Monthly Archives: March 2012

SEC Guidance on Registration of Investment Advisory Affiliates

The SEC’s Division of Investment Management issued a no-action letter on January 18, 2012 that provides guidance for registered investment advisers who have multiple entities in control relationships. The no-action letter affirms prior SEC guidance for investment advisers who have entities that serve as general partners and managing members to private funds and other similar special purpose vehicles (“SPVs”). Additionally, other investment advisers who “conduct a single advisory business” through multiple separate legal entities may use a single registration (i.e. register on a single Form ADV) under certain circumstances.

Affiliates Serving as Fund General Partners, Managing Members and Similar SPVs

Entities that function as fund general partners, fund managing members, and similar SPVs are not required to separately register as an investment adviser, as long as the following conditions are satisfied:

1. The investment adviser to a private fund establishes the SPV to act as the fund’s general partner or managing member;

2. The SPV’s formation documents designate the investment adviser to manage the private fund’s assets;

3. All of the investment advisory activities of the SPV are subject to the Investment Advisers Act of 1940 (the “Advisers Act”), Advisers Act rules, and SEC examination; and

4. All employees and persons acting on behalf of the registered investment adviser and/or an SPV are subject to supervision and control of the investment adviser.

For SPVs that have independent directors, the independent directors are excepted from the condition that they be under the registered investment adviser’s supervision and control, and thus are not “persons associated with” the registered investment adviser.

Other Investment Advisory Affiliates Under Common Control

Under the SEC’s guidance, a registered investment adviser (the “filing adviser”) can file a single Form ADV on behalf of itself and each entity that is controlled by or under common control with the filing adviser (each, a “relying adviser”) as long as those entities are conducting a single advisory business. Under the no action letter, using a single registration is appropriate under the following circumstances:

1. The filing adviser and each relying adviser advise only private funds and separate account clients that are “qualified clients” (as defined in Rule 205-3 promulgated under the Investment Advisers Act of 1940 (the “Advisers Act”));

2. Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control;

3. The filing adviser has its principal office and place of business in the United States;

4. The advisory activities of each relying adviser are subject to the Advisers Act and SEC examination;

5. The filing adviser and each relying adviser operate under a single code of ethics and single set of compliance policies and procedures; and

6. The filing adviser discloses in its Form ADV (Miscellaneous Section of Schedule D) that it and its relying advisers are together filing a single Form ADV and each relying adviser is identified by completing a separate Section 1.B, Schedule D, with the notation “relying adviser.”

For more information on whether the above guidance applies to your firm, please contact us directly.


Cole-Frieman & Mallon LLP provides investment adviser registration and compliance services. Bart Mallon can be reached directly at [email protected] and by phone at 415-868-5345.

NFA Member Annual Update Reminder

Annual Update Information for CPOs, CTAs, IBs, and FCMs

We are a little behind getting this update out this year. Please contact us if you have any questions or would like help with any updates.


NFA members (including commodity pool operators, commodity trading advisers, introducing brokers, futures commission merchants, and retail foreign exchange dealers) are reminded that every year, in order to maintain their registration and/or NFA membership, they must do the following by the anniversary date of their registration:

  1. complete the electronic Annual Registration Update;
  2. pay the annual registration records maintenance fee of $100 for each category of registration;
  3. complete the electronic Annual Questionnaire, which includes firm and disaster recovery information as well as a questionnaire for each category of registration; and
  4. pay annual membership dues. Information about dues is available here.

The NFA will send an email to the member, along with a letter detailing the annual filing requirements along with an invoice for fees due. If all of the annual filing requirements are not completed within 30 days following the annual due date, the NFA will treat it as a request to withdraw from registration and/or NFA membership. That status will be reflected on the NFA’s Online Registration System (ORS).

Annual Registration Update

To complete the Annual Registration Update, the firm should log into ORS and select the Update/Withdraw Registration Information tab. At the bottom of the screen, below the Annual Filings heading, the firm should click on the Annual Registration Update link to access the Annual Registration Update filing.

Annual Questionnaire

As indicated above, once a year, members must complete an Annual Questionnaire. The questionnaire provides the NFA with information about the firm and allows the NFA to better understand the composition of its membership as a whole. Additionally, the information provided allows the NFA to tailor its regulatory programs to better serve its members. Members are encouraged to update their questionnaire data on a regular basis, but must, at a minimum, complete the Annual Questionnaire on the anniversary of their NFA membership date.

To complete the Annual Questionnaire, the firm should log into ORS and select the Update/Withdraw Registration Information tab. At the bottom of the screen, below the Annual Filings heading, the firm should click on the Annual Questionnaire link to access the Annual Questionnaire.

Other Regulatory Reminders

Once a year, members should also be sure to complete the following items to remain in compliance with CFTC and NFA rules and regulations:

  • Send the firm’s privacy policy to every client, customer, or investor in a pool.
  • Test the firm’s disaster recovery plan and address any issues in the plan.
  • Provide ethics training as outlined in the firm’s compliance materials.
  • Supervise the operations of any branch offices, including conducting an annual onsite inspection.
  • Commodity pool operators and commodity trading advisors soliciting new investors or clients should update and file their disclosure documents with the NFA. A disclosure document used to solicit investors or clients cannot be more than 9 months old.

There are additional requirements specific to commodity pool operators, commodity trading advisers, introducing brokers, futures commission merchants, and retail foreign exchange dealers. More information about these requirements is available on the NFA website here.


Cole-Frieman & Mallon LLP provides managed futures legal services and other support to hedge fund managers. Bart can be reached directly at [email protected] or 415-868-5345.


Hedge Fund Events March 2012

All apologies…we are late this month…

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


March 1

March 2, 2012

March 2, 2012

March 5-6, 2012

March 5-7, 2012

March 6

March 6-8, 2012

  • Sponsor: WBR
  • Event: TradeTech
  • Location: New York, NY

March 6-8, 2012

March 7, 2012

March 7, 2012

March 8, 2012

March 10

March 11-13, 2012

March 12-13, 2012

March 13, 2012

March 13-15, 2012

March 13-16

  • Sponsor: FIA
  • Event: Boca 2012
  • Location: Boca Raton, FL

March 14, 2012

March 14

March 14-16

March 14-16, 2012

March 15

March 15

March 15

March 15-16

March 18-21

March 19-20, 2012

March 19-20, 2012

March 19-20

March 20

March 22

March 22

March 23, 2012

March 26, 2012

March 26, 2012

March 26-27, 2012

March 26-27, 2012

March 26-27, 2012

March 26-27, 2012

March 27, 2012

March 27-28, 2012

March 28

March 29, 2012

March 29, 2012

March 29, 2012

March 29


Cole-Frieman & Mallon LLP provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.

Major Futures Industry SROs Call for More FCM Reporting

The NFA released an announcement that the major SROs for the futures industry – the CME, NFA, ICE, KCBOT, and the Minneapolis Grain Exchange – have created a series of recommendations on ways to increase the security of customer deposits with FCMs. I

t is no surprise that the proposed safeguards all involve more oversight by the SROs.

The recommendations can be summed up as follows:

  1. Require FCMs to file daily segregation reports
  2. Require FCMs to file bimonthly reports detailing how segregated funds are invested and where those assets are custodialized
  3. Require more frequent unannounced audits/inspections of the FCM
  4. Require a principal of the FCM to approve a disbursement from the segregated accounts which is in excess of 25% of those accounts

As we discussed in a piece earlier about the changing managed futures regulations, there will be various proposals over the next several months detailing how the futures industry can be better regulated. Many of these proposals mean that FCMs will need to increase compliance and oversight. We believe that a number of the proposals below (and a number which have been suggested by other groups) are reasonable and would increase managed futures customer protection. The question, as with any increase in regulation, is whether the costs of implementing and maintaing these compliance programs outweigh any benefits to customers. We will certainly hear more on these issues in the near term…


Futures industry SRO committee announces initial recommendations to strengthen current safeguards for customer segregated funds

March 12, Chicago – A special committee composed of representatives from the futures industry’s self-regulatory organizations (SRO) has proposed a series of initial recommendations for changes to SRO rules and regulatory practices designed to strengthen current safeguards for customer segregated and secured funds held at the firm level in light of the MF Global bankruptcy.

The four recommendations include:

• Requiring all Futures Commission Merchants (FCM) to file daily segregation and secured reports. This will provide SROs with an additional means of monitoring firm compliance with segregation and secured requirements and a risk management tool to track trends or fluctuations in the amount of customer funds firms are holding and the amount of excess segregated and secured funds maintained by the firms.

• Requiring all FCMs to file Segregation Investment Detail Reports, reflecting how customer segregated and secured funds are invested and where those funds are held. These reports would be filed bimonthly and will enhance monitoring of how FCMs are investing customer segregated and secured funds.

• Performing more frequent periodic spot checks to monitor FCM compliance with segregation and secured requirements. FCMs are audited each year by both their DSRO and their outside accountant.

• Requiring a principal of the FCM to approve any disbursement of customer segregated and secured funds not made for the benefit of customers and that exceed 25% of the firm’s excess segregated or secured funds. The firm would also be required to provide immediate notice to its SROs.

Dan Roth, president of NFA, stated that “The committee believes that these recommendations will provide regulators with better tools to monitor firms for compliance with segregation and secured requirements and strengthen the industry’s customer protection regime. These are our initial recommendations. We will continue to work with the CFTC and the industry as we consider additional improvements.”

The special committee, formed in January 2012 in response to the MF Global bankruptcy, includes representatives from CME Group, NFA, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange.


Cole-Frieman & Mallon LLP provides legal services to the managed futures industry. Bart Mallon can be reached directly at 415-868-5345.


California Extends Hedge Fund IA Exemption Implementation

Extension of Comment Period Delays Implementation of Private Adviser Exemption

As we have advised previously, states are responding to the Federal overhaul of investment adviser registration requirements by evaluating and in some

case changing their own laws governing investment advisers. This response, spearheaded by the National Association of Securities Administrators, or NASAA, includes exemptions for advisers to certain private funds.

In December, California’s Department of Corporations (the “Department”) released its own proposed exemption, which we discuss in detail here. In sum, the proposed rule, if

adopted, will exempt many hedge fund managers from registration with the state of California. The firm must provide advice solely to one or more “qualifying private funds,” which includes Section 3(c)(1), Section 3(c)(7) funds and certain other funds that fall under an Investment Company Act of 1940 exception. In addition, the adviser must:

  • have not violated securities laws;
  • file periodic reports (an abbreviated version of the Form ADV);
  • pay the existing investment adviser registration and renewal fees ($125); and
  • comply with additional safeguards when advising funds organized under Section 3(c)(1) (other than venture capital companies).

The initial deadline for comments on the proposal was February 20, 2012. However, the Department has extended that deadline to March 25, 2012.

While the rule is being considered, California has extended its existing private adviser exemption until April 19, 2012. If the new rule is not adopted by that time and the current exemption is not extended, those fund managers with over $25 million in assets under management must register in California. If however, the new rule is adopted, such managers will be exempt from registration. As long as their assets under management fall below $100 million, they will only have to file certain reports (similar to the reports filed by Exempt Reporting Advisers) with California. Once their assets under management exceed $100 million, they will have to register with the SEC unless an exemption applies (e.g. the Private Adviser Exemption).

The proposed exemption will significantly change the registration regime in California. Firms that solely manage qualifying funds and meet the additional requirements will not have to register and those that are currently registered may withdraw their registration. California fund managers with less than $100M in AUM generally will not be registered with any regulatory agency.


The original comment period ending February 20 gave California fund managers plenty of time to evaluate their current business, future plans and potential eligibility for the exemption prior to the deadline for the ADV Annual Updating Amendment (deadline March 31). With the comment period extended to March 25, and final adoption of the exemption likely pushed to early April, managers will now need to plan on filing their annual updating amendment as usual; managers whose registrations are pending should proceed with that process until the final rule is released.


Cole-Frieman & Mallon LLP provides hedge fund and adviser registration services to managers throughout the United

States. Bart Mallon can be reached directly at 415-868-5345.