Monthly Archives: October 2014

Cole-Frieman & Mallon LLP 2014 Third Quarter Update

October 23, 2014

Clients and Friends:

It has already been a busy fourth quarter, but we would like to take this opportunity to provide you with a brief overview of some of the legal, business and regulatory updates from the third quarter.

Before we begin, Cole-Frieman & Mallon LLP is pleased to announce that Lilly A. Palmer has been promoted to partner, effective October 1, 2014. Lilly’s practice focuses on advising private funds and investment advisers in connection with their structuring, formation and ongoing operational needs, general securities laws matters, and regulatory and compliance issues. Please join us in congratulating Lilly.

JOBS Act Updates

  • CFTC Grants Relief for General Solicitation.  After the JOBS Act relaxation of the general solicitation rules, fund managers exempt from CPO registration pursuant to CFTC Regulations 4.13(a)(3) or 4.7 were still prohibited from engaging in general solicitation with respect to the offering of private fund interests under Rule 506(c). However, a recent CFTC Letter 14-116 now allows such fund managers to engage in public offerings under Rule 506(c) without risking their exemptions, subject to the following conditions:
    1. The fund issuing interests must do so under Rule 506(c) or as a reseller under SEC Rule 144A.
    2. The fund manager must file a notice with the CFTC.
    3. The fund manager must represent that it meets all other requirements of the CFTC exemption on which it is relying.

Fund managers utilizing the CFTC Regulation 4.13(a)(3) exemption should take special note of the third requirement listed above. Even under the relief granted by CFTC Letter 14-116, such managers must refrain from marketing funds “as or in a vehicle for trading in the commodity futures or commodity options markets.”

  • SEC Guidance on “Reasonable Steps” to Verify Accredited Investors. In order to engage in general solicitation under Rule 506(c), fund managers must, among other items, take “reasonable steps” to verify that each subscriber for fund interests meets the accredited investor standard. The SEC has previously described “safe harbors” with steps that, if followed, constitute sufficient evaluation of a prospective investor’s accredited investor status. The SEC has now released a new Q&A that addresses income and net worth calculations under the safe harbor rules, including (among others):
    • How to calculate income when the investor’s income is not reported in USD;
    • How to calculate net worth when an asset is held jointly with a person other than the prospective investor’s spouse;
    • How recent certain documentation must be (including tax documents) to demonstrate sufficient income or net worth; and
    • Alternatives to satisfy the “reasonable steps” requirement if the safe harbors are not available.
  • SIFMA Guidance on “Reasonable Steps” to Verify Accredited Investors. The Securities Industry and Financial Markets Association (“SIFMA”) also released its own guidance  on the “reasonable steps” required to verify accredited investor status. This guidance applies with respect to the written confirmation that third parties can provide to issuers under Rule 506(c)(2)(ii)(C) with respect to the accredited investor status of investors.

AIFMD Annex IV.  The Alternative Investment Fund Managers Directive (“AIFMD”) requires alternative investment fund managers (“AIFMs”) that manage or market alternative investment funds (“AIFs”) to EU investors to comply with heightened reporting and disclosure requirements. Notable is the imposition of a new Annex IV reporting requirement on AIFMs with assets under management of at least €100 million. Annex IV is a large complex filing, similar to the Form PF filed with the SEC, and it must be filed regularly with the National Competent Authority (“NCA”) of each EU Member State where AIFs are marketed. Annex IV is required on either a semiannual or quarterly basis, determined by the types of investments, the AIFM’s assets under management, and whether the AIFs are leveraged. Reports are due one month after the period end. This means AIFMs must make the first Annex IV filings no later than January 30, 2015.

Annex IV requires information such as the manager’s principal types of investments, the markets of which the AIFM is a member or on which it actively trades, and information on the AIF’s investment strategy, principal exposures and concentrations, risk profile, market and liquidity stress tests and leverage information. Although Annex IV and Form PF share almost 60% of data points, a number of differences prevent merely transferring Form PF data to Annex IV. Managers with Form PF infrastructure have a good starting point, but they will have to add classifications, and the data will need to be mapped and regrouped. Note also that the instructions for calculating assets under management are different from that of Form PF. Further, unlike Form PF, Annex IV requires the entire template to be populated notwithstanding size or strategy, and does not permit managers to list assumptions made on any questions or explain how a particular question may not be applicable.

The Annex IV must be filed in XML format with the NCA of each EU Member State where AIFs are marketed. Although the Annex IV template provided by the European Securities and Markets Authority has been adopted consistently by most EU Member States, managers should verify the format and filing requirements of each NCA.

“Bad Actor” Recertification Requirement. Last year the SEC adopted bad actor disqualification provisions for Rule 506 of Regulation D. These new provisions provide that an issuer is disqualified from relying on Rule 506(b) and 506(c) of a Regulation D offering if the issuer or any other “covered person” has a relevant disqualifying event. Under the rule, fund managers are required to determine whether they are subject to the bad actor disqualification any time they are offering or selling securities in reliance on Rule 506. The SEC issued a Q&A in December 2013 further clarifying, among other things, that “an issuer may reasonably rely on a covered person’s agreement to provide notice of a potential or actual bad actor triggering event pursuant to, for example, contractual covenants, bylaw requirements, or an undertaking in a questionnaire or certification. However, if an offering is continuous, delayed or long-lived, the issuer must update its factual inquiry periodically through bring-down of representations, questionnaires and certifications, negative consent letters, periodic re-checking of public databases, and other steps, depending on the circumstances.” Fund managers should consult with fund counsel to determine how frequently such an update is required. As a matter of practice, most fund managers should perform such an update at least annually.

Municipal Advisor Regulatory Updates. Municipal advisors generally include firms (including hedge fund managers and other asset managers) who provide advice to state and local governments and other borrowers involved in the issuance of municipal securities.  In general, this will include advisors to funds that contain any proceeds of municipal securities or municipal escrow investments. The Municipal Securities Rulemaking Board (“MSRB”) and the SEC have recently issued guidance, including both proposed and final rules, affecting registered municipal advisors. The rules involve the following topics, among others:

Examinations of Selected Newly Registered Municipal Advisors. The National Exam Program (“NEP”), a sub-organization of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), has launched a new initiative to examine selected Municipal Advisors for compliance with federal securities laws, including the SEC’s final Municipal Advisor rules and final MSRB rules “as and when those rules” are approved. If selected for examination, the selected Municipal Advisor will be notified and the NEP staff will review the Municipal Advisor in “one or more” of the following identified risk areas: registration, fiduciary duty, disclosure, fair dealing, supervision, books and records, and training and qualifications. The NEP will report the examination results, which may include “high-risk focus areas, industry trends, and significant issues” to the SEC.

SEC  Guidance on Proxy Voting. Two SEC divisions jointly published a new Q&A with guidance on proxy voting responsibilities for investment advisers and proxy advisory firms. For investment advisers, the Q&As include a number of examples of acceptable practices. These examples address compliance issues in areas such as meeting an investment adviser’s fiduciary duty in implementing proxy policies, entering into arrangements to assume some (but not all) proxy voting authority, and selecting and overseeing a proxy advisory firm. The Q&As also provide guidance to proxy advisory firms, including information on what proxy rules apply to proxy advisory firms, and how such firms can comply with common exemptions from certain information and filing requirements.

FATCA Implementing Legislation in Cayman & BVI. Many jurisdictions in which offshore funds are commonly domiciled, such as the Cayman Islands and the British Virgin Islands, have entered into intergovernmental agreements (“IGAs”) with the U.S. regarding the Foreign Account Tax Compliance Act (“FATCA”). Such IGAs generally provide that a foreign government office in the country of domicile will collect the information required by FATCA and transmit it to the IRS. However, until the jurisdiction passes domestic implementing legislation to enact its IGA, it is often unclear exactly what information must be provided, how it will be collected, and to which government entity it should be directed.

In early July, the Cayman Islands passed such implementing legislation as well as corresponding regulations that detail a fund’s obligations. The BVI regulators are expected to issue guidelines in October. Managers should remain in touch with both U.S. and offshore fund counsel regarding the regulatory landscape and to plan any changes to the fund’s offering documents, and/or any investor communications that may become necessary.

SEC Guidance on Cross-Border Security-Based Swaps. Last year the CFTC issued guidance on cross-border swaps transactions. This guidance did not apply to security-based swaps, which are regulated instead by the SEC. Now the SEC has adopted final rules governing cross-border security-based swaps. This set of rules is the first in what is expected to be a series of SEC rules on these transactions, and it covers only a few select topics, including certain compliance-related rules and which entities must register as security-based swap dealers or security-based major swap participants. Although the rules technically went into effect on September 7, 2014, they will not have practical effect until the SEC adopts additional final rules on topics such as the actual registration process for security-based swap dealers and security-based major swap participants.

SEC Charges Breach of Fiduciary Duty for Improper Expense Sharing Among Funds. The SEC charged a fund manager, Lincolnshire Management, with breaching its fiduciary duty to a pair of private equity funds that it managed by sharing portfolio company expenses in a way that benefited one fund over the other. The factual situation was that each fund owned a separate portfolio company, but the manager integrated the portfolio companies and operated them as one. However, an SEC investigation found that the expense allocation practices between the two funds occasionally caused one fund to pay more than its fair share of joint expenses that equally benefited both funds’ portfolio companies. The SEC found that this preferential practice of commingling the funds’ assets violated the manager’s fiduciary duty to the funds. Lincolnshire Management settled the SEC’s charges for more than $2.3 million.

CFTC and NFA Updates

  • Broker-Dealers and NFA Registration. Our firm recently received informal guidance in a series of conversations with the NFA and CFTC. The topic at issue was under what circumstances a broker-dealer that is registered with FINRA might also have to register as an Introducing Broker with the CFTC. We had a series of phone calls with the NFA and the CFTC, and while we were not provided definitive or formal guidance, we were told that a broker-dealer soliciting for a fund that is managed by a registered CPO may have to register with the NFA as an Introducing Broker. We suspect that many broker-dealers engage in this activity and may not realize that the funds for which they solicit are managed by a registered CPO, especially in cases where the fund manager manages multiple funds, some of which are operated under an exemption – such as the de minimis exemption from CPO registration – while others are operated as non-exempt commodity pools. Broker-dealers that provide services to funds operated by registered CPOs should consult with counsel regarding their obligation to register as an Introducing Broker.

Updates to Form CPO-PQR and Form CTA-PR. Registered CPOs and CTAs are required to submit quarterly filings to the NFA and CFTC via Form CPO-PQR or Form CTA-PR (respectively), which are submitted via the NFA’s online EasyFile system. The NFA recently made some changes to both forms, as described in a Notice to Members.  For CPO filers that submit via XML uploads, the XML schema files have changed, in part to accommodate changes to the box numbers on the Form CPO-PQR. (The Form CTA-PR still does not support XML capabilities.) A number of questions in both forms have been removed and replaced with different questions, with the goal of better quantifying the percentage of the firm’s AUM invested in futures and swaps. Finally, certain questions and help text boxes have been added or amended for the sake of clarity. All changes have gone into effect for the Q2 2014 forms.


Deadline Description
October 30, 2014 Quarterly Account Statements (small CPOs and CPOs claiming the 4.7 exemption)
November 14, 2014 Form 13F filing (advisers managing $100 million in 13F Securities)
November 14, 2014 CTA-PR Filing with NFA
November 29, 2014 CPO-PQR Filing with NFA
December 12, 2014 IARD Preliminary Renewal Statement payments due (submit by December 9 to ensure processing by deadline)
December 27, 2014 Last day to submit form filings via IARD prior to year-end
December 31, 2014 Review AUM to determine 2015 Form PF filing requirement
January 30, 2015 “Annex IV” AIFMD Filing
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.


Hedge Fund Events October 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: October 1, 2014

Date: October 1, 2014

Date: October 1-2, 2014

Date: October 1-2, 2014

Date: October 5-7, 2014

Date: October 6, 2014

Date: October 6-7, 2014

Date: October 6-7, 2014

Date: October 6-7, 2014

Date: October 6-8, 2014

  • Sponsor: Reuters Hedgeworld West
  • Event: HedgeWorld West 2014
  • Location: Half Moon Bay, CADate: October 7, 2014

Date: October 7, 2014

Date: October 7, 2014

Date: October 7, 2014

Date: October 7-8, 2014

Date: October 8, 2014

  • Sponsor: Terrapinn
  • Event: Trading Show
  • Location: New York, NY

Date: October 8, 2014

Date: October 8, 2014

Date: October 8, 2014

Date: October 8, 2014

Date: October 8-10, 2014

Date: October 9, 2014
Sponsor: Accredited Investors
Event: Accredited Investors Lead Generation Webinar
Location: Online via Skype

Date: October 9, 2014

Date: October 14-15, 2014

Date: October 14-16, 2014

Date: October 15, 2014

Date: October 15, 2014

Date: October 15, 2014

Date: October 15-16, 2014

Date: October 16, 2014

  • Sponsor: FTF News
  • Event:CAPCon
  • Location: New York, New York

Date: October 16-17, 2014

Date: October 17, 2014

Date: October 20-22, 2014

Date: October 20-23, 2014

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

Date: October 21, 2014

Date: October 21, 2014

Date: October 21-22, 2014

Date: October 22, 2014

Date: October 23, 2014

  • Sponsor: FTF News
  • Event: ReCon
  • Location: New York, NY

Date: October 23, 2014

Date: October 23-24, 2014

Date: October 27, 2014

Date: October 27, 2014

Date: October 27-28, 2014

Date: October 27-29, 2014

Date: October 27-29, 2014

Date: October 27-30, 2014

Date: October 27-29, 2014

  • Sponsor: Big Data TechCon
  • Event: Big Data Techon
  • Location: San Francisco, CA

Date: October 28-29, 2014

Date: October 28-29, 2014

Date: October 28-30, 2014

Date: October 28-31, 2014

Date: October 30, 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.