. He can be reached

at 415-352-2300 or through our contact form.


Family Office Definition

SEC Releases New Rule on Family Offices for IA Registration Exclusion

The Dodd-Frank Act created a new “family office” exclusion from the definition of investment adviser because the private advisor exemption was repealed.  While Congress believed that family offices should not be subject to the SEC registration requirements, it did grant authority to the SEC to define what constitutes a “family office”.  On June 22, 2011 the SEC issued a final rule which narrowly defined a family office to essentially include only an office which represents a single family that does not exceed 10 generations.  The new regulation takes effect on August 29, 2011 and those companies which do not fall within the new family office definition will be required to register with the SEC by March 30, 2012.

Family Office Definition

The term “family office” means a company that :

  • provides investment advice only to certain “family clients”;
  • is wholly owned by the “family clients” and controlled by family members or family entities; and
  • does not hold itself out to the public as an investment adviser.

The term “family clients” includes:

  • current and former family members,
  • certain employees of the family office (and, under certain circumstances, former employees),
  • charities funded exclusively by family clients,
  • estates of current and former family members or key employees,
  • trusts existing for the sole current benefit of family clients,
  • revocable trusts funded solely by family clients,
  • certain key employee trusts, and
  • companies wholly owned exclusively by and operated for the sole benefit of, family clients.

The term “family member” includes:

  • all lineal descendants of a common ancestor (who may be living or deceased)*
  • current spouses or spousal equivalents of those descendants
  • former spouses or spousal equivalents of those descendants

* The common ancestor cannot be more than 10 generations removed from the youngest generation of family members.  For an example of how this works, please see this ancestor diagram.

Notably, the exclusion does not extend to family offices serving multiple families.

Also, it is important to note that family offices are excluded from the definition of investment adviser as opposed to being exempted from registration requirements.  Previously family offices would have been exempt from registration because of the private adviser exemption.

Grandfathering Provision & Exemptive Orders

The Dodd-Frank Act included a grandfathering provision that precluded the SEC from excluding certain persons from the definition of “family office” solely because those persons provide investment advice to certain clients and provided that advice prior to January 1, 2010. The SEC’s rule incorporated that grandfathering provision such that employees of a family officer who are accredited investors (as defined by Regulation D) and companies controlled by a family member are permitted clients of a family office.

A family office that previously received a SEC exemptive order under section 202(a)(11)(G) of the Advisers Act will be able to continue to rely on the exemptive order and will thus not be required to register as an investment adviser.

Our Thoughts

The family office definition may have received more attention recently than it normally would have because of the Soros news.  However, it seems more important that the new rule does not include in the definition those groups which provide advisory services to more than one family.  This means that groups traditionally deemed to be family offices (albeit that services were provided to multiple families) will need to register with the SEC by March 30, 2012.  While we encourage managers to begin the registration process as soon as possible, we believe that managers will not begin the process en mass until the fourth quarter of 2011 and into the first quarter of 2012.

The full rule is reprinted below.

The full adopting release can be found here: IA-3220 – Final Family Office Rule.


§ 275.202(a)(11)(G)-1 Family offices.

(a) Exclusion. A family office, as defined in this section, shall not be considered to be an investment adviser for purpose of the Act.

(b) Family office. A family office is a company (including its directors, partners, members, managers, trustees, and employees acting within the scope of their position or employment) that:

(1) Has no clients other than family clients; provided that if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person shall be deemed to be a family client for purposes of this section 275.202(a)(11)(G)-1 for one year following the completion of the transfer of legal title to the assets resulting from the involuntary event;

(2) Is wholly owned by family clients and is exclusively controlled (directly or indirectly) by one or more family members and/or family entities; and

(3) Does not hold itself out to the public as an investment adviser.

(c) Grandfathering. A family office as defined in paragraph (a) above shall not exclude any person, who was not registered or required to be registered under the Act on January 1, 2010, solely because such person provides investment advice to, and was engaged before January 1, 2010 in providing investment advice to:

(1) Natural persons who, at the time of their applicable investment, are officers, directors, or employees of the family office who have invested with the family office before January 1, 2010 and are accredited investors, as defined in Regulation D under the Securities Act of 1933;

(2) Any company owned exclusively and controlled by one or more family members; or

(3) Any investment adviser registered under the Act that provides investment advice to the family office and who identifies investment opportunities to the family office, and invests in such transactions on substantially the same terms as the family office invests, but does not invest in other funds advised by the family office, and whose assets as to which the family office directly or indirectly provides investment advice represents, in the aggregate, not more than 5 percent of the value of the total assets as to which the family office provides investment advice; provided that a family office that would not be a family office but for this subsection (c) shall be deemed to be an investment adviser for purposes of paragraphs (1), (2) and (4) of section 206 of the Act.

(d) Definitions. For purposes of this section:

(1) Affiliated Family Office means a family office wholly owned by family clients of another family office and that is controlled (directly or indirectly) by one or more family members of such other family office and/or family entities affiliated with such other family office and has no clients other than family clients of such other family office.

(2) Control means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of being an officer of such company.

(3) Executive officer means the president, any vice president in charge of a principal business unit, division or function (such as administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions, for the family office.

(4) Family client means:

(i) Any family member;

(ii) Any former family member;

(iii) Any key employee;

(iv) Any former key employee, provided that upon the end of such individual’s employment by the family office, the former key employee shall not receive investment advice from the family office (or invest additional assets with a family office-advised trust, foundation or entity) other than with respect to assets advised (directly or indirectly) by the family office immediately prior to the end of such individual’s employment, except that a former key employee shall be permitted to receive investment advice from the family office with respect to additional investments that the former key employee was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to the time the person became a former key employee.

(v) Any non-profit organization, charitable foundation, charitable trust (including charitable lead trusts and charitable remainder trusts whose only current

beneficiaries are other family clients and charitable or non-profit organizations), or other charitable organization, in each case for which all the funding such foundation, trust or organization holds came exclusively from one or more other family clients;

(vi) Any estate of a family member, former family member, key employee, or, subject to the condition contained in paragraph (d)(4)(iv) of this section, former key employee;

(vii) Any irrevocable trust in which one or more other family clients are the only current beneficiaries;

(viii) Any irrevocable trust funded exclusively by one or more other family clients in which other family clients and non-profit organizations, charitable foundations, charitable trusts, or other charitable organizations are the only current beneficiaries;

(ix) Any revocable trust of which one or more other family clients are the sole grantor;

(x) Any trust of which: (A) each trustee or other person authorized to make decisions with respect to the trust is a key employee; and (B) each settlor or other person who has contributed assets to the trust is a key employee or the key employee’s current and/or former spouse or spousal equivalent who, at the time of contribution, holds a joint, community property, or other similar shared ownership interest with the key employee; or

(xi) Any company wholly owned (directly or indirectly) exclusively by, and operated for the sole benefit of, one or more other family clients; provided that if any such entity is a pooled investment vehicle, it is excepted from the definition of “investment company” under the Investment Company Act of 1940.

(5) Family entity means any of the trusts, estates, companies or other entities set forth in paragraphs (v), (vi), (vii), (viii), (ix), or (xi) of subsection (d)(4) of this section, but excluding key employees and their trusts from the definition of family client solely for purposes of this definition.

(6) Family member means all lineal descendants (including by adoption, stepchildren, foster children, and individuals that were a minor when another family member became a legal guardian of that individual) of a common ancestor (who may be living or deceased), and such lineal descendants’ spouses or spousal equivalents; provided that the common ancestor is no more than 10 generations removed from the youngest generation of family members.

(7) Former family member means a spouse, spousal equivalent, or stepchild that was a family member but is no longer a family member due to a divorce or other similar event.

(8) Key employee means any natural person (including any key employee’s spouse or spouse equivalent who holds a joint, community property, or other similar shared ownership interest with that key employee) who is an executive officer, director, trustee, general partner, or person serving in a similar capacity of the family office or its affiliated family office or any employee of the family office or its affiliated family office (other than an employee performing solely clerical, secretarial, or administrative functions with regard to the family office) who, in connection with his or her regular functions or duties, participates in the investment activities of the family office or affiliated family office, provided that such employee has been performing such functions and duties for or on behalf of the family office or affiliated family office, or substantially similar functions or duties for or on behalf of another company, for at least 12 months.

(9) Spousal equivalent means a cohabitant occupying a relationship generally equivalent to that of a spouse.

(e) Transition.

(1) Any company existing on July 21, 2011 that would qualify as a family office under this section but for it having as a client one or more non-profit organizations, charitable foundations, charitable trusts, or other charitable organizations that have received funding from one or more individuals or companies that are not family clients shall be deemed to be a family office under this section until December 31, 2013, provided that such non-profit or charitable organization(s) do not accept any additional funding from any non-family client after August 31, 2011 (other than funding received prior to December 31, 2013 and provided in fulfillment of any pledge made prior to August 31, 2011).

(2) Any company engaged in the business of providing investment advice, directly or indirectly, primarily to members of a single family on July 21, 2011, and that is not registered under the Act in reliance on section 203(b)(3) of this title on July 20, 2011, is exempt from registration as an investment adviser under this title until March 30, 2012, provided that the company:

(i) During the course of the preceding twelve months, has had fewer than fifteen clients; and

(ii) Neither holds itself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a), or a company which has elected to be a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-54) and has not withdrawn its election.


Cole-Frieman & Mallon LLP is a hedge fund law firm which provides investment adviser registration and compliance services to hedge fund managers and other members of the investment management community such as family offices.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.


CTA Expo 2011 Chicago

Ronnie Lott Keynote Speaker at CTA Conference

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

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

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

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

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

    /a> – Professional Sports and Business – Lessons Learned

  • Marketing Managed Futures in Europe –

    Tips from the Trenches by Simon Rostron of Rostron Parry

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

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


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


NFA Reminds CPOs of Rule 2-46 Reporting Requirement

Late Filers Possibly Subject to Disciplinary Action

The NFA issued a Notice to Members on July 21, 2011 (the “Notice”) reminding commodity pool operators (“CPOs”) registered with the NFA to file their quarterly pool reports in a timely manner. Most importantly, the NFA stated that beginning with the June 30, 2011 report, which is due on Monday, August 15, 2011, the NFA will review the filing history of any CPO that files the report late and determine whether disciplinary action is appropriate.  The Notice stressed the importance of filing in a timely manner, as the value to the NFA of the information reported diminishes the later a report is filed. Below is our quick summary of what is required in the quarterly report.

CPO Quarterly Report Requirements

NFA Rule 2-46 requires CPOs to file a pool’s quarterly report within 45 days after the end of the quarter. The report should be filed through the NFA’s EasyFile system and will include the following information:

Key Relationships – the CPO must report the identities of the pool’s administrator, carrying broker(s), trading manager(s), and custodian(s).

Statement of Changes of NAV – the CPO must report the change in the pool’s net asset value for the quarter. Information required includes beginning net asset value, net income, additions, withdrawals, ending net asset value, and special allocations to the CPO. Data for each of these fields will be broken down into values for the participants (generally limited partners) and the

CPO (the General Partner). Additionally, the CPO will be required to report information on any halts or material restrictions applicable to redemptions during the quarter.

Monthly Rates of Return – the CPO must report the monthly performance of the pool for each of the three (3) months comprising the quarter.

Schedule of Investments – the CPO must report a schedule of investments that identifies any investments that are 10% or more of the pool’s net asset value at the end of the quarter. The schedule will be separated into dollar-value breakdowns across seven categories of investments: (1) equities, (2) alternative investments, (3) fixed income, (4) derivatives, (5) options, (6) funds, and (7) cash.

CPOs should be sure to file the June 30, 2011 quarterly report for each pool that is subject to the reporting requirement by the August 15, 2011 due date. The full NFA Notice is reprinted below and can also be found here.


Notice I-11-13

July 21, 2011

Regulatory Reminder to CPOs of Quarterly Reporting Requirements

In March 2010, NFA Compliance Rule 2-46 became effective. Rule 2-46 requires each CPO Member to report quarterly to NFA specific information on each pool that it operates (for which it has a reporting requirement under CFTC Regulation 4.22). The reports are due within 45 days after the end of the quarterly reporting period. NFA adopted this quarterly reporting requirement in order to regularly obtain certain performance and operational data that NFA staff utilizes to assess risks and identify trends related to Member CPOs.

Obviously, if a Member CPO does not file this report within the specified time frame, then the value of the report to NFA diminishes since the information becomes less useful as it ages. Beginning with the June 30, 2011 report, which is due on Monday, August 15, 2011, NFA will review the filing history of any CPO Member that files the report after its due date and determine whether disciplinary action is appropriate.

All Member CPOs with reporting requirements under Compliance Rule 2-46 must be aware of the filing deadlines for these quarterly reports on an ongoing basis and ensure that these quarterly reports are filed in a timely manner. NFA staff remains available to assist CPO Members in meeting this filing requirement. Anyone needing additional information regarding these quarterly reports should contact Tracey Hunt at (312) 781-1284. You may also review NFA's two-part brief video series that walks through the process of filing a pool quarterly report:

NFA's Expanded Filing Requirements for Commodity Pool Operators – Part One

NFA's Expanded Filing Requirements for Commodity Pool Operators – Part Two


Cole-Frieman & Mallon LLP provides legal advice to NFA Member firms with respect to CFTC Regulations and NFA Rules.  Bart Mallon can be reached directly at 415-868-5345.


Social Media Regulation &amp; Managed Futures Industry

Futures Magazine Publishes Article on Social Media by Bart Mallon

In this month’s issue of Futures Magazine I wrote a featured article about the legal and regulatory issues that managers in the futures industry face with respect to the use of social media. The article, Social Media Considerations for Financial Firms, provides a broad overview of the many issues which managers should be aware of when utilizing social media in any sort of marketing campaign. Specifically the article discusses the NFA rules which member firms must follow and also discusses some best practices and common deficiencies.

I believe that the article comes at an important time – managers

are using social media more often to communicate with clients.  These managers are also using various platforms to communicate and market to potential clients.  The necessity of creating compliance programs with respect to these activities has been clearly communicated to the managed futures community by the NFA and we have written a number of posts on the use of social media. Many of these posts are informed by information provided to the NFA either through more formal discussions or informally at

various conferences. The posts include:

We recommend that NFA member firms implement robust compliance policies with respect to the use of such media. Additionally, these programs should be reviewed and revised, as appropriate, on a periodic basis to respond to new marketing and communication practices and any guidance promulgated by the NFA or CFTC.


Bart Mallon’s is a managing partner at Cole-Frieman & Mallon LLP and his practice focuses on the hedge fund industry. He routinely works with managers who trade commodities and futures on corporate and regulatory matters. He can be reached through our contact form or by phone at 415-868-5345.