Monthly Archives: December 2013

Cole-Frieman & Mallon LLP End of Year Checklist 2013

Below is our end of the year update and checklist.  Please contact us directly if you would like to be added to the distribution list.


December 4, 2013

Clients, Friends, Associates:

December is the busiest month of the year for most private fund managers. In addition to end of year administrative upkeep, the regulatory landscape has shifted dramatically over the past twelve months. As a result, year-end processes and 2014 planning are particularly important, especially for General Counsels, CCOs and key operations personnel. As we head into 2014, we have put together this checklist to help managers stay on top of the business and regulatory landscape for the coming year.

This overview includes the following:

* Regulatory & Other Changes in 2013
* Adviser Registration & Compliance
* CFTC Regulation
* Annual Compliance & Other Items
* Annual Fund Matters
* Annual Management Company Matters
* Compliance Calendar


Regulatory & Other Changes in 2013:

Foreign Account Tax Compliance Act (“FATCA”). FATCA will require certain financial institutions to identify and disclose direct and indirect U.S. investors and withhold U.S. income tax on nonresident aliens and foreign corporations, or be subject to a 30% U.S. withholding tax on payments they receive from U.S. sources (the “FATCA Tax”). FATCA’s implementation deadline was delayed by six months, such that foreign financial institutions (including offshore funds), now have until April 25, 2014 to complete certain steps in order to avoid being subject to the FATCA Tax. Offshore fund managers should contact their tax advisers and compliance counsel to prepare for FATCA compliance and, if required, to register with the IRS before April 25, 2014. In addition, domestic fund managers should work with their tax advisers, administrators and legal counsel to properly address the new account onboarding and due diligence procedures required under FATCA, including updating their offering documents and subscription materials.

General Solicitation Ban Lifted. Earlier this year, the SEC issued long-awaited implementing regulations and other proposed rules relating to the Jumpstart Our Business Startups Act (“JOBS Act”), including most famously (and potentially least well understood), the New Rule 506(c) under Regulation D. New Rule 506(c) became effective on September 23, 2013, and it permits private investment funds to engage in general solicitation and advertising to the public, provided that the funds take “reasonable steps” to verify that all investors are “accredited investors.” Mere reliance on investors’ representations in a questionnaire or subscription agreement (the most common means of establishing accredited status among private investment funds that do not generally solicit) is insufficient. In addition, to rely on the New Rule 506(c), funds must amend their current Form Ds filed with the SEC to indicate that going forward they will rely on Rule 506(c).

Additional Proposed Rules. Beyond the accredited investor verification requirements noted above, the SEC has proposed several additional new rules in connection with Rule 506(c) offerings, including (i) requiring an “advance” Form D filing at least 15 days before generally soliciting; (ii) requiring a “closing amendment” to Form D at the conclusion of the offering; (iii) temporarily requiring funds to submit all general solicitation materials to the SEC in advance of their use; (iv) mandating that certain legends be included on all general solicitation materials; (v) automatically disqualifying an issuer from using Regulation D for one year if it fails to file a Form D; and (vi) increasing the information disclosed on Form D.

CFTC Issues. While the SEC’s New Rule 506(c) permits general solicitation under the conditions set forth above, the CFTC has yet to revise its rules to reflect this change. As such, managers that rely on the CFTC’s Rule 4.13(a)(3) exemption from registration as a CPO, and managers that are registered CPOs operating under the CFTC Rule 4.7 exemption, remain prohibited from marketing to the public in the United States.

Identity Theft “Red Flag” Rules. This year the SEC and CFTC jointly issued final rules (the “Rules”) that went into effect on November 20, 2013 requiring certain investment advisers and other regulated entities to develop and implement written identity theft prevention programs. The Rules stipulate that such programs should seek to detect, prevent and mitigate potential identity theft associated with accounts the advisers manage.

Application to Investment Advisers. The Rules are detailed and nuanced in nature, but they should generally only apply to investment advisers to the extent the advisers, pursuant to powers of attorney or other arrangements, are authorized by individual clients to direct payment of such clients’ redemption monies to third parties. For this reason, certain investment advisers are revising their offering documents to narrow the scope of the powers of attorney granted thereunder.

What is Included in a Program? To be compliant with the Rules, any program developed and implemented thereunder must include reasonable policies and procedures to identify relevant “red flags” (any activity indicating the possible existence of identity theft), and detect and respond appropriately to any red flags to prevent and mitigate identity theft. Further, the entity must train its staff to properly implement the program, and oversee service providers’ compliance therewith (by, for example, obtaining certifications from their administrators that the administrator understands, and is complying with, the program).

European Union’s Alternative Investment Fund Managers Directive (“AIFMD”). The AIFMD went into effect in July of this year, and generally subjects managers marketing alternative investment funds in the EU to heightened reporting and disclosure obligations. These obligations consist of providing pre-investment and ongoing disclosures to investors, complying with requirements affecting manager remuneration, and preparing annual and regular reports to an EU national regulator. In addition, managers may need to comply with the domestic implementing legislation of the jurisdiction where specifically targeted investors are located.

Certain countries, including the UK, Sweden and Germany (for existing funds as of July 22, 2013), are allowing a one-year transitional period delaying the application of the AIMFD to non-EU managers. Other jurisdictions have adopted much more stringent requirements to restrict marketing efforts by non-EU managers. If you are marketing to EU investors, you should carefully review the directive’s provisions as well as applicable national laws to make sure you comply with all requirements.

Dodd-Frank Protocols. The International Swaps and Derivatives Association’s Dodd-Frank Documentation Initiative aims to facilitate compliance with the Dodd-Frank Act. The Documentation Initiative minimizes the need for bilateral negotiations and reduces disruptions to trading by providing a standard set of amendments, referred to as protocols, to update existing swap documentation. 2013 brought compliance deadlines for two such protocols: the ISDA August 2012 Dodd-Frank Protocol (the “Protocol 1.0”), which had an effective compliance date of May 1, 2013, and the ISDA March 2013 Dodd-Frank Protocol (the “Protocol 2.0”) which had an effective compliance date of July 1, 2013. To indicate participation in Protocol 1.0 and Protocol 2.0, market participants must respond to each Protocol’s questionnaire, submit an adherence letter and pay an adherence fee of $500.00 per Protocol through the online ISDA Amend system. Detailed instructions for (i) Protocol 1.0 can be found here, and (ii) Protocol 2.0 can be found here.

Medicare Tax. As of the beginning of 2013, individuals, estates and trusts are subject to a Medicare tax of 3.8% on “net investment income” (or undistributed “net investment income”, in the case of estates and trusts) for each taxable year. For individuals, the 3.8% tax applies to the lesser of such “net investment income” or the excess of such person’s adjusted gross income (with certain adjustments) over a specified threshold amount. For estates and trusts, the 3.8% tax applies if such entities have undistributed “net investment income” above a certain threshold. Net income and gain attributable to an investment in private investment funds will likely be included in investors’ “net investment income” subject to this Medicare tax. Fund managers should contact their tax advisers and legal counsel to assess whether their corporate structure is ideally configured to reduce the impact of this 3.8% tax.

Adviser Registration & Compliance:

Form ADV Annual Amendment. Registered investment advisers (“RIAs”), or managers filing as exempt reporting advisers (“ERAs”), with the SEC or a state securities authority must file an annual amendment to Form ADV within 90 days of the end of their fiscal year. RIAs must provide a copy of the updated Form ADV Part 2A brochure and Part 2B brochure supplement (or a summary of changes with an offer to provide the complete brochure) to each “client”. Note that for SEC-registered advisers to private investment vehicles, a “client” for purposes of this rule is the vehicle(s) managed by the adviser. State-registered advisers need to examine their state’s rules to determine who constitutes the “client.

Switching to/from SEC Regulation.

SEC Registration. Managers who no longer qualify for SEC registration as of the time of filing the annual amendment must withdraw from SEC registration within 180 days after the end of their fiscal year by filing Form ADV-W. Managers should consult their state securities authorities to determine whether they are required to register in their home states. Managers who are required to register with the SEC as of the date of their annual amendment must register with the SEC within 90 days of filing the annual amendment.

Exempt Reporting Advisers. Managers who no longer meet the definition of an ERA will need to submit a final report as an ERA and apply for registration with the SEC or the relevant state securities authority, if necessary, generally within 90 days after the filing of the annual amendment.

CFTC Regulation: 

Annual Re-Certification of CFTC Exemptions. CPOs and CTAs currently relying on certain exemptions from registration with the CFTC will be required to re-certify their eligibility within 60 days of the calendar year end. CPOs currently relying on CFTC Regulation 4.13(a)(3) will need to evaluate whether the commodity pool is still eligible for the exemption when taking into account the new CFTC regulated products.

CPO and CTA Annual Updates. Registered CPOs and CTAs must prepare and file Annual Questionnaires and Annual Registration Updates with the NFA, as well as submit payment for annual maintenance fees and NFA membership dues. Registered CPOs must also prepare and file their fourth quarter report for each commodity pool (Form CPO-PQR). Further, 2013 saw certain changes in CTA reporting, as the NFA now requires CTAs to file a quarterly Form CTA-PR within 45 days of the end of the quarter (the fourth quarter CTA-PR will be due on February 14, 2014). Unless eligible to claim relief under Regulation 4.7, registered CPOs and CTAs must update their disclosure documents periodically, as they may not use any document dated more than 12 months prior to the date of its intended use. Disclosure documents that are materially inaccurate or incomplete must be promptly corrected and the corrected version must be promptly distributed to pool participants.

Annual Compliance & Other Items:

New Issue Status. On an annual basis, managers need to confirm or reconfirm the eligibility of investors that participate in initial public offerings or new issues, pursuant to both FINRA Rules 5130 and 5131. Most managers reconfirm investors’ eligibility via negative consent, i.e., investors are informed of their status as on file with the manager and are asked to inform the manager of any changes. No response operates as consent to the current status.

ERISA Status. Given the significant problems that can occur from not properly tracking ERISA investors, we recommend that managers also confirm or reconfirm on an annual basis the ERISA status of their investors. This is particularly important for managers that track the underlying percentage of ERISA funds for each investor. This reconfirmation can also be obtained through a negative consent.

Annual Privacy Policy Notice. On an annual basis, a registered investment adviser must also provide its investors with a copy of its privacy policy, even if there are no changes to the policy.

Annual Compliance Review. On an annual basis, the CCO of a registered investment adviser must conduct a review of the adviser’s compliance policies and procedures. This annual compliance review should be in writing and presented to senior management. We recommend that you discuss the annual review with your outside counsel or compliance firm, who can provide guidance about the review process as well as a template for the assessment and documentation. Advisers should be careful that sensitive conversations regarding the annual review are protected by attorney-client privilege. CCOs may also want to consider additions to the compliance program. Advisers that are not registered may still wish to review their procedures and/or implement a compliance program as a best practice.

Trade Errors. Managers should make sure that all trade errors are properly addressed pursuant to the manager’s trade errors polices by the end of the year. Documentation of trade errors should be finalized, and if the manager is required to reimburse any of its funds, it should do so by year-end.

Soft Dollars. Managers that participate in soft dollar programs should make sure that they have addressed any commission balances from the previous year.

Custody Rule Annual Audit. SEC registered advisers must comply with certain custody procedures, including (i) maintaining client funds and securities with a qualified custodian; (ii) having a reasonable basis to believe that the qualified custodian sends an account statement to each advisory client at least quarterly; and (iii) undergoing an annual surprise examination conducted by an independent public accountant.

Advisers to pooled investment vehicles may avoid both the quarterly statements and surprise examination requirements by having audited financial statements prepared in accordance with GAAP by an independent public accountant registered with the Public Company Accounting Oversight Board. Statements must be sent to the fund or, in certain cases, investors in the fund, within 120 days after the fund’s fiscal year end. Managers should review their custody procedures to ensure compliance with the rules. Requirements for state-registrants may differ, and we encourage you to contact us if you have any questions or concerns about your custody arrangements.

Schedule 13G/D and Section 16 Filings. Managers who exercise investment discretion over accounts (including funds and separately managed accounts) that are beneficial owners of 5% or more of a registered voting equity security must report these positions on Schedule 13G. Schedule 13G filings are updated annually within 45 days of the end of the year. For managers who are also filing Schedule 13D and/or Section 16 filings, this is an opportune time to review your filings to confirm compliance and anticipate needs for Q1.

Form 13F. A manager must also file a Form 13F if it exercises investment discretion with respect to $100 million or more in certain securities within 45 days after the end of the year in which the manager reaches the $100 million filing threshold. The SEC lists the securities subject to 13F reporting on its website.

Form 13H. Managers who meet the SEC’s large trader thresholds (in general, managers whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month) are required to file an initial Form 13H with the SEC within 10 days of crossing the threshold. Large traders also need to amend Form 13H annually within 45 days of the end of the year. In addition, changes to the information on Form 13H will require interim amendments following the calendar quarter in which the change occurred.

SEC Form D. Form D filings for most funds need to be amended on an annual basis, on or before the anniversary of the initial SEC Form D filing. Form D has changed slightly this year in connection with the lifted ban on general solicitation discussed above. Instead of checking a box to indicate reliance on “Rule 506” there are now separate boxes to indicate reliance on either Rule 506(b) or Rule 506(c). Funds that previously selected “Rule 506” and do not wish to generally solicit will now check the “Rule 506(b)” box. Funds wishing to take advantage of the relaxed rules surrounding general solicitation will check the Rule 506(c) box. Importantly, the SEC has indicated that one offering cannot simultaneously rely on both Rule 506(b) and 506(c), and that once a general solicitation is made, issuers may no longer rely on Rule 506(b). Copies of Form D can be obtained by potential investors via the SEC’s website.

Blue Sky Filings. On an annual basis, a manager should review its blue sky filings for each state to make sure it has met any renewal requirements. States are increasingly imposing late fees or rejecting late filings altogether. Accordingly, it is critical to stay on top of filing deadlines for both new investors and renewals.

IARD Annual Fees. Preliminary annual renewal fees for state registered and SEC registered investment advisers are due by December 13, 2013 (submit payment by December 10 in order for payment to post prior to the deadline).

Pay-to-Play and Lobbyist Rules. SEC rules disqualify investment advisers, their key personnel and placement agents acting on their behalf, from seeking to be engaged by a governmental client if they have made political contributions. State and local governments are following suit, including California, which requires internal sales professionals who meet the definition of “placement agents” (people who act for compensation as finders, solicitors, marketers, consultants, brokers, or other intermediaries in connection with offering or selling investment advisory services to a state public retirement system in California) to register with the state as lobbyists, and comply with California lobbyist reporting and regulatory requirements. Investment professionals (employees who spend at least one-third of their time managing the assets or securities of the manager) are statutorily excluded from California’s “placement agent” definition, and thus do not have to register as lobbyists. Note that managers offering or selling investment advisory services to local government entities have to register as lobbyists in the applicable cities and counties.

State laws on lobbyist registration differ widely, so we recommend reviewing your reporting requirements in the states in which you operate to make sure you are in compliance with the rules.

Form PF. Managers to private funds that are either registered with the SEC or required to be registered with the SEC and have at least $150 million in regulatory AUM began filing Form PF in 2012. Smaller private advisers (fund managers with fewer than $1.5 billion in regulatory AUM) must file Form PF annually within 120 days of their fiscal year end. Larger private advisers (fund managers with $1.5 billion or more in regulatory AUM) must file Form PF within 60 days of the end of each fiscal quarter.

Electronic Schedule K-1s. This year, the IRS authorized partnerships and limited liability companies taxed as partnerships to issue Schedule K-1s to investors solely by electronic means, provided the partnership has received the investor’s affirmative consent. States may have different rules regarding electronic K-1s and partnerships should check with their counsel whether they may still be required to send state K-1s on paper. Partnerships must also provide each investor with specific disclosures that include a description of the hardware and software necessary to access the electronic K-1s, how long the consent is effective and the procedures for withdrawing the consent. If you would like to send K-1s your investors electronically you should discuss your options with your service providers.

Other Fund Matters:

Wash Sales. Managers should carefully manage wash sales for year end. Failure to do so could result in embarrassing book/tax differences for investors. Certain dealers can provide managers with swap strategies to manage wash sales, including Basket Total Return Swaps and Split Strike Forward Conversion. These strategies should be considered carefully to make sure they are consistent with the investment objectives of the fund.

Redemption Management. Managers with significant redemptions at the end of the year should carefully manage the unwinding positions so as to minimize transaction costs in the current year (that could impact performance), and prevent transaction costs from impacting remaining investors in the next year. When closing funds or managed accounts, managers should pay careful attention to the liquidation procedures in the managed account agreement and the fund constituent documents.

NAV Triggers and Waivers. Managers should promptly seek waivers of any applicable termination events set forth in a fund’s ISDA or other counterparty agreement that may be triggered by redemptions, performance or a combination of both at the end of the year (NAV declines are common counterparty agreement termination events).

Fund Expenses. Managers should wrap up all fund expenses for 2013 if they have not already done so. In particular, managers should contact their outside legal counsel to obtain accurate and up to date information about legal expenses for inclusion in the NAV for year-end performance.

Management Company Issues:

Management Company Expenses. Managers who distribute profits on an annual basis should attempt to address management company expenses in the year they are incurred. If ownership or profit percentages are adjusted at the end of the year, a failure to manage expenses could significantly impact the economics of the partnership or the management company.

Employee Reviews. An effective annual review process is important to reduce employment-related litigation and protect the management company in the event of such litigation. Moreover, it is an opportunity to provide context for bonuses, compensation adjustments, employee goals and other employee-facing matters at the firm. It is not too late to put an annual review process in place.

Compensation Planning. In the fund industry, and the financial services industry in general, the end of the year is the appropriate time to make adjustments to compensation programs. Since much of a manager’s revenue is tied to annual income from incentive fees, any changes to the management company structure, affiliated partnerships, or any shadow equity programs should be effective on the first of the year. Make sure that partnership agreements and operating agreements are appropriately updated to reflect such changes.

Insurance. If a manager carries D&O Insurance or other liability insurance, the policy should be reviewed on an annual basis to make sure that the manager has provided notice to the carrier of all claims and all potential claims. Also, newly launched funds should be added to the policy as appropriate.

Compliance Calendar

As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

Deadline                          Filing

November 20, 2013     “Red Flag” Rules effective

December 13, 2013     IARD Preliminary Renewal Statement Due (submit payment by Dec. 10 in order for payment to post by deadline)

February 14, 2014     Fourth Quarter CTA-PR Due

February 14, 2014     Schedule 13G Update Due; Form 13F Due (if applicable); Form 13H Amendment Due

March 1, 2014     Deadline for Re-Certification of CFTC Exemptions

March 3, 2014     Quarterly Form PF Due for Larger Private Advisers (if applicable)

March 31, 2014     Annual ADV Amendments Due

Periodic Filings     Form D and Blue Sky filings should be current

Please feel free to reach out to us if you have any questions regarding your end-of-the-year compliance. We wish you all the best as 2013 comes to a close.


Karl Cole-Frieman & Bart Mallon


Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP has an international practice that services both start-up investment managers as well as multi-billion dollar firms. The firm provides a full suite of legal services to the investment management community, including: hedge fund, private equity fund, and venture capital fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog which focuses on legal issues that impact the hedge fund community. For more information please visit us at:

This newsletter is published as a source of information only for clients and friends of the firm and should not be construed as legal advice or opinion on any specific facts or circumstances. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Cole-Frieman & Mallon LLP is a California limited liability partnership and this publication may be considered attorney advertising in some jurisdictions.

Hedge Fund Events December 2013

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


December 2

December 3

December 3

December 3

December 3-4

December 4

December 5

December 5

December 5

December 5

  • Sponsor: N.Y. HF Roundtable
  • Event: Effects of QE
  • Location: New York, NY

December 6

December 8-10

December 8-10

December 8-10

  • Sponsor: Opal
  • Event: CLO Summit
  • Location: Dana Point, CA

December 8-10

December 9

  • Sponsor: Incisive Media
  • Event: Waters USA
  • Location: New York, NY

December 9

December 9

December 9

December 10

December 10

December 10

December 11

December 13


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.