Monthly Archives: October 2011

Form PF Filings to be Submitted via FINRA

SEC Mandates FINRA to Receive Form PF Filings

SEC has chosen FINRA to accept Form PF filings on its behalf when and if Form PF is adopted.  As background, on January 26, 2011 the SEC issued a proposed Rule 204(b)-1 under the Investment Advisers Act of 1940 which would require SEC registered investment advisers to file a new Form PF with the SEC on either a quarterly or annual basis.  Although the rest of the proposed rule is still under consideration, the SEC has determined that if Form PF is adopted, investment advisers would file Form PF electronically through FINRA.  FINRA currently is the operator of IARD, the system through which investment advisers electronically file their Form ADV and make necessary notice filings to states.  If the rule is passed, FINRA will develop and maintain the filing system for Form PF as well.

The SEC initially anticipated that the proposed rule implementing Form PF would have an initial compliance date of December 15, 2011 – this appears less likely as we get closer to that date and plan to provide updates as appropriate.

Form PF Filing Process and Filing Fees

Because the filing system for Form PF will likely be an extension of the current IARD filing system, we expect the process will be substantially similar to the current process of filing Form ADV.  Investment advisers filing Form PF will likely have to go through the entitlement process and then fund their accounts with the fees necessary to submit the filing through the system.  Managers will have to make quarterly annual filing based on their assets under management. Regardless of assets under management, the filing fees shall be as the same for each filing:

  • $150 for each Form PF annual update
  • $150 for each Form PF quarterly update


FINRA is the logical choice to accept and manage the filing of Form PF because, as the current operator of the IARD system, they are uniquely situated to develop and deploy the Form PF filing system in a timely manner.  The SEC believes that having FINRA expand its existing platform to accommodate this additional filing would be result in greater efficiency for both the advisers and the SEC.  However, managers should be wary of the continued consolidation of filing platforms as FINRA continues to move towards becoming the SRO for hedge fund managers and other investment advisers.

The text of FINRA’s letter regarding Form PF can be found here: FINRA Form PF Letter

The text of SEC’s notice of intent to have Form PF filed through FINRA can be found here: SEC Form PF Announcement – IA-3297


Cole-Frieman & Mallon LLP provides comprehensive registration and compliance services to hedge fund managers, including help with filing Form PF.  Bart Mallon can be contacted directly at 415-868-5345.

Requesting a Waiver from NFA Enhanced Supervisory Requirements

Member Firms Subject to ESRs May Seek Waiver

As we have discussed previously, an NFA Member firm may be required to adopt enhanced supervisory requirements (“ESR”) based on:

  • the employment history of its APs and Principals,
  • the affiliations of its Principals,
  • if the firm charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract, or
  • it becomes subject to NFA or CFTC enforcement or disciplinary proceedings.

If a Member firm meets any of the criteria requiring it to adopt ESRs, it may request a waiver from these requirements. This post discusses how a firm may request such a waiver and what the NFA will consider in granting or denying the waiver.

Requesting a Waiver

To request a waiver from enhanced supervisory requirements, a Member firm may file a petition with the NFA’s three-person Telemarketing Procedures Waiver Committee (the “TPWC”) for a partial or full waiver from the requirement to adopt ESRs.  The firm must file the petition with the TPWC within 30 days of receiving notice from the NFA that the firm is required to adopt ESRs.  This deadline is important because failure to timely file the request will prohibit the firm from filing the waiver again until at least 2 years after the firm adopts the ESRs.  If the TPWC denies the waiver, the firm is also prohibited from filing the waiver again until at least 2 years after the firm adopts the ESRs.

Factors the NFA Will Consider

The TPWC may consider the following factors when evaluating a waiver request:

  • total number and the backgrounds of APs sponsored by the Member;
  • number of branch offices and guaranteed introducing brokers (“GIBs”) operated by the Member;
  • experience and background of the Member’s supervisory personnel;
  • number of the Member’s APs who had received training from firms which have been closed for fraud, the length of time those APs worked for those firms and the amount of time which has elapsed since those APs worked for the disciplined firms;
  • results of any previous NFA examinations;
  • cost effectiveness of the taping requirement in light of the firm’s net worth, operating income and related telemarketing expenses;
  • whether the Member assesses commissions, fees and other charges that are based on all of the relevant circumstances, including the expense of executing orders and the value of services the Member renders based on its experience and knowledge; and
  • whether the Member adequately discloses the amount of commissions, fees and other charges before transactions occur in light of a retail customer’s trading experience and the impact that the commissions, fees and other charges may have on the likelihood of profit.

Conditions on Waiver

Even if the TPWC grants a full or partial waiver, it will still impose certain requirements on the firm. The firm must:

  • notify the NFA of any actions charging it with violation of CFTC, SEC, or other self-regulatory organization’s (“SRO”) regulations or rules;
  • notify the NFA of any customer complaints involving sales practices or promotional material;
  • not change ownership;
  • not have any material deficiencies noted during any SRO examination;
  • not hire additional APs from Disciplined Firms;
  • execute a written acknowledgement that the firm understands the conditions of the waiver;
  • and may include any other conditions deemed by the TPWC to be appropriate in consideration of a total or partial waiver from the enhanced supervisory requirements.

If the firm violates these conditions, the TPWC may revoke or amend the wavier that was previously granted.


The ESRs impose more strict requirements on Member firms.  It is important for a firm to evaluate the employment history of its APs and Principals to determine whether the firm meets the criteria set forth in NFA Interpretive Notice 9021 and must therefore adopt the ESRs or seek a waiver from such requirements. If a firm receives a notice from the NFA that it must adopt ESRs and it wishes to request a waiver, it should act quickly. Failure to file a petition within 30 days will bar the firm from filing a request for at least 2 years after it adopts the ESRs.


Cole-Frieman & Mallon LLP provides comprehensive legal services to CFTC registered managers.  The firm also provides NFA registration and compliance support.  Bart Mallon can be reached directly at 415-868-5345.

Alternative Mutual Funds Overview

Hedge Fund Strategies Employed by Mutual Funds

Since the financial crisis of 2008, a growing number of retail investors have sought access to more sophisticated investment strategies to protect against downside risk.  Most retail investors are not eligible to invest directly in hedge funds so they have turned to mutual funds that employ alternative investment strategies to achieve greater diversification.  This increasing demand for alternative mutual funds is also fueled by hedge fund investors seeking greater transparency and liquidity, as well as more conservative investment strategies that are typically utilized by mutual funds.  Additionally, the Dodd-Frank Act restricts certain individuals and institutions from investing in hedge funds, which will likely force these investors to seek out “hedge-like” investment vehicles in which to invest the money formerly invested in hedge funds.  To accommodate these new investors and the converging demands of retail and hedge fund investors, investment managers have developed mutual funds designed to mimic hedge fund investment strategies to the extent permitted under federal securities laws.

What is an Alternative Mutual Fund?

An alternative mutual fund is a professionally managed, pooled investment vehicle, designed to provide individual investors with access to investment strategies that offer non-correlated returns and diversification benefits. Generally, the goal of alternative mutual funds is to minimize portfolio volatility and preserve return objectives. Strategies utilized by alternative mutual funds include traditional hedge fund investment strategies such as long-short, market neutral, arbitrage and merger/arbitrage strategies.

Starting an Alternative Mutual Fund – Legal Considerations

Some of the operational and legal steps for launching a mutual fund are similar to starting a hedge fund, but there are some important differences. The high-level legal steps to launch an alternative mutual fund include:

  1. Register the fund manager as an investment adviser with the SEC.
  2. Form a corporation or a business trust (or leveraging an existing business trust) – a mutual fund will typically be established as a Delaware statutory trust or Massachusetts business trust.
  3. Prepare and file Form N-1A with the SEC to simultaneously register the fund as an investment company under the Investment Company Act of 1940 (’40 Act) and register fund shares under the Securities Act of 1933. This filing includes the fund’s prospectus, which discloses the fund’s investment objective, investment strategies and principal investment risks, as well as other material information regarding the fund manager and the fund.
  4. Seed the fund (or fund family) with at least $100,000 as required by the ’40 Act.
  5. Choose a board of directors (or trustees). While board sizes vary, the ’40 Act requires that at least 40% of the directors on a board be independent. Typically, independent directors hold a majority (75%) of board seats in nearly 90% of fund complexes.
  6. Negotiate agreements with fund service providers, including a custodian, prime broker (for fund derivative transactions), transfer agent, fund accountant, independent auditor, administrator, financial printer, and distributor. [Note: some hedge fund service providers also provide services to mutual funds, but in general the service providers are likely to be different.]
  7. Draft fund compliance policies and procedures reasonably designed to detect, prevent, and resolve violations of federal securities laws.
  8. Make requisite blue sky filings (or notice filings) in states where fund shares will be sold.

Other Considerations

The ‘40 Act also imposes leverage and other investment restrictions on mutual funds. While some of these restrictions can be addressed by investing in ETFs and other investments, it is imperative that investment managers consult a ’40 Act attorney prior to launching an alternative mutual fund to fully understand the implications of regulatory restrictions on portfolio management.


Investor preference and regulatory developments are driving the convergence of mutual funds and hedge funds and resulting in a rapidly growing demand for mutual funds that employ hedge fund strategies. This demand is being met by the emergence of alternative mutual funds. The process of launching an alternative mutual fund varies depending on the complexity of the fund, however, these steps along with others can typically be completed in six months with the assistance of a seasoned ’40 Act attorney and other fund service providers.  For more information on registering a mutual fund and the regulations governing mutual funds, please see the SEC’s Investment Company Registration and Regulation Package or contact us.


Cole-Frieman & Mallon LLP is a boutique investment management law firm with an alternative mutual funds law practice. Aisha Hunt, a Partner and the head of the ’40 Act practice at Cole-Frieman & Mallon LLP, can be reached directly at 415-762-2854.


Independent Directors for Failed Offshore Hedge Fund Found Personally Liable

Weavering Case Overview

An August 26, 2011 judgment of the Grand Court of the Cayman Islands, Financial Services Division, held two independent directors personally liable for “wilful neglect or default” in exercising their supervisory responsibilities as directors of the Weavering Macro Fixed Income Fund Limited (the “Fund”). The two independent directors were ordered to pay US $111 million plus costs.

The judgment is notable because it gives guidance for directors of Cayman Islands companies in discharging their “duty to exercise independent judgment, to exercise reasonable care, skill and diligence and to act in the interests of the [Fund].”  The guidance is likely to impact the manner in which offshore directors supervise functions that are delegated to professional service providers, including investment managers and administrators.  The court indicated that the exercise of the power of delegation “does not absolve [independent directors] from the duty to supervise the delegated functions.”  “They are not entitled to assume the posture of automatons . . . without making enquiry . . . on the assumption that the other service providers have all performed their respective roles . . . .”

The following points made by the court in the opinion provide useful guidance for independent directors as well as the professional service providers in coordinating with and responding to the supervision of independent directors.

Supervision During Fund Establishment Phase

  • Directors should satisfy themselves that the overall structure of a fund is consistent with Cayman Island industry standards and that the terms in the service providers’ contracts are reasonable.
  • Directors should understand the nature and scope of work of each of the professional service providers and determine that the division or responsibilities between the service providers is appropriate.
  • Directors should satisfy themselves that the hedge fund offering documents comply with the requirements of Cayman Islands law (in particular section 4(6) of the Mutual Funds Law). The court suggests that this may be done by making inquiry of the lawyers who have coordinated the work of developing the offering documents.

Supervision During Ongoing Operations

  • Directors should convene board meetings to discuss matters of substance and not simply to rubber stamp routine matters raised by the investment manager. Generally, an agenda should be prepared in advance of the meeting and the substance of discussions should be maintained in the minutes at least to the extent that it is necessary to understand the basis upon which any decisions were made and any resolutions passed.
  • Directors should review a fund’s balance sheet and other financial reports so that they can understand the fund’s general financial/NAV position and satisfy themselves that a fund is trading in accordance with any investment restrictions.
  • If directors accept a responsibility for a fund’s financial statements, they must exercise independent judgment in satisfying themselves that the financial statement do present fairly the fund’s financial condition.
  • Directors must be cognizant of issues that are likely to arise from side letters and determine whether there could be an adverse impact on a fund before approving or signing the letters.


We have talked previously about some of the offshore hedge fund structural considerations and we have discussed the issues involved with establishing a Cayman hedge fund, but we have not specifically written a post about the obligations of directors of offshore hedge funds.  Independent directors of offshore funds will need to be more cognizant about their duties going forward and the position needs to be taken seriously.  As with other high profile hedge funds that have failed, certain service providers and directors are being taken to task for not properly doing what they were supposed to do.  As more lawsuits go through the courts we are likely to see more lawsuits similar to this lawsuit.

The case can be found here: Weavering Judgement – Grand Court of the Cayman Islands


Cole-Frieman & Mallon LLP provides legal services to domestic and offshore hedge funds.  Bart Mallon can be reached directly at 415-868-5345.  Karl Cole-Frieman can be reached at 415-352-2300.


California’s Hedge Fund "Pay to Play" Laws Updated

New Lobbyist Requirements Apply to Hedge Fund Placement Agents

With the enactment of AB 1743 (effective January 1, 2011) and SB 398 (effective October 9, 2011), California has imposed new requirements on persons who market investment managers and their funds to California pension plans – that is, California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). The laws, similar to the recently passed SEC pay to play rules, are designed to prevent “pay-to-play” activities to increase transparency and accountability by prohibiting a person from acting as a “placement agent” in connection with any potential investment by CalPERS or CalSTRS.

Placement Agents Deemed to be Lobbyists

Placement agents—generally persons that are compensated to act for an external investment manager in connection with securing an investment by CalPERS and CalSTRS—are considered lobbyists under the new laws. SB 398 clarifies that placement agents include those that market interests in any type of private investment fund (not just marketing investment management services), including private equity funds, hedge funds, venture capital funds, and real-estate funds. There are two exclusions from being considered a placement agent under the laws:

“(1) an employee, officer, director, equityholder, partner, member, or trustee of an external manager who spends one-third of his or her annual time managing the assets held by the external manager; and

(2) any employee, officer, director or affiliate of an external manager, if that external manager is: (a) registered with the SEC or a comparable state securities regulator; (b) selected for investment through a statutorily defined competitive bidding process; and (c) willing to be subject to the fiduciary standard of care applied to the retirement fund board.”

Placement Agent Registration Requirements

Placement agents must register under the Political Reform Act of 1974 (PLR) prior to acting as a placement agent. Additionally, among other things, placement agents:

  • Must not make gifts to a person totaling more than $10 in any calendar month if that person works for CalPERS or CalSTRS;
  • May not make a political contribution to any elected state officer or candidate for elected office if the agent is registered to lobby the governmental agency for which the candidate is seeking election (e.g. CalPERS Board Member, CalSTRS Board Member, Supt. of Public Instruction, State Treasurer, or the State Controller; and
  • May not receive fees that are contingent on the outcome of any proposed legislative action or administrative action, including investment decisions.

Local Lobbyist Regulations

The new laws also subject placement agents to “applicable” local lobbyist regulation if the agents market to local government plans. Before marketing to any California city or county retirement system, investment managers should evaluate the relevant local lobbyist ordinances to determine which, if any, local requirements may apply.


Cole-Frieman & Mallon LLP is an investment management boutique law firm.  The firm’s clients include hedge fund managers, hedge fund investors and other groups within the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.

FINRA Cannot Sue to Collect Unpaid Fines

2nd Circuit Holds that FINRA Lacks Statutory Authority and FINRA Rule was Invalid

The Securities Exchange Act of 1934 (the “Exchange Act”) authorizes the Financial Industry Regulatory Authority (“FINRA”) and other SROs to regulate within the securities industry. FINRA’s role includes registering and educating industry participants, examining firms, implementing rules, and enforcing them alongside the federal securities laws. FINRA’s enforcement tools include imposing fines for violations. Last week, in Firero v. FINRA, the United States Court of Appeal for the Second Circuit found that FINRA lacked the power to sue for unpaid fines.

Summary of Facts and Judgment

Fiero Brothers (the “Firm”) was a FINRA member and registered broker-dealer. John J. Fiero (“Mr. Fiero,” and together with the Firm, “Fiero”) was the Firm’s only registered representative. In 1998, FINRA brought an enforcement action against Fiero for engaging in illegal short-selling, among other violations. FINRA permanently barred and fined them $1 million, plus costs. For the next ten years, FINRA attempted unsuccessfully to collect the fine from Fiero. In 2003, FINRA filed suit in New York state court to recover the fine and costs. The lower courts found in FINRA’s favor; however, the New York Court of Appeals reversed, holding that the FINRA complaint fell under the exclusive jurisdiction of the federal courts.

Fiero then sought a declaratory judgement in federal district court, that FINRA lacked authority to collect fines through judicial proceedings. FINRA filed a counterclaim seeking to enforce its fine, and both parties moved to dismiss each other’s claims. The District Court entered judgment in FINRA’s favor, dismissing Fiero’s complaint. The Second Circuit reversed, holding that:

(1) the Exchange Act did not authorize FINRA to sue for fines, stating that the specificity of the statute, and omission of the power to sue indicated Congress’ intent to withhold this power from SROs. The court noted that FINRA’s longstanding practice did not include filing suits, and that the Fiero case was the first it had brought; and

(2) FINRA’s 1990 rule permitting it to sue for fines was improperly promulgated under the Exchange Act, specifically that it was not a “housekeeping rule” that is approved upon receipt of the SEC (as submitted by FINRA), but was instead a substantive rule, subject to notice and a comment period.

Implications of the Court’s Decision

Following the decision, FINRA’s general counsel reportedly stated that FINRA would “continue to review the ruling and weigh our options.”

Those options include seeking review by the United States Supreme Court, or asking Congress to provide SROs with the right to seek enforcement of their fines in court. In the meantime, FINRA may, and will, pursue collection of fines short of litigation, and suspend or bar violators from the industry. FINRA may seek the SEC’s assistance in obtaining court orders that include payment of fines. However, the decision hampers FINRA to the extent that fear of litigation inspired violators to pay their fines.

But some commentators have noted that FINRA seldom pursued barred individuals for unpaid fines, and rarely sued (one put the total number of lawsuits at five, including Fiero). Furthermore, violators who are not barred have an incentive to pay their fines if they wish to keep their licenses. Reactions were positive from those who believed that FINRA had been exceeding its statutory power for years, and abusing the rule-making process.

Rule-making is likely the area most impacted by the ruling. The court’s criticism that FINRA bypassed the notice and comment procedure may cause SROs and the SEC to scrutinize proposed rules, or second-guess existing “housekeeping” rules, to ensure that they are not substantive, and subject to a lengthy approval process. Moreover, future litigants may be encouraged to seek judicial review of SRO rules that were approved in the more streamlined process for “housekeeping” rules.

New York is home to many financial firms, and the courts there have expertise in interpreting the federal securities laws. Though not binding on other courts, the Second Circuit’s decision will be influential among the other federal circuits. State courts may follow the New York Court of Appeals, and decide that they do not have subject matter jurisdiction over collections cases involving federally-authorized SROs.

A remaining question is whether the decision will impact the proposed SRO for investment advisers, and FINRA as the candidate for that role. At this point, the particulars of that legislation and the SRO’s powers in collecting fines, is unknown. The decision is not expected to affect FINRA’s status as the frontrunner to fill this role.


Recent years have seen expanded regulation of the financial industry. Thus, it is surprising that the Second Circuit determined that FINRA lacked a particular enforcement tool. However, it is this climate of expanding regulation that may give FINRA the leverage to seek greater enforcement powers and options from Congress. In the meantime, and perhaps despite a FINRA spokeswoman’s comment that “the decision will not…restrict our ability to enforce FINRA rules and securities laws….,” at least some violators who receive significant fines, but have the means to leave the industry may walk away as an alternative to paying fines.


Cole-Frieman & Mallon LLP provides legal advice and support to all types of investment managers.  If you have a question regarding any industry SRO, please feel fre to contact us directly.  Bart Mallon can be reached directly at 415-868-5345.

NASAA Examination of IA Compliance Deficiencies

Examination Reveals Compliance Focus Areas

NASAA, the lobbying body of the various state securities divisions, recently released a set of examination findings which describe the common compliance deficiency areas for IA firms registered with the state securities commissions.  The exams, which were completed by state administrators, showcase a number of compliance issues for both registered investment advisers and fund managers.  According to the NASAA press release:

Examinations of 825 investment advisers conducted between January 1, 2011 and June 30, 2011 uncovered 3,543 deficiencies in 13 compliance areas, compared to 1,887 deficiencies in 13 compliance areas identified in a similar 2009 coordinated examination of 458 investment advisers.

Below we have summarized the findings released in the NASAA 2011 Examinations Findings (.ppt).

Deficiency Categories

Below are the categories which were covered, along with the percentages of advisers with at least one deficiency in such category:

  • Registration (59.9%)
  • Books and Records (45%)
  • Unethical Business Practices (36.8%)
  • Supervisory/Compliance (30.2%)
  • Advertising (21.6%)
  • Privacy (21.2%)
  • Financials (19.8%)
  • Fees (19.4%)
  • Custody (12.6%)
  • Investment Activities (3.9%)
  • Solicitors
  • Pooled Investment Vehicles (Hedge Fund)
  • Performance Reporting

Discussion of Deficiencies

There are a number of slides devoted to providing more granular information on the various deficiencies.  Below are some of my thoughts when I read through these deficiencies:

  • Properly completing ADV, including proper descriptions (AUM, fees, business overview, disclosures) and making sure there are no inconsistencies; unregistered IAs were not a large part of the deficiencies.
  • Investment adviser books and records are what you would expect – a number of different items were not properly kept as required by regulations. Surprisingly, it seems that many IAs do not keep the suitability information on their clients as required.
  • Under unethical practices, it seems that many of the deficiencies were likely caused by careless drafting of contract documents. Non-contract unethical business practices revolved around advertising and conflicts of the IA.
  • One interesting note for Supervisory/Compliance is that a large number of IAs did not follow their own internal procedures. This might be worse than having inadequate procedures – if your compliance manual says you will do something, you should make sure it is being done.
  • Financials might be what you would expect – issues with respect to net worth of the IA, bond issues and inaccurate financials.
  • Advertising deficiencies focused on website issues. I would expect this to increase in the future as more IAs establish websites in the future. Additionally, social media deficiencies are likely to increase in the future as more firms use these tools to advertise their business. [Note: while the managed futures industry has different regulations, the concepts of social media regulation for the futures industry can be applied to securities compliance.]
  • Custody is probably the single most misunderstood concept for IA firms. Most people view custody to be having physical possession of a client’s cash or securities.  However, if you directly deduct a fee from a client account (even if this is done by the custodian, i.e. Schwab) then in most states the IA is deemed to have “custody” of the account and must adhere to the custody requirements of the state.
  • It is interesting to note that with respect to investment activities the following were some common deficiencies: preferential treatment (I assume, without disclosure), aggregate trades, and soft dollars.
  • Solicitors have become a more prevalent issue over the last few months as more fund managers (who are RIAs) offer separately managed account programs. [Note: we will have more articles forthcoming on this issue shortly.] For solicitor issues the big items were undisclosed solicitors and issues with disclosure. Also, the agreement between the IA and the solicitor was a common deficiency.
  • Hedge fund managers with no separately managed account business had many more deficiencies than IA only firms. Deficiencies with respect to hedge funds related to valuation, cross-trading and preferential treatment (again, we assume, without disclosure).

IA Compliance Best Practices

As a result of the report, the NASAA identified the following as best practices for IAs:

  • Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.
  • Review and update all contracts.
  • Prepare and maintain all required records, including financial records.
  • Back-up electronic data and protect records.
  • Document all forwarded checks.
  • Prepare and maintain client profiles.
  • Prepare a written compliance and supervisory procedures manual relevant to the type of business to include business continuity plan.
  • Prepare and distribute a privacy policy initially and annually.
  • Keep accurate financials. File timely with the jurisdiction.
  • Maintain surety bond if required.
  • Calculate and document fees correctly in accordance with contracts and ADV.
  • Review all advertisements, including website and performance advertising, for accuracy.
  • Implement appropriate custody safeguards, if applicable.
  • Review solicitor agreements, disclosure, and delivery procedures.


It is clear that NASAA is trying to be more of an influence on how the state administrators conduct examinations and the focus areas of those examinations.  While it is helpful for NASAA to release investment adviser compliance best practices, it would be more useful if they released more robust compliance materials such as sample compliance manuals/ policies and clearer guidance on state interpretations of regulations.  As Congress and the SEC determine whether to establish an investment adviser SRO, we are likely to see NASAA take a larger thought leadership role.  In any event, investment advisers and hedge fund managers should begin to start thinking about registration and implementing robust compliance policies and procedures which address all parts of state or SEC IA registration regulations.


Cole-Frieman & Mallon LLP provides legal advice to hedge fund start ups and well as established fund complexes.  Bart Mallon can be reached directly at 415-868-5345.

Connecticut Issues Orders Regarding Investment Adviser Registration

Three Orders Focused on New Hedge Fund Regulations

On June 11, 2011, Connecticut Department of Banking issued three orders relating to Connecticut investment adviser registration requirements in response to the SEC issuing final hedge fund registration regulations required by the Dodd-Frank Act.  The orders (1) create a registration transition period for previously exempt advisers, (2) provide several new exemptions from state registration and (3) define the term “client” for the purposes of Connecticut’s de minimus exemption.

First Order – State Registration Timeline

The first order establishes a state registration timeline for Connecticut advisers affected by the Dodd-Frank Act.  Under this order the following timelines will be in effect:

Investment advisers currently registered with the SEC with assets under management of less than $90 million as of March 30, 2012, will have until June 28, 2012 to withdraw from registration with the SEC and register as an investment adviser in CT.

Investment advisers who had relied on the repealed “private adviser” exemption under Rule 203(b)(3) will have until March 30, 2012 to either register with Connecticut or to register with the SEC and make a notice filing with Connecticut.

Investment advisers who are not eligible for SEC registration or for either of the above deferrals and new advisers starting their advisory business after July 21, 2011 must continue to comply with applicable Connecticut registration and notice filing requirements.

This first order can be found here.

Second Order – Exemptions from Connecticut IA Registration

Previously, Connecticut provided an exemption from investment adviser registration for those hedge fund managers who were located in Connecticut and had more than $25M in assets under management and managed less than 15 hedge funds. The new order repeals this previous exemption and adopts the same exemptions from Connecticut state registration as have been adopted by the SEC.

Accordingly, the following investment advisers are exempt from registration in Connecticut:

  • Foreign private advisers
  • Investment advisers that are registered with the CFTC
  • Investment advisers to small business investment companies
  • Investment advisers to venture capital funds
  • Investment advisers solely to private funds with assets under management of less than $150 million.

Some of these exempted advisers will still be subject to various reporting and recordkeeping requirements by the SEC and may need to make notice filings and/or reports available to Connecticut.

It is important for managers to understand that the above extensions don’t apply to investment advisers and fund managers commencing business on or after July 21, 2011. Those investment advisers and others that don’t fall into the described exemptions remain subject to applicable registration and notice filing requirements in Connecticut.

The second order can be found here.

Third Order – Definition of “Client” for Connecticut’s De Minimus Exemption

To further conform its regulations to the new SEC rules, Connecticut has adopted the definition of “client” in accordance with the Investment Advisers Act Rule 202(a)(30)-1 for Connecticut’s de minimus exemption. The de minimus exemption allows an investment adviser to not register with the state if the investment adviser:

  1. does not have a place of business in Connecticut AND
  2. during the preceding 12 month period had fewer than 6 “clients” who are residents of Connecticut

Under the new Connecticut rule, a single “client” generally means:

  1. a natural person, family members of the same household and accounts for such persons OR
  2. an entity (such as a hedge fund) to which the investment adviser provides investment advice based on the entity’s investment objectives (two entities with exactly the same ownership can, together, be counted as a single client)
The third order can be found here.


The new SEC rules implementing investment adviser regulation amendments under the Dodd-Frank Act have created new compliance and regulatory issues for investment advisers. States will need to amend their rules to coordinate their regulatory regime with the new changes. We expect to see similar releases from other states in the coming weeks, and will be providing updates as appropriate.


Cole-Frieman & Mallon LLP provide advice with respect to hedge fund formation as well as investment adviser registration and compliance.  Bart Mallon can be reached directly at 415-868-5345.

Karl Cole-Frieman Speaking at San Francisco Hedge Fund Event

Dodd-Frank Implementation Considerations for Private Equity and Hedge Funds

On October 18th Grant Thornton LLP and Financial Women’s Association of San Francisco will be hosting a panel discussion and reception focused on regulatory issues for hedge funds and private equity funds.  Karl Cole-Frieman, a partner with Cole-Frieman & Mallon LLP, will be the attorney on the panel and will be discussing both the legal and business aspects of compliance with the various Dodd-Frank regulations.

Information on the event is posted below and you can register for the event by clicking here.


Grant Thornton LLP and the Financial Women’s Association of San Francisco invite you to join our upcoming panel discussion, focusing on implementation considerations for Private Equity and Hedge Funds under the Dodd-Frank Act. At this informative event, professionals from the industry will discuss various hot topics including:

  • Registration requirements
  • Restructuring considerations
  • Implementation and best practices
  • Focus areas of SEC examinations
  • Cost effective ways to comply with Dodd-Frank

Featured Panelists

Winston Wilson – National Financial Services Sector Leader, Grant Thornton LLP

Mark Catalano – Director, Deutsche Bank, Alternative Fund Services

Chris Lombardy – Member, Regulatory compliance, Kinetic Partners

Karl Cole-Frieman – Partner, Cole-Frieman & Mallon LLP

Moderated by Ann Oglanian, President & CEO, ReGroup LLC


4:00 – 4;30 p.m. Registration*

4:30 – 6:00 p.m. Panel / Q&A

6:00 – 7:00 p.m. Cocktail reception


Omni Hotel

500 California Street

2nd Floor

San Francisco, CA 94104

* This event is by invitation only. Spots are limited so register early!


Cole-Frieman & Mallon LLP provides a variety of services including: hedge fund formation, advisor registration and counterparty documentation, CFTC and NFA matters, seed deals, internal investigations, operational compliance, regulatory risk management, hedge fund due diligence, marketing and investor relations, employment and compensation matters, and routine business matters. For more information please visit us at: