Monthly Archives: April 2014

San Francisco Hedge Fund Events – April 22 and April 23

There are two big events in San Francisco this week.

SF Hedge Fund Networking Group

Meeting April 22 at 4pm at Blanc et Rouge in San Francisco.  For more information, please see the LinkedIn page.

Hedge Funds Care 13th Annual Benefit

The annual Open Your Heart to the Children event featuring the San Francisco 49ers Foundation is on April 22 at 4:30pm.  This year the event will be at the City View space at the Metreon and will feature a number of Bay Area wineries.  For more information on the event and to buy tickets, please go here.


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


CFTC Issues No-Action Letters for CPO Registration Relief

Hedge Fund General Partner CPO Registration Relief 

In a series of no-action letters issued in March, the CFTC has granted no-action relief from registration as a commodity pool operator (“CPO”) for a general partner of a fund (or a managing member, if the fund is an LLC) that delegates its entire management authority over the fund to another entity – typically an “investment manager” entity – that is under common control with the general partner. Under this relief, the investment manager is required to register as a CPO, but the general partner is relieved from the CPO registration requirement.

Background on CPO Registration

Based on the legal structure of a fund organized as a limited partnership or limited liability company, typically the general partner or managing member (respectively) has the operational authority over the fund that makes CPO registration process necessary. Under the Commodity Exchange Act of 1936 (the “Act”), an entity that engages in the following activities on behalf of a fund (a “pool” in CFTC parlance) is generally required to register as a CPO:

“any person engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests.”  See text here.

In some fund structures, however, the general partner may wish to delegate its CPO responsibilities to an investment manager. This is often (but not exclusively) done in the context where a fund’s performance allocation is paid to the general partner, in order to obtain favorable tax treatment, but the investment manager runs the fund on a day-to-day basis, often receiving management fees as compensation. In this situation, it would be costly and burdensome to register both the general partner and the investment manager as separate CPOs of the fund, so it may be worthwhile to request CFTC no-action relief.

Requirements for No-Action Relief

The CFTC issued four no-action letters outlining the general guidelines for how to take advantage of the CPO registration relief described in this article: CFTC Letter No. 13-17, CFTC Letter No. 13-18, CFTC Letter No. 13-19, and CFTC Letter No. 13-20. Although the facts of each no-action letter differ somewhat, the following basic requirements apply. The general partner and investment manager should be able to make representations to the CFTC with respect to each of the following:

Common Ownership and Control. The general partner entity and the investment manager entity should have the same owners and be subject to the control of the same persons.

Delegation Agreement – All Management Authority. The general partner and investment manager should enter into a “Delegation Agreement” whereby all of the CPO-related authority of the general partner is delegated to the investment manager.

Soliciting Clients and Managing Assets. The general partner must not engage in the solicitation of investors to the fund, and must not manage the property of the fund.

Books and Records. All books and records related to the CPO activities should be maintained at the offices of the investment manager.

CPO Registration. The investment manager must be registered or be in the process of registering as a CPO, and must maintain its registration on an ongoing basis.

Employees and Agents. The general partner must not have any employees or others acting on its behalf, and must not engage in any other activities that would subject it to the Act or the CFTC’s regulations.

Joint & Several Liability. The general partner and investment manager entities must agree to be jointly and severally liable for any violation of the Act or the CFTC’s regulations.

Statutory Disqualification. The general partner cannot be subject to statutory disqualification from CPO registration under section 8a(2) or 8a(3) of the Act.

How to Apply for No-Action Relief

If you wish to apply for the no-action relief described above, you will need to draft a letter to the CFTC to request the relief. This letter should comply with the requirements of CFTC Regulation 140.99. Please reach out to us if you would like any assistance with drafting such a letter.


Cole-Frieman & Mallon LLP acts as legal counsel to the investment management industry.  If you have questions on the above please contact us or call Bart Mallon directly at 415-868-5345.

California Finance Lenders License

California Requirements for Hedge Funds and Private Equity Funds Engaged in Lending Businesses

Investment advisers, private equity managers, private fund managers, and other businesses that are engaged in making loans should be aware of whether their activities fall under the purview of the lending laws of any state such that they would be required to obtain a license and comply with certain ongoing regulatory requirements.

Under California law, finance lenders (defined as “any persons who are engaged in the business of making consumer loans or making commercial loans”) and finance brokers (defined as “any persons engaged in the business of negotiating or performing any act as brokers in connection with loans made by a finance lender”) are required to obtain a California Finance Lenders License. Private investment funds, such as hedge funds and private equity funds, that engage in such activities are no exception.

Notwithstanding the foregoing, the California Finance Lenders Law (“CFLL”) exempts certain transactions from its licensing requirements. Lenders relying on these exemptions will be able to avoid a lengthy application process with the California Department of Business Oversight and its associated requirements and costs.

New and Existing Exemptions under the California Finance Lenders Law

Effective January 1, 2014, section 22050(e) of the California Financial Code was amended to exempt persons who make five or fewer commercial loans in a 12-month period, provided that the loans are incidental to the business of the person relying upon the exemption. This amendment expanded the previous de minimis exemption for any person making just one commercial loan in a 12-month period. As such, investment advisers, private fund managers, and other members of the investment management industry that occasionally provide commercial loans may take advantage of this expanded safe harbor as long as such loans are incidental to their primary business.

A full list of exemptions is set forth under Sections 22050 – 22065 of the California Financial Code, providing relief from CFLL regulation for other types of transactions and specific entities licensed by other regulatory agencies. Among those exempt are the following:

• Banks, trust companies, savings and loan associations, insurance premium finance agencies, credit unions, small business investment companies, community advantage lenders, California business and industrial development corporations, or licensed pawnbrokers;

• Loans made or arranged by persons licensed as a real estate broker by the state and secured by a lien on real property, or to any licensed real estate broker when making such loan;

• Commercial bridge loans made by a venture capital company to an operating company, subject to certain requirements.

If you are engaged in lending transactions, we encourage you to contact your legal counsel to determine if you are eligible for one of the exemptions under the CFLL.

Licensing and Regulation under the California Finance Lenders Law

Finance lenders unable to avail themselves of an exemption from CFLL regulation will need to submit an application to the California Department of Business Oversight. Currently, the application must include the following attached items:

• Balance sheet

• Surety bond in the amount of $25,000

• Proof of Legal Presence (for sole proprietor applicants)

• California Customer Authorization for Disclosure of Financial Records Form

• Fictitious Business Name Statement (if applicable)

• Certificate of Status or Good Standing in the applicant’s state of formation and in CA

• Partnership Agreement (for general partnership applicants)

• Federal Taxpayer Identification Number or Social Security Number (for sole proprietors)

• Organization Chart for the Applicant

In addition, each individual responsible for the applicant’s lending activities must complete a “Statement of Identity and Questionnaire” and provide fingerprints. The application fee is currently $200 (nonrefundable), plus an investigation fee of $100 and fingerprint processing fees ($20 per California resident; $80 per non-California resident).

It should be noted that the licensing process for residential mortgage providers (mortgage lenders and brokers) is a separate application, filed through the Nationwide Mortgage Licensing System.

Once approved, licensees are subject to periodic regulatory examinations for which they must pay; pay an annual assessment each year; file an Annual Report by March 15 of each year; are subject to statutory books and record requirements; and must maintain a $25,000 surety bond at all times.

If you are subject to licensing would like our assistance with obtaining a California Finance Lenders License, please contact us.


Cole-Frieman & Mallon LLP provides legal services to hedge fund and private equity funds.  Bart Mallon can be reached directly at 415-868-5345.