Monthly Archives: July 2014

New IA Rules in Washington State

Amendments to Investment Adviser Rules in Washington State

Washington State Department of Financial Institutions has amended the rules governing the registration and activities of investment advisers set forth in Chapter 460-24A WAC. Effective July 13, 2014, the amendments update various provisions, including examination and registration requirements, financial reporting requirements, custody, performance compensation arrangements, books and records requirements, and unethical business practices. There are new rules addressing compliance policies and procedures, proxy voting, and advisory contracts. In addition, there are new exemptions from registration for certain private fund and venture capital fund advisers. The amendments repeal WAC 460-24A-058, which defines when an application is considered filed; and make additional updates, clarifications, and changes to the rules.

The full text of the revised rules can be found here.  Some notable amendments:

Exemptions from Registration for 3(C)(7) Fund Advisers and Venture Capital Fund Advisers

The amendments created a new exemption from registration for investment advisers who provide advisory services solely to one or more qualifying private funds (as defined by the SEC Rule 203(m)-1, but excluding 3(c)(1) funds) or venture capital funds. In order to qualify for this exemption, investment advisers have to satisfy the following requirements: (i) an investment adviser and its affiliates are not subject to disqualification pursuant to WAC 460-44A-505(2)(d); and (ii) an investment adviser has to file with WA Securities Division same reports and amendments as an exempt reporting adviser is required to file with the SEC. The filings must be submitted electronically through IARD.

Compliance Policies and Procedures

The amendments codified the requirement that investment advisers registered or required to be registered in WA adopt and implement written compliance procedures designed to prevent violation of the securities laws.  Investment advisers must review the procedures at least annually, and designate an individual administering the adopted code of ethics.

Proxy Voting

The amendments make it unlawful for an investment adviser registered or required to be registered in WA to exercise voting authority with respect to client securities absent: (1) the implementation of written policies and procedures designed to ensure proxy voting will be in the best interests of clients and include how to address material conflicts that may arise between the investment adviser and the clients; (2) disclose to clients how they may obtain information on the investment adviser voted with respect to their securities; and (3) describe to clients the proxy voting policies and procedures, and provide a written copy upon request.

Financial Reporting Requirements

The amendments created the following financial reporting requirements for investment advisers:

(1) An investment adviser with custody of client accounts must submit an audited balance sheet within 120 days of the end of the adviser’s fiscal year. Each balance sheet must be prepared in conformity with generally accepted accounting principles, audited by an independent certified public accountant, and accompanied by an audit opinion of the accountant.
(2) An investment adviser with custody of client accounts that manages pooled investment vehicles must provide audited financial statements of each pooled investment vehicle of which the investment adviser is a general partner (or comparable position) within 120 days of the end of the pooled investment vehicle’s fiscal year.
(3) An investment adviser who does not have custody of client accounts must submit a yearly unaudited balance sheet within 120 days of the end of the adviser’s fiscal year.

New Custody Requirements for Investment Advisers that Manage a Pooled Investment Vehicle

The amendments created new safekeeping and reporting requirements for investment advisers that manage a pooled investment vehicle. Such advisers must: (a) enter into a written agreement with an independent party to review all fees, expenses, and capital withdrawals from the pooled accounts and approve all payments; or (b) provide audited financial statements of the pooled investment vehicle to all limited partners within 120 days of the end of the pooled investment vehicle’s fiscal year. Further, investment advisers that manage a pooled investment vehicle must deliver account statements at least quarterly to all limited partners in accordance with WAC 460-24A-105 and include the following information:

(1) The total amount of all additions to and withdrawals from the fund as a whole, as well as the opening and closing net asset value of the fund at the end of the quarter;
(2) listing of the fund’s long and short positions on the closing date of the statement; and
(3) The total amount of additions to and withdrawals from the fund by the investor, as well as the total value of the investor’s interest in the fund at the end of the quarter.


Washington state investment advisors should review their practice to determine if they must implement new procedures in order to comply with the amendments. For individuals who are considering becoming an investment adviser in Washington, it will be important to review the new examination and registration requirements.  If you have any questions or would like assistance, please contact us.

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.

Cole-Frieman & Mallon LLP 2014 Second Quarter Update


July 10, 2014

FATCA Transitional Period. The IRS and U.S. Treasury Department issued a notice (the “Notice”) announcing that calendar years 2014 and 2015 will be deemed a “transition period” with respect to IRS enforcement and administration of certain due diligence, reporting and withholding provisions of FATCA. In order to rely on this relief, the withholding agent, Foreign Financial Institution (“FFI”) or other subject entity must make a “good faith” effort to comply with FATCA requirements. In addition, the Notice:

  • extended the cutoff date for “pre-existing obligations” to January 1, 2015 (however this extension not apply to individual accounts opened on or after July 1, 2014);
  • provides transitional rules for documentation of expiration dates for account holders;
  • relaxes the requirements for treatment as a “Limited FFI” or “limited branch”; and
  • clarifies the requirements of a reasonable explanation of foreign status for an individual under FATCA.

Fund managers should work with their tax advisers, administrators and legal counsel to properly address the new account on-boarding and due diligence procedures required under FATCA, including updating their offering documents and subscription materials.

FATCA IRS Tax Forms. The IRS has finally issued instructions for new Form W-8BEN-E, one of the IRS forms that includes specific FATCA certifications investment funds will need to obtain from non-U.S. investors in order to satisfy their obligations under FATCA. U.S. withholding agents and FFIs will be required to begin withholding on payments beginning July 1, 2014. In addition, maintaining updated documentation regarding the FATCA status of the fund and its investors is necessary for FATCA compliance. Fund managers should make sure to use the new FATCA compliant IRS forms and applicable instructions to obtain information regarding non-U.S. investors prior to the deadline and for new investors after July 1, 2014. The new versions of Form W-8BEN for individuals and entities can be found on the IRS website (see Form W-8BEN and Form W-8BEN-E).

Deferral of Tax on Incentive Fee Arrangements with Offshore Funds. On June 10, 2014, the IRS issued a ruling which may expand the ability of U.S. managers to offshore funds to defer performance-based compensation through nonstatutory stock options and stock-settled stock appreciation rights (“SAR”) in the offshore fund. U.S. fund managers would need to structure their incentive fee arrangements with offshore funds based on a multi-year, rather than annual, calculation of the incentive fee. The incentive fee allocated in such manner would not be taxable until the fund shares are distributed to the manager pursuant to the terms of the SAR, i.e. until the manager actually receives the payment of the incentive fees.  However, once received, the value of the shares would be subject to U.S. income taxation as ordinary compensation and will not be eligible to be treated as capital gains irrespective of the underlying character of the gains in the offshore fund.  Managers that want to explore the alternative fee arrangement should discuss the implications with their tax advisor and legal counsel. More information can be found here.

Upcoming Deadline for an Annual Report of Foreign Bank and Financial Accounts (“FBAR”). Every U.S. person who holds a financial interest in or signature authority over any financial accounts outside of the U.S. with the aggregate maximum value exceeding $10,000 at any time during the calendar year must file an FBAR. “Financial account” includes mutual funds or similar pooled funds which issue shares to the general public and have a regular net asset value determination and regular redemptions. According to the IRS FBAR Reference Guide, foreign hedge funds and private equity funds are generally not reportable on the FBAR. However, a U.S. hedge fund itself, as well as officers and employees of the fund’s investment manager or general partner, may still have a filing obligation under certain circumstances. For instance, a U.S. feeder fund may have to file the FBAR if it owns more than 50% of a foreign master fund that owns a foreign bank account.

The FBAR for the 2013 calendar year has to be filed electronically on or before June 30, 2014. Certain individuals who have signature authority over, but no financial interest in, one or more foreign financial accounts (including officers and employees of the SEC-registered investment advisers who have only signature authority over foreign financial accounts) have been given an extension until June 30, 2015.

CFTC Announces Streamlined Approach for Considering Requests for Relief From Registration for Delegating CPOs. In May, the CFTC issued a no-action letter adopting a streamlined approach for requesting CPO registration relief. The letter clarifies the conditions under which a CPO otherwise required to register (“Delegating CPO”) may delegate its CPO functions to another CPO (“Designated CPO”) and be relieved from a registration requirement under Section 4m(1) of the Commodity Exchange Act (the “CEA”). To request a relief through the streamlined approach, the Delegating CPO and its Designated CPO must meet the following criteria:

  1. The Delegating CPO must: (a) delegate all of its investment management authority with respect to the commodity pool to the Designated CPO; (b) not participate in the solicitation of participants for the pool; and, (c) not manage any property of the pool.

  2. The Designated CPO is a registered CPO.
  3. The Delegating CPO is not subject to a statutory disqualification from registration.
  4. There is a business purpose for the Designated CPO being a separate entity from the Delegating CPO that is not solely to avoid CPO registration by the Delegating CPO.

  5. The Designated CPO maintains the Delegating CPO’s books and records with respect to the commodity pool in accordance with Regulation 1.31.

In addition, depending on whether the Delegating CPO and Designated CPO are entities or individuals, one or both of the parties will need to comply with additional requirements.  The Delegating CPO seeking registration relief through the streamlined approach must submit a request to the CFTC’s Division of Swap Dealer and Intermediary Oversight using the forms attached to the no-action letter. Delegating CPOs who do not meet all the criteria may still submit a request for relief to the CFTC for review.

NFA Late Disciplinary Disclosure Fee. The National Futures Association (“NFA”) announced that effective on June 1, 2014 it will impose a $1,000 late fee when a firm or individual does not disclose a disciplinary matter upon registration or fails to promptly update an existing registration to disclose a new disciplinary matter. Generally, NFA considers a matter to have been promptly disclosed if the firm, whether for itself or its associated persons (“AP”) and principals, discloses the matter before NFA discovers the matter and requests disclosure. The sponsor of a principal or AP is responsible for performing sufficient due diligence to ensure that all matters requiring disclosure are promptly disclosed as well as for the payment of the late disclosure fee. Managers that are members of NFA should make sure they have sufficient compliance policies in place to ensure that all disciplinary matters of the firm, its APs and principals are promptly disclosed.

Cayman Islands Revised Licensing Regime. The Directors Registration and Licensing Law (the “DRLL”), effective as of June 4, 2014, established a new registration and licensing regime for directors of certain Cayman Island regulated entities, including directors of entities registered as mutual funds with the Cayman Islands Monetary Authority (“CIMA” and such entities “Covered Entities”).  The DRLL does not, at present, apply to Covered Entities which are partnerships.  All directors of Covered Entities will need either to (i) register with CIMA; or (ii) apply to be licensed by CIMA in the case of corporate directors, or directors acting for 20 or more entities.

Directors of Covered Entities should be contacted by the relevant registered office service provider for their Covered Entity, however, if you have not been contacted and you serve as a director for a CIMA registered fund you should contact your registered office provider or counsel. Individual directors must submit their applications no later than September 3, 2014.  Once registered, the director must provide certain information to CIMA and the annual fee of $855. Failure to comply with the director registration requirements under the DRLL is an offence and conviction carries a maximum fine of approximately $60,000 and/or up to 12 months imprisonment.

California Custody Rule. Effective April 1, 2014, a new custody rule (the “Rule”) applies to California-registered investment advisers (“RIAs”) deemed to have custody of client assets.  Generally, an RIA will be deemed to have “custody” of assets if it directly or indirectly holds client funds or securities or has the authority to obtain them, such as where an RIA can deduct fees directly from client accounts.

Under the Rule, RIAs with custody that manage pooled investment vehicles must provide notice of such custody on the Form ADV.  As well, these RIAs must implement certain additional practices pursuant to the Rule, including (1) maintaining client assets with a qualified custodian; (2) engaging an independent party to act in the best interest of investors to review fees, expenses and withdrawals; and (3) retaining an independent certified public accountant to conduct surprise examinations of assets.  RIAs also are obligated to provide certain quarterly statements to investors, with the first statements required to report Q2 2014.

Practices under the Rule require specific implementation, and RIAs advising separately managed accounts will have different obligations than those generally outlined above.  Certain RIAs also may qualify for exemptions under the Rule, and thus RIAs are encouraged to consult with legal counsel about their specific obligations under the new regime.

Segregation of Initial Margin for Non-Cleared Swaps. The CFTC adopted new rules relating to segregation of initial margin with respect to non-cleared swap transactions. Under these new rules, a swap dealer (“SD”) is required to segregate the initial margin of non-cleared swaps at a third-party custodian upon request from its swap counterparties (the “Segregation Rule”). The Segregation Rule requires the SD to notify counterparties of the right to require segregation of initial margin and to provide one or more non-affiliated custodians and price information for each. An SD will be required to obtain confirmation of notification and election prior to entering into any swap transaction, however a counterparty may change its election at any time.  If a counterparty elects segregation, the counterparty and SD must put in place a tri-party custodial agreement between the SD, counterparty and custodian to segregate the initial margin, which must include certain specific CFTC prescribed provisions. More information can be found here.

Washington State Amendments to Investment Adviser Regulations. On June 19, 2014, Washington State Department of Financial Institutions issued a notice regarding amendments of certain rules governing the registration and activities of investment advisers. The amendments update various provisions, including the requirements for financial reporting, custody, books and records, and unethical practices.

One of the amendments, effective July 13, 2014, provides an exemption from investment adviser registration for advisers solely to one or more qualifying private funds (excluding private funds that rely on the Section 3(c)(1) exemption from registration under the Investment Company act of 1940) or venture capital funds. In order to take advantage of the exemption, an investment adviser will need to make an annual exempt reporting adviser filing with the Washington Securities Division. Furthermore, the amendments codified the code of ethics requirements such that advisers registered with the Washington Securities division will need to adopt and implement and administer a written code of ethics. More information can be found here.


SEC Cybersecurity Initiative. On April 15, 2014, the SEC issued a risk alert announcing that it would conduct examinations of more than 50 registered investment advisers to assess cybersecurity preparedness in the securities industry and to obtain information about the industry’s recent experiences with certain types of cyber threats. The examinations will focus on the entity’s cybersecurity governance;identification and assessment of cybersecurity risks; protection of networks and information;risks associated with remote customer access and funds transfer requests;risks associated with vendors and other third parties;detection of unauthorized activity; and experiences with certain cybersecurity threats. This announcement reaffirms the SEC’s increased interest in cybersecurity preparedness of regulated entities-the concern that was initially raised and identified as an examination priority for 2014.

SEC’s Responses to the FAQs regarding the Volcker Rule. On June 10, 2014, the SEC provided some guidance regarding the recently implemented Volcker Rule by issuing responses to the frequently asked questions. Among other things, the guidance provides clarification regarding a banking entity’s ownership/interest in covered funds. The SEC may update or modify these questions and answers periodically.

Upcoming Second Circuit’s Ruling on Tippee’s Liability in Insider Trading Cases. On April 22, 2014, the Second Circuit Court of Appeals heard oral arguments in United States v. Newman, a joint appeal from two former hedge fund managers who were found guilty of insider trading. The issue on appeal is whether, in order to be convicted of insider trading, a downstream tippee of the material, non-public information (“MNPI”) has to know that the insider who leaked the information received a personal benefit from doing so. This case may implicate how far down a tipper/tippee chain prosecutors can go in prosecuting “remote tippees” for insider trading. In Newman, the appellants received and traded on MNPI, but they were four or five degrees removed from the initial source of the inside information. One of the appellants did not even know the identity of the sources. It is unclear how the Court will rule on the issue. If the Court rules for the appellants, the government will face a greater challenge to proving insider trading cases where the tippee is several degrees removed from the insider, which will likely decrease the number of the insider trading cases against downstream tippees. On the contrary, if the Court rules in favor of the government, hedge funds and trading firms may need to re-evaluate and revise their insider trading policies and the ways they receive information about securities.

Qualified Institutional Buyer (“QIB”). Although this is not a new rule, we receive frequent inquiries from managers regarding qualifying as a QIB for purposes of purchasing certain restricted securities exempted from the registration requirements of the Securities Act under Rule 144A (the “144A Securities”). In order for the broker to rely on Rule 144A, it must reasonably believe that the offerees/purchasers are QIBs and will usually require the manager to complete a QIB certification.

In general, a QIB is an entity that, acting for its own account of the accounts of other QIBs, owns and invests on a discretionary basis of at least $100 million in securities of issuers not affiliated with the QIB as of a specific date on or after the close of the entity’s most recent fiscal year. For these purposes, the aggregate value of securities is calculated on a cost basis, except where the entity reports its securities holdings in its financial statements on the basis of their market value, and no current information with respect to the cost of those securities has been published. In the latter event, the securities may be valued at market.

In order to be eligible to purchase 144A Securities, both the manager and each account for which orders are placed must be a QIB. This means that while the manager can aggregate its proprietary holdings and the assets it manages in determining whether the manager is a QIB, this determination is not useful unless each fund or account has $100 million in securities to qualify as a QIB as well. As a practical matter, if a manager’s fund or account is a QIB, the manager will also be a QIB, assuming it has discretion over the account.

SEC Charges Private Equity Firm with “Pay-to-Play” Violations.  On June 20, 2014, the SEC charged a Philadelphia-based private equity firm TL Ventures Inc. (“TLV”) with violating “pay-to-play” rules. Under these rules, investment advisers are prohibited from receiving compensation for advisory services from government entities for two years if the firm or its associates make contributions (above a certain de minimus threshold) to a government official who can influence the hiring of the investment adviser. TLV continued receiving advisory fees from two public pension funds within two years following campaign contributions made to the governor of Pennsylvania and a candidate for mayor of Philadelphia by a TLV associate. TLV has agreed to settle the charges by paying nearly $300,000. This is the first case the SEC brings under the “pay-to-play” rules after they were adopted in 2010.

The SEC Guidance on Application of the Custody Rules to Private Funds Using SPVs and Escrows.  The SEC has issued a guidance update (the “Update”) regarding the application of Rule 206(4)-2 of the Investment Advisers Act of 1940, as amended (“Custody Rule”) to special purpose vehicles used to facilitate investments in certain securities private funds (“Investment SPVs”) and escrows.

Investment SPVs: An investment adviser (“IA”) or its related persons can, in certain cases, treat the assets of an Investment SPV as assets of the pooled investment vehicles they manage and do not have to comply with the Custody Rule audited financial statement distribution requirements with respect to such Investment SPV. An Investment SPV may be treated as assets of the pooled investment vehicle as long as (1) the assets of this SPV are considered within the scope of the pooled investment vehicle client’s financial statement audit; and (2) the SPV has no owners other than the IA or IA’s related persons (i.e. investment funds that have owners other than an IA or IA’s related persons would not qualify).

Escrow Accounts:  The Update clarifies that maintaining client funds with other client and non-client assets in an escrow account in connection with a sale or merger of a portfolio company owned by a pooled investment fund would not violate the Custody Rule if the pooled investment vehicle relies on the audit provision of the Custody Rule and includes its portion of the escrow in its financial statements.  In addition, the escrow funds must be maintained at a qualified custodian and the certain escrow formalities are adhered to.


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

Deadline              Description

June 1, 2014        Limited   partnerships    and    limited   liability   companies formed in                                      Delaware were required to pay an annual tax in the amount of $250 by June                             1 of each year. For the tax year 2015, the annual tax amount will be $300.

June 30, 2014      Delivery of audited financial statements to investors (fund of funds)

June 30, 2014      Annual Report of Foreign Bank and Financial Accounts (FBAR) Filing

July 30, 2014       Quarterly NAV Reports (CPOs claiming the 4.7 exemption)

August 14, 2014   Form 13F filing (advisers managing $100 million in 13F Securities)

August 14, 2014   CTA-PR filing with NFA

August 29, 2014   CPO-PQR filing with NFA

August 29, 2014   Form PF filing for quarterly filers

Periodic Filings      Form D and Blue Sky filings should be current

Please contact us with any questions or for assistance with any compliance, registration or planning issues on any of the above topics.


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:

Cole-Frieman & Mallon LLP
One Sansome Street, Suite 1895
San Francisco, CA 94104

Karl Cole-Frieman                          Bart Mallon
[email protected]          [email protected]
415-762-2841                              415-868-5345

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.                    

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 July 2014

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


Date: July 2, 2014

Date: July 2, 2014

Date: July 8, 2014

Date: July 9, 2014

Date: July 9, 2014

Date: July 9, 2014

Date: July 10, 2014

Date: July 12, 2014

Date: July 15, 2014

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

Date: July 15-16, 2014

Date: July 16, 2014

  • Sponsor: Institutional Investor
  • Event: Delivering Alpha
  • Location: New York, NY

Date: July 17, 2014

Date: July 17, 2014

Date: July 17, 2014

Date: July 17, 2014

Date: July 21-23, 2014

Date: July 21-23, 2014

Date: July 23, 2014

Date: July 24, 2014

Date: July 24-25, 2014

Date: July 24-25, 2014

Date: July 28-29, 2014


Date: July 30, 2014


Date: July 31-Aug 1, 2014


Cole -Frieman & Mallon 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.