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NFA Annual Compliance Overview 2011

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CTA and CPO firms which are registered with the CFTC will need to make sure that they are completing all necessary annual compliance items in accordance with CFTC regulations and NFA rules.

Below we have provided a list of the major items which registered firms should address with respect to annual compliance.  Many registered CTA and CPO firms have compliance manuals which address (or should address) these items.

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Rule 2-46 Quarterly Report (CPO only)

  • Due 2/14/2011
  • The following information must be submitted to the NFA:
    • Summary of Itemized Balances
    • Key Relationships
    • NAV
    • Monthly Performance – Rates of Return
    • Schedule of Investments
  • More information:
  • Once the report has been filed, complete and keep the Acknowledgment of Quarterly Report Filed (Rule 2-46) form and any related documents with your books and records.

Quarterly Review of Emails

  • Registered CPO and CTA firms are responsible for supervising employees and should periodically review employee emails.  It is a good idea to complete a quarterly review of employee emails, document the review and keep the documentation as part of the firm’s books and records.

Yearly Review of Email Procedures

  • The firm’s compliance officer should review the effectiveness of the firm’s email review procedures on a yearly basis.  The compliance office should document the review and keep the documentation as part of the firm’s books and records.

Compliance Manual Review

  • The compliance officer should review the firm’s compliance manual on an annual basis.  After the compliance manual has been reviewed and updated as necessary, the compliance officer should have each Principal, Associated Person, and Agent certify that he or she has read and understands the compliance manual and has complied with its requirements.

NFA Self-Examination Checklist

  • The NFA self-examination needs to be completed on a yearly basis.  The compliance office will need to review the firm’s operations using the NFA’s Self-Examination Checklist (http://www.nfa.futures.org/nfa-compliance/publication-library/self-exam-checklist.HTML), document the self-examination and keep the documentation as part of the firm’s books and records.
  • Mallon P.C. has provided an overview of the NFA Self-Examination process.

Privacy Policy

  • All firms should provide each fund investor or client with a copy of the firm’s Privacy Policy within 30 days of the close of the fiscal year.  If the firm provides monthly or other periodic statements, the firm might want to include the Privacy Policy with such normal communication.

Ethics Training

  • The firm’s compliance officer should review the firm’s ethics training program.  If the program changes, the compliance officer must make sure that all Principals, APs and Agents have completed the appropriate ethics training.  If the policy has not changed, this is a good time to confirm all Principals, APs and Agents have completed all appropriate ethics training.

Annual Report (CPO only)

We have outlined the reporting requirements for CPOs before which include an annual reporting requirement.  The CPO will need to provide, within 90 days after the end of the fund’s fiscal year (or within 90 days of the cessation of trading if the fund closes), an annual report to (i) each investor in the fund and (ii) the NFA.  The annual report must be presented and computed in accordance with GAAP consistently applied and must be audited by an independent public accountant.  [Please note that some CPOs may be able to request a waiver from the annual audit requirement.]

The report must include:

  • Fund NAV for the preceding two fiscal years
  • Total value of investor’s interest in the fund at the end of the preceding two fiscal years
  • Statement of Financial Condition for the fund’s fiscal year and preceding fiscal year
  • “Statement of operations” and “Statement of changes in net assets”
  • Footnotes if required to make statements not misleading (including certain information on underlying funds if the fund invests in other commodity pools)
  • Certain information if there is more than one ownership class or series.

Bunched Orders Allocation (CTA only)

  • CTA firms should periodically review the allocation of bunched orders.  Many firms will have a policy to review these allocations on a quarterly basis.  For more information, please see our post on CTA Bunched Orders.

Other Important Items

  • Annual Questionnaire – the annual questionnaire is due within 1 year of the date of registration.  This form is available through the NFA’s ORS (Online Registration System).  For more information see our post on this topic.
  • Annual Registration Update – the annual registration update is due within 1 year of the date of registration.  This form is available through the NFA’s ORS (Online Registration System).  In general the NFA will send a letter (and email) and invoice for annual fees and dues.
  • Other – some firms have policies regarding their Disaster Recovery Program which may need to be revisited during the annual review process.  Additionally, both CTA and CPO firms should take the opportunity to review their disclosure documents and see if any revisions to those documents should be made.  Other business issues, like bank reconciliations and general bookkeeping matters, should be reviewed in light of the firm’s compliance policies.

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The above list is not indended to be exhaustive and each firm has different compliance requirements depending on unique circumstances.  If your firm would like help with developing a compliance program or if you have questions with respect to these topics, please don’t hesitate to contact us.

Cole-Frieman & Mallon LLP provides comprehensive compliance and regulatory support for CTAs and CPOs.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

NFA Provides Guidance for CPOs on Performance Fees

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Notice to Members I-11-01

As many CFTC registered entities understand, having disclosure documents approved by the NFA can be a lengthy and frustrating process.  While the NFA has done a decent job explaining to firms that disclosure documents must meet all of the requirements under the CFTC’s Part 4 Regulations, it can feel as though the NFA has a target which is constantly moving.  As we explained earlier in a post describing the NFA Changes after the CFTC audit (see also CFTC Report on NFA Registration Process, the CFTC will occasionally communicate to the NFA certain items which the CFTC would like to see emphasized or changed in the disclosure documents.

Recently, the CFTC provided guidance to the NFA with respect to incentive or performance fee arrangements in CTA and CPO  investment programs.  Essentially the CFTC asked the NFA to make sure that all disclosure documents for programs with performance fees include a discussion of the conflicts of interest involved with performance fee arrangements.  Specifically:

[The CFTC] staff’s guidance prescribes that every CPO or CTA that charges a typical incentive fee include in its Disclosure Document a discussion that the incentive fee may encourage a CPO or CTA to take excessive risks to earn an outsized incentive fee, and that such risk-taking may place the interests of the CPO and CTA in conflict with the interests of its clients. Furthermore, [CFTC staff] has indicated that the fact that Regulations 4.24(i) and 4.34(i) require the disclosure of fees and expenses (from which conflicts of interest frequently arise) does not mitigate or lessen the required discussion of conflicts of interest.

Many firms will have already provided this information in the disclosure documents.  For those groups who have not, this means that the disclosure document will need to be amended and reviewed by the NFA according to normal amendment procedures.

The full notice to members is reprinted below and can be found here.

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Notice I-11-01

January 05, 2011

NFA provides guidance for disclosure of conflicts of interests arising from Typical Incentive Fee Arrangements by commodity pool operators and commodity trading advisors

In 1997, the Commodity Futures Trading Commission (CFTC) delegated the review of Disclosure Documents submitted by commodity pool operators (CPO) and commodity trading advisors (CTA) to NFA. The Division levaquin cipro of Clearing and Intermediary Oversight (DCIO) performs periodic oversight of NFA’s implementation of its delegated authority. As part of these reviews, DCIO staff has recently communicated to NFA by letter dated December 2, 2010 its position as to the disclosure of conflicts of interests that arise from typical incentive fee arrangements. NFA is providing the following guidance based upon DCIO’s letter to assist members in complying with the requirements as they relate to the disclosure of conflicts of interests.

CFTC Regulations 4.24(j) and 4.34(j) require CPOs and CTAs to include in their respective Disclosure Documents a “full description of any actual or potential conflicts of interest” regarding “any aspect” of their pools or trading programs as it concerns an enumerated list of entities, including the CPOs and CTAs themselves.

DCIO staff’s guidance relates specifically to the conflicts of interests arising from the collection of incentive fees by CPOs and CTAs. The typical incentive fee collected by a CPO or CTA is usually a fixed percentage of new profits that exceed a pool’s or an account’s previous high-water mark. DCIO stated that from one perspective, the typical incentive fee can be viewed as aligning the interests of the CPOs and CTAs with the interests of their clients as the fee ensures that CPOs and CTAs are compensated in proportion to their clients’ gains, which plainly incentivizes CPOs and CTAs to pursue investment strategies that will seek to maximize returns for their clients. DCIO further states that the typical incentive fee can also be viewed as placing the interests of CPOs and CTAs in conflict with the interests of their clients. From this perspective, the incentive fee could encourage a CPO or CTA to take excessive risks in an attempt to earn an outsized incentive fee. Because the typical fee is generally paid quarterly and is not subject to clawbacks for poor long-term performance, the typical incentive fee can be viewed as an incentive for CPOs and CTAs to take greater short-term risks, which may conflict with their clients’ long-term interests.

DCIO staff’s guidance prescribes that every CPO or CTA that charges a typical incentive fee include in its Disclosure Document a discussion that the incentive fee may encourage a CPO or CTA to take excessive risks to earn an outsized incentive fee, and that such risk-taking may place the interests of the CPO and CTA in conflict with the interests of its clients. Furthermore, DCIO has indicated that the fact that Regulations 4.24(i) and 4.34(i) require the disclosure of fees and expenses (from which conflicts of interest frequently arise) does not mitigate or lessen the required discussion of conflicts of interest.

CPOs and CTAs are encouraged to review their existing Disclosure Documents in light of DCIO’s guidance and make any necessary changes prior to submitting subsequent filings of the document. If you have any questions concerning this notice or Disclosure Documents generally, please contact Mary McHenry, Senior Manager, Compliance ([email protected] or 312-781-1420) or Susan Koprowski, Manager, Compliance ([email protected] or 312-781-1288).

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Cole-Frieman & Mallon LLP provides comprehensive hedge fund start up and regulatory support for commodity pool operators.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

SEC Extends Compliance Date for “Brochure Supplement,” Part 2B of Form ADV

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On July 21, 2010, the Securities and Exchange Commission (“SEC”) adopted amendments to cheap viagra brand Part 2 of Form ADV that became effective October 12, 2010.  Part 2A of Form ADV, the “firm brochure,” contains information about the advisory firm itself.  Part 2B of Form ADV, the “brochure supplement,” contains information about the advisory personnel.

On December 28, 2010, the SEC issued a four-month extension for the Part 2B compliance dates.   The new compliance dates for Part 2B are as follows:

  • New IAs – All newly registered IAs filing their applications for registration with the SEC from January 1, 2011 through April 30, 2011, have until May 1, 2011 to begin delivering Part 2B to new and prospective clients. These advisers have until July 1, 2011 to deliver Part 2B to existing clients. The compliance dates for delivering Part 2B for newly-registered IAs filing applications for registration after April 30, 2011 remain unchanged.
  • Existing registered IAs – All IAs registered with the SEC as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011, to begin delivering Part 2B to new and prospective clients. These advisers have until September 30, 2011 to deliver Part 2B to existing clients. The compliance dates for delivering Part 2B for existing registered IAs with fiscal years ending after April 30, 2011 remain unchanged.

The compliance dates for Part 2A remain unchanged.  More information about the compliance dates initially set by the SEC are available here.

For the full SEC release, please see SEC Extends Compliance Deadline for ADV Part 2.

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Bart Mallon Esq. is a hedge fund attorney and provides hedge fund compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

New York LLC Publication Requirement

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Fund sponsors who have established a limited liability company in New York to serve as the management company for their hedge fund should be aware of the New York publication requirement.  Pursuant to Section 206 of the New York Limited Liability Company Act, within 120 days after the effective date of the initial articles of organization, a LLC must publish a copy of the articles of organization or a notice related to the formation of the LLC in two newspapers.  After publication, the sponsor will need to submit additional paperwork to the New York Department of Corporations to complete the publication requirement process.  This article provides an overview of the process as well as the consequences for not fulfilling the requirement.

Publication in Newspapers

The notice required under the act must be printed in two different newspapers once each week for six successive weeks.  The sponsor does not choose the newspapers in which the notice will be published; instead, the newspapers are predetermined for the LLC.

The first newspaper will be the same for all LLCs – the New York Law Journal.  [Information on the New York Law Journal to be forthcoming.]

The second newspaper will be different for each LLC.  In order to determine the second newspaper, the fund sponsor will need to contact the county clerk of the county in which the LLC’s office is located (as stated in the articles of organization).  After the county clerk provides the sponsor with the information as to which newspaper to publish the notice, the sponsor will need to contact the newspapers for instruction on the manner in which to cialis in the united kingdom submit the materials for publication.

Submitting the Certificate of Publication

After the publication notices have run for six weeks in the two newspapers, the printer or publisher of each newspaper will provide the sponsor with an affidavit of publication.  The sponosor will then need to submit (1) a Certificate of Publication (2) the affidavits of publication of the newspapers, and (3) a filing fee of $50, to:

Department of State, Division of Corporations
One Commerce Plaza
99 Washington Avenue
Albany, NY 12231

Failure to Satisfy the Publication Requirement

According to the law, if an LLC fails to satisfy this requirement, the LLC will be “suspended” from carrying on, conducting or transacting business in the state.  However, a suspension will not invalidate any contract or act of the LLC or the limited liability of the members.  It is therefore unclear exactly what “suspended” means, as the law and the courts have failed to elaborate.  In the future, the New York legislature or courts could institute more serious repercussions, such as the inability to open bank accounts or enter into certain transactions, but presently, the law explicitly states that a suspension does not invalidate the LLC’s contracts or acts and a suspension can be lifted if the LLC substantially complies with the publication requirement.

More information about the LLC publication requirement is available here and here.

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Bart Mallon, Esq. is a hedge fund attorney and provides hedge fund compliance services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

New BVI Hedge Fund Regulations Start 01/01/2011

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Transition Period for BVI Mutual Funds Act of 1996 Ends on December 31, 2010

Sponsors with funds located in the BVI should be aware that at the beginning of next year there will be a new regulatory regime.  Starting on January 1, 2011, all funds must comply with the requirements of the Securities and Investment Business Act, 2010 (“SIBA”) instead of the current Mutual Funds Act, 1996 (“MFA”).

The new laws are much stricter than the previous laws and continue the push by the BVI Financial Services Commission (FSC) to maintain greater oversight of funds located in the BVI.  Managers with BVI funds should pay careful attention to the new laws and make revisions to their documents or operations accordingly.

Below is an overview of the major new requirements under the SIBA:

  • Disclaimer on Offering Documents – in the event a fund offers interests or shares on or after December 31, 2010, the fund offering documents must be amended to include the prescribed investment warning under the new law.  The subscription agreements must also include an acknowledgement from any new investor that it has received, understood and accepted the investment warning.
    • Note: these documents must be filed with the Financial Services Commission (“Commission”) within 14 days of their issue.
  • 2 Directors viagra canada – all private funds must at all times have at least 2 directors (at least 1 of which is an individual).
    • Note: a change of the board (and auditor) must be filed with the Commission within 14 days.
  • Manager, Administrator, and Custodian – all private funds must have a manager, an administrator, and a custodian which is independent from the manager and administrator.
    • Note:  funds may apply to the Commission from an exemption from the requirement to have a custodian or a manager.
  • Notices
    • Appointing a new custodian, administrator, prime broker, or manager must be reported to the Commission at least 7 days prior to the appointment.
    • Audited accounts must be filed within 6 months of the financial year end.
    • 14 days notice to the Commission is also required for change in place of business and amendments of constitutional or offering documents.
    • Annual returns must be filed by June 30 of each year.

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Bart Mallon, Esq. is a hedge fund attorney and works with a variety of domestic and offshore hedge fund manager.  He can be reached directly at 415-868-5345.

Rule 203(m)-1 – Private Fund Adviser Exemption

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SEC Proposed Rule 203(m)-1 under Investment Advisers Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. New Advisers Act Section 203(m)-1 provides an exemption from registration with the SEC to those groups who only advise one or more qualifying private funds and manages less than $150 million in private fund assets.   The proposed new rule 203(m)-1 essentially exempts smaller fund managers from SEC registration.

Managers should note, however, that they may still be required to either:

  1. Register as an investment adviser pursuant to state law
  2. Become a reporting adviser subject to proposed Rule 204-4

The proposed rule also provides that the exemption is available for managers who are based outside of the United States and manage funds which are domiciled in the U.S. provided that the funds have less than $150 million in assets.

The full proposed rule is reprinted below.

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§ 275.203(m)-1 Private fund adviser exemption.

(a)  United States investment advisers.  For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business in the United States is exempt from the requirement to register under section 203 of the Act if the investment adviser:

(1) Acts solely as an investment adviser to one or more qualifying private funds; and

(2) Manages private fund assets of less than $150 million.

(b)  Non-United States investment advisers.  For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business outside of the United States is exempt from the requirement to register under section 203 of the Act if:

(1) The investment adviser has no client that is a United States person except for one or more qualifying private funds; and

(2) All assets managed by the investment adviser from a place of business in cheapest perscription for xenical the United States are solely attributable to private fund assets, the total value of which is less than $150 million.

(c)  Calculations.  For purposes of this section, private fund assets are calculated as the total value of such assets as of the end of each calendar quarter.

(d)  Transition rule.  With respect to the calendar quarter period immediately following the calendar quarter end date that the investment adviser ceases to be exempt from registration under section 203(m) of the Act (15 U.S.C. 80b-3(m)) due to having $150 million or more in private fund assets, the Commission will not assert a violation of the requirement to register under section 203 of the Act (15 U.S.C. 80b-3) by an investment adviser that was previously exempt in reliance on section 203(m) of the Act; provided that such investment adviser has complied with all applicable Commission reporting requirements.

(e)  Definitions.  For purposes of this section,

(1)  Assets under management means the regulatory assets under management as determined under Item 5.F of Form ADV (§ 279.1 of this title).

(2)  Place of business has the same meaning as in § 275.222-1(a) of this title.

(3)  Principal office and place of business of an investment adviser means the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser.

(4)  Private fund assets means the investment adviser’s assets under management attributable to a qualifying private fund.

(5)  Qualifying private fund means any private fund that is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C 80a-8) and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53).

(6)  Related person has the meaning set forth in § 275.204-2(d)(7) of this title.

(7)  United States has the meaning set forth in § 230.902(l) of this title.

(8)  United States person means any person that is a “U.S. person” as defined in § 230.902(k) of this title, except that any discretionary account or similar account that is held for the benefit of a United States person by a dealer or other professional fiduciary is a United States person if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.

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Bart Mallon, Esq. is a hedge fund attorney and works with a variety of managers to hedge funds, private equity funds and venture capital funds.  He can be reached directly at 415-868-5345.

Investment Adviser and IA Representative Registration Renewal

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If your firm is registered as an investment adviser (IA) then you have probably received notice to renew your firm’s registration for 2011.  If you have not received the notice or have not paid the renewal fees, the following provides an overview of the process.

Background

IA firms and IA representatives (RA) should be aware that registrations expire annually on December 31.  In order for an IA firm to maintain their active registrations and/or notice filing statuses and for RAs to maintain active registration statuses, the IA firms must pay applicable renewal fees annually.  The IARD Renewal Program facilitates the annual renewal process.  Generally, a Preliminary Renewal Statement will be made available via the IARD system during the latter half of November.  The Preliminary Renewal Statement will include an amount that must be paid to FINRA by December 13, 2010.  Online payments made via E-Pay should be made by December 9, 2010 in order for the funds to be posted by December 13, 2010.

Submitting Payment

The Preliminary Renewal Statement will be available online generally during the latter half of November.  This year, it was made available on November 15, 2010.  IA firms can access this statement via IARD by following these steps:

  1. Log onto IARD at (https://accountmgmt.finra.org/auth/ews_logon.jsp?CTAuthMode=BASIC&login_form_location_basic).
  2. Enter your firm’s ID and password.
  3. Review and accept the terms and conditions.
  4. Under the “Accounting” tab at the top of the page, select “Renewal Account.”
  5. One the left column, select “Renewal Statement.”
  6. The bottom of the page provides an itemized list of all applicable fees.

Payment by Check

If you choose to submit payment by check, print the statement and mail it, along with the check to the following address:

U.S. Mail:

FINRA
P.O. Box 7777-8705
Philadelphia, PA 19175-8705

(Note: this P.O. Box address will not accept courier or overnight deliveries.)

Express Delivery:

FINRA
8705
Mellon Bank Room 3490
701 Market Street
Philadelphia, PA 19106-1532

(240) 386-4848

The check should be made payable to: FINRA.  Be sure to write your CRD Number and the word “Renewal” on the face of the check.

Payment via CRD/IARD E-Pay

Payment can also be submitted online via CRD/IARD E-Pay.  To do so, follow these instructions:

  1. Go to the E-Pay website.
  2. Enter your login and password.
  3. On the left column under “Payments,” click “Pay my accounts.”
  4. Select the account and click “Continue.”
  5. Enter the total Payment Amount and check “Renewal” under Account Type.  female viagra alternative Then enter the payment method and click “continue.”
  6. Review the information and click “Make Payment.”
  7. Log out and the money should post within about 2 days.

Automatic Daily Account-to-Renewal Account Transfer

If your firms has sufficient funds in the Daily Account to cover the total renewal amount, FINRA will automatically process the renewal payment by the payment deadline.

Other Payment Methods

Wire payments sent by 2 p.m. (ET), should post the next business day.  Wire payments sent after 2  p.m., ET, may take up to 2 business days to post.  Instructions for initiating a wire can be found here.

Confirming Payment

After payment is submitted, you will be able to retrieve your firm’s online Final Renewal Statement on IARD on or after January 3, 2011.  These statements will reflect the final registration status of the IA firm and RAs.  To do so, follow the instructions above to log onto IARD.  Under the “Renewal Statement” link in the “Accounting” section, you can retrieve the Final Renewal Statement, which will state “Paid in Full” or “Amount Due.”  If an amount is due, the balance must be paid by February 4, 2011.

More information about the Renewal Program can be found on the IARD website.  FINRA has also posted a bulletin on the 2011 IARD Renewal Program, available here.

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Bart Mallon, Esq. is a hedge fund attorney and provides investment adviser registration and renewal services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Rule 203(l)-1 – Definition of Venture Capital Fund

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SEC Proposed Rule 203(l)-1 under Investment Advisers Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. New Advisers Act Section 203(l) provides an exemption from registration with the SEC to those groups who only advise “venture capital funds,” without regard to the number of such funds advised by the adviser or the size of such funds.  The following proposed new rule 203(l)-1 essentially creates a definition of “venture capital fund” for the purposes of the new section.  The proposed rule also provides a grandfathering provision for certain presently existing venture capital funds.

For the purposes of Section 203(l)-1, the term “venture capital fund” will generally mean any private fund that:

  1. Represents it is a venture capital funds;
  2. Invests in only equity securities of a portfolio company and 80% of such securities must have been acquired directly from the portfolio company;
  3. Has a management company which provides guidance to the portfolio company regarding management and operations of the portfolio levitra mail no prescription company or the fund must control the portfolio company;
  4. Uses less than 15% leverage which may only be short term; and
  5. Provides fund investors with no withdrawal rights except in extraordinary circumstances.

The full proposed rule is reprinted below.

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§ 275.203(l)-1 Venture capital fund defined.

(a) Venture capital fund defined. For purposes of section 203(l) of the Act (15 U.S.C. 80b-3(l)), a venture capital fund is any private fund that:

(1) Represents to investors and potential investors that it is a venture capital fund;

(2) Owns solely:

(i) Equity securities issued by one or more qualifying portfolio companies, and at least 80 percent of the equity securities of each qualifying portfolio company owned by the fund was acquired directly from the qualifying portfolio company; and

(ii) Cash and cash equivalents, as defined in § 270.2a51-1(b)(7)(i), and U.S. Treasuries with a remaining maturity of 60 days or less;

(3) With respect to each qualifying portfolio company, either directly or indirectly through each investment adviser not registered under the Act in reliance on section 203(l) thereof:

(i) Has an arrangement whereby the fund or the investment adviser offers to provide, and if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of the qualifying portfolio company; or

(ii) Controls the qualifying portfolio company;

(4) Does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days;

(5) Only issues securities the terms of which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata; and

(6) Is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53).

(b) Certain pre-existing venture capital funds. For purposes of section 203(l) of the Act (15 U.S.C. 80b-3(l)) and in addition to any venture capital fund as set forth in paragraph (a), a venture capital fund also includes any private fund that:

(1) Has represented to investors and potential investors at the time of the offering of the private fund’s securities that it is a venture capital fund;

(2) Prior to December 31, 2010, has sold securities to one or more investors that are not related persons, as defined in § 275.204-2(d)(7), of any investment adviser of the private fund; and

(3) Does not sell any securities to (including accepting any committed capital from) any person after July 21, 2011.

(c) Definitions. For purposes of this section,

(1) Committed capital means any commitment pursuant to which a person is obligated to acquire an interest in, or make capital contributions to, the private fund.

(2) Equity securities has the same meaning as in section 3(a)(11) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(11)) and § 240.3a11-1 of this chapter.

(3) Publicly traded means, with respect to a company, being subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), or having a security listed or traded on any exchange or organized market operating in a foreign jurisdiction.

(4) Qualifying portfolio company means any company that:

(i) At the time of any investment by the private fund, is not publicly traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is publicly traded;

(ii) Does not borrow or issue debt obligations, directly or indirectly, in connection with the private fund’s investment in such company;

(iii) Does not redeem, exchange or repurchase any securities of the company, or distribute to pre-existing security holders cash or other company assets, directly or indirectly, in connection with the private fund’s investment in such company; and

(iv) Is not an investment company, a private fund, an issuer that would be an investment company but for the exemption provided by § 270.3a-7, or a commodity pool.

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Bart Mallon, Esq. is a hedge fund attorney and works with a variety of managers to hedge funds, private equity funds and venture capital funds.  He can be reached directly at 415-868-5345.

Rule 202(a)(30)-1 – Foreign Private Adviser Definition

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Proposed Rule 202(a)(30)-1 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 202(a)(30), among other things, defines the terms “client” and “investor” for the purposes of new Section 202(a)(30) of the Advisers Act which requires “foreign private advisers” to register with the SEC.

New section 202(a)(30) of the Advisers Act defines “foreign private adviser” as an investment adviser that

  • has no place of business in the United States,
  • has fewer than 15 clients in the United States and investors in the United States in private funds advised by the adviser, and
  • less than $25 million in aggregate assets under management from such clients and investors.

For the purposes of Section 202(a)(30)-1, a single “client” generally means:

  • a natural person, family members of the same household and accounts for such persons
  • an entity and not the “owners” of an entity (two entities with exactly the same ownership can, together, be counted as a single client)

Other rules with respect to the “client” definition:

  • an “owner” will be deemed to be a client separate from an entity if advisory services are provided to the owner separately from the entity
  • managers to a hedge fund or other private fund do not necessarily need to count the individual investors in the fund as a client
  • a fund entity will be a client of the manager of the fund entity

For the purposes of Section 202(a)(30)-1, the term “investor” will generally mean a “beneficial owner” (if the fund is a 3(c)(1) fund) or a “qualified purchaser” (if the fund is a 3(c)(7) fund).  With respect to any “client” or “investor,” the term “in the United States” generally means any person who is a deemed to be a “U.S. person” as it is defined in Rule 902(k) of Regulation S under the Securities Act of 1933 (which is premised on residence in the United States, regardless of any temporary presence outside the United States).

The full proposed rule is reprinted below.

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§ 275.202(a)(30)-1 Foreign private advisers.

(a) Client. You may deem the following to be a single client for purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)):

(1) A natural person, and:

(i) Any minor child of the natural person;

(ii) Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence;

(iii) All accounts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries; and

(iv) All trusts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries;

(2)

(i) A corporation, general partnership, limited partnership, limited liability company, trust (other than a trust referred to in paragraph (a)(1)(iv) of this section), or other legal organization (any of which are referred to hereinafter as a “legal organization”) to which you provide investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries (any of which are referred to hereinafter as an “owner”); and

(ii) Two or more legal organizations referred to in paragraph (a)(2)(i) of this section that have identical owners.

(b) Special rules regarding clients. For purposes of this section:

(1) You must count an owner as a client if you provide investment advisory services to the owner separate and apart from the investment advisory services you provide to the legal organization, provided, however, that the determination that an owner is a client will not affect the applicability of this section with regard to any other owner;

(2) You are not required to count an owner as a client solely because you, on behalf of the legal organization, offer, promote, or sell interests in the legal organization to the owner, or report periodically to the owners as a group solely with respect to the performance of or plans for the legal organization’s assets or similar matters;

(3) A limited partnership or limited liability company is a client of any general partner, managing member or other person acting as investment adviser to the partnership or limited liability company; and

(4) You are not required to count a private fund as a client if you count any investor, as that term is defined in paragraph (c)(1) of this section, in that private fund as an investor in the United States in that private fund.

Note to paragraphs (a) and (b): These paragraphs are a safe harbor and are not intended to specify the exclusive method for determining who may be deemed a single client for purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)).

(c) Definitions. For purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)),

(1) Investor means any person that would be included in determining the number of beneficial owners of the outstanding securities of a private fund under section 3(c)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1)), or whether the outstanding securities of a private fund are owned exclusively by qualified purchasers under section 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(7)), except that any of the following persons is also an investor:

(A) Any beneficial owner of the private fund that pursuant to § 270.3c-5 of this title would not be included in the above determinations under section 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1), (7)); and

(B) Any beneficial owner of any outstanding short-term paper, as defined in section 2(a)(38) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(38)), issued by the private fund.

Note to paragraph (c)(1): You may treat as a single investor any person that is an investor in two or more private funds you advise.

(2) In the United States means with respect to:

(i) Any client or investor, any person that is a “U.S. person” as defined in § 230.902(k) of this title, except that any discretionary account or similar account that is held for the benefit of a person in the United States by a dealer or other professional fiduciary is in the United States if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.

Note to paragraph (c)(2)(i): A person that is in the United States may be treated as not being in the United States if such person was not in the United States at the time of becoming a client or, in the case of an investor in a private fund, at the time the investor acquires the securities issued by the fund.

(ii) Any place of business, in the United States, Online levitra as that term is defined in § 230.902(l) of this title; and

(iii) The public, in the United States, as that term is defined in § 230.902(l) of this title.

(3) Place of business has the same meaning as in § 275.222-1(a) of this title.

(4) Assets under management means the regulatory assets under management as determined under Item 5.F of Form ADV (§ 279.1 of this title).

(d) Holding out. If you are relying on this section, you shall not be deemed to be holding yourself out generally to the public in the United States as an investment adviser, within the meaning of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)), solely because you participate in a non-public offering in the United States of securities issued by a private fund under the Securities Act of 1933 (15 U.S.C. 77a).

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Bart Mallon, Esq. is a hedge fund attorney and providers legal services to hedge fund managers through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Rule 204-4 – Reporting by Exempt Reporting Advisers

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Proposed Rule 204-4 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 204-4 provides that certain “exempt reporting advisers” are required to file Form ADV with the SEC.  The instructions to Form ADV will specify which information on Form ADV is to be completed by such “exempt reporting advisers.”

The term “exempt reporting advisers” means an adviser exempt from SEC registration because:

  • the adviser only advises solely one or more “venture capital funds” (Advisers Act Section 203(l)); or
  • the adviser acts only as an adviser to private funds and has AUM in the US of less than $150MM (Advisers Act Section 203(m)).

The full proposed revised rule is reprinted below.

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§ 275.204-4 Reporting by exempt reporting advisers.

(a) Exempt Reporting Advisers. If you are an investment adviser relying on the exemption from registering with the Commission under section 203(l) or (m) of the Act (15 U.S.C. 80b-3(l) or 80b-3(m)), you must complete and file reports on Form ADV (17 CFR 279.1) by following the instructions in the Form, which specify the information that an exempt reporting adviser must provide.

(b) Electronic Filing. You must file Form ADV electronically with the Investment Adviser Registration Depository (IARD) unless you have received a hardship exemption under paragraph (e) of this section.

Note to paragraph (b): Information on how to file with the IARD is available on the Commission’s website at http://www.sec.gov/iard.

(c) When filed. Each Form ADV is considered filed with the Commission upon acceptance by the IARD.

(d) Filing fees. You must pay FINRA (the operator of the IARD) a filing fee. The Commission has approved the amount of the filing fee. No portion of the filing fee is refundable. Your completed Form ADV will not be accepted by FINRA, and thus will not be considered filed with the Commission, until you have paid the filing fee.

(e) Temporary hardship exemption.

(1) Eligibility for exemption. If you have unanticipated technical difficulties that prevent submission of a filing to the IARD system, you may request a temporary hardship exemption from the requirements of this chapter to file electronically.

(2) Application procedures. To request a temporary hardship exemption, you must:

(i) File Form ADV-H (17 CFR 279.3) in paper format no later than one business day after the filing that is the subject of the ADV-H was due; and

(ii) Submit the filing that is the subject of the Form ADV-H in electronic format with the IARD no later than seven business days after the filing was due.

(3) Effective date – upon filing. The temporary hardship exemption will be granted when you file a completed Form ADV-H.

(f) Final Report. You must file a final report in accordance with instructions in Form ADV when:

(1) You cease operation as an investment adviser;

(2) You no longer meet the definition of exempt reporting adviser under paragraph (a); or

(3) You apply for registration with the Commission.

Note to paragraph (f): You do not have to pay a filing fee to file a final report on Form ADV through the IARD.

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Bart Mallon, Esq. is a lawyer and providers hedge fund registration and compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.