Author Archives: Hedge Fund Attorney

San Francisco Hedge Funds Care Poker Event

January 25th 

This is the second biggest event of the year for the hedge fund industry in San Francisco.  Ticket information is below and we all look forward to seeing you there.


California Hedge Funds to Support Child Abuse Prevention at 2nd Annual West Coast Committee of Hope Poker Tournament

Charity Poker Event Will Be Held Wednesday, January 25th at The City Club of San Francisco

NEW YORK – January 12, 2012 – Hedge Funds Care, a financial services industry-supported charity dedicated to preventing and treating child abuse, today announced that it would be holding the 2nd Annual West Coast Committee of Hope Poker tournament. Proceeds from the event will go to support child abuse prevention and treatment programs in the San Francisco Bay area. The event, sponsored by Battea Class Action Services and Ernst and Young, will be held on January 25th at 4:30pm PST at The City Club of San Francisco (155 Sansome Street, San Francisco, CA). Hedge fund industry participants who attend will enjoy an open bar, hors d’oeuvres and networking.

“This event has really grown in size and reputation over the last year and we expect to easily surpass last year’s fundraising achievements,” said Alicia Gavello, Fund Accountant at Partner Fund Management and the chair for this year’s benefit. “Programs that help treat child abuse are still badly underfunded and this is the California hedge fund industry’s chance to stand up and make a difference,” she added.

Since their inception, the West Coast Committee of Hope and Committee of Hearts have raised a combined $6.1 million and distributed 150 grants to Californian child abuse and prevention programs. A limited number of tickets and sponsorships are still available. For more information, please click here:

About Hedge Funds Care

Hedge Funds Care is an international charity supported largely by the alternative investment industry. Its sole mission is to support efforts to prevent and treat child abuse. Hedge Funds Care raises money, primarily through events, and awards grants in 12 major cities in the United States, Canada, the Cayman Islands, and the United Kingdom. Approximately 30 events are held annually. Hedge Funds Care’s grantees service children of all ages and span the entire spectrum from preventive and educational services for at-risk families to forensic interviews and treatment of children who have already experienced abuse. It generally funds small, community-based organizations, where small grants can have a profound impact. Since inception, Hedge Funds Care has awarded more than 660 grants totaling almost $24 million. Hedge Funds Care is largely a volunteer-driven organization, with professionals from the hedge fund industry serving on the Board and on local committees that plan events and evaluate grant proposals. The organization has a small staff based in New York City.


Hedge Funds Care – West Coast Events

Dan Butchko

Hedge Funds Care

212-991-9600 ext. 336

[email protected]

70 West 36th Street, Suite 1404    – New York, NY 10018 – tel. 212.991.9600 fax. 646.214.1079 –


Cole-Frieman & Mallon LLP provides hedge fund start-up and other legal services to hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.

California Proposes Private Fund Adviser Exemption

Hedge Fund Managers Exempt from Registration in California

As a general proposition, managers who are located in California must register as an investment adviser if they are providing investment advice for compensation.  There are exemptions from the registration requirement which we have detailed previously.  Because of the changes in the statutes and regulations at the Federal level, the states are changing their laws with respect to adviser registration.  Some states, such as California (see post), have adopted interim orders for certain advisers to address gaps in the Federal and state laws until state laws or appropriate regulations can be adopted.  California is proposing to adopt laws which would exempt many hedge fund managers from registration with the California Securities Regulation Division.

The proposed regulations if adopted would likely go into effect sometime in the first half of 2012.  The California Department of Corporations has requested comments on the proposal which may be submitted by February 20, 2012.  We have summarized the proposed exemption below and for more information, please see the following releases:

California Private Adviser Exemption Overview

If the proposed rule is approved, a manager would be exempt from registration as an investment adviser with the state of California if the manager meets the following requirements:

  • manager provides advice only to one or more “qualifying private funds” (includes Section 3(c)(1) funds and Section 3(c)(7) funds)
  • manager may not have not violated securities laws;
  • manager must file periodic reports with the Department of Corporations (an abbreviated version of the Form ADV);
  • manager must pay the existing investment adviser registration and renewal fees ($125); and
  • manager must comply with additional safeguards when advising funds organized under Section 3(c)(1) (other than venture capital companies). This includes:
    • only accredited investors may invest in the private fund;
    • the firm shall provided certain written disclosures about the services it provides, its duties, and other material information;
    • the firm shall obtain an annual audit of each fund and deliver them to each investor; and
    • performance fees can only be charged to qualified clients.

Firms may register with the SEC once they reach $100M in AUM. Therefore, the firm may rely on the California private adviser exemption and then, absent an exemption from SEC registration, register with the SEC at that point. Section 203(m) of the Adviser’s Act of 1940 (as amended by Dodd-Frank) provides such an exemption from such registration if the firm only manages private funds and has less than $150M AUM (the firm would be an exempt reporting adviser and would have to file the abbreviated Form ADV with the SEC).

Funds with Non-Accredited Investors

The proposed rule does have a grandfathering provision that will make the California private adviser exemption available to a firm that currently manages any Section 3(c)(1) fund that has non-accredited investors if the following requirements are met:

  • the fund existed prior to the effective date of the California private adviser exemption;
  • as of the effective date of the Private Adviser Exemption, the fund no longer accepts accredited investors;
  • the firm provides certain written disclosures about the services it provides, its duties, and other material information; and
  • as of the effective date of the Private Adviser Exemption, the firm delivers audited financials to the investors.

Currently, the proposed rule does not have an anticipated effective date. If approved, managers of funds with non-accredited investors may still qualify for the Private Adviser Exemption.


The California private adviser exemption will change the entire registration regime in California. Firms that solely manage qualifying funds and meet the requirements discussed above will not have to register with the DOC and those that are currently registered may withdraw their registration. So, hedge fund managers in California with under $100M in AUM generally will not be registered with any regulatory agency. Do keep in mind that if a manager manages even a single separate account, in addition to the qualifying funds, it will not be eligible for the private adviser exemption.


Cole-Frieman & Mallon LLP provides investment adviser registration and compliance services to hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.

Hedge Fund Events January 2012

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


January 10 – 11

January 10 – 12

January 17

January 17

January 17

January 17

January 18 – 20

January 18 – 20

January 19

January 20

January 23 – 24

January 23 – 25

January 24

January 25 – 26

January 25

January 26

January 29 – 31

January 29

January 31

January 31

January 31


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.

Requesting a Waiver from NFA Enhanced Supervisory Requirements

Member Firms Subject to ESRs May Seek Waiver

As we have discussed previously, an NFA Member firm may be required to adopt enhanced supervisory requirements (“ESR”) based on:

  • the employment history of its APs and Principals,
  • the affiliations of its Principals,
  • if the firm charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract, or
  • it becomes subject to NFA or CFTC enforcement or disciplinary proceedings.

If a Member firm meets any of the criteria requiring it to adopt ESRs, it may request a waiver from these requirements. This post discusses how a firm may request such a waiver and what the NFA will consider in granting or denying the waiver.

Requesting a Waiver

To request a waiver from enhanced supervisory requirements, a Member firm may file a petition with the NFA’s three-person Telemarketing Procedures Waiver Committee (the “TPWC”) for a partial or full waiver from the requirement to adopt ESRs.  The firm must file the petition with the TPWC within 30 days of receiving notice from the NFA that the firm is required to adopt ESRs.  This deadline is important because failure to timely file the request will prohibit the firm from filing the waiver again until at least 2 years after the firm adopts the ESRs.  If the TPWC denies the waiver, the firm is also prohibited from filing the waiver again until at least 2 years after the firm adopts the ESRs.

Factors the NFA Will Consider

The TPWC may consider the following factors when evaluating a waiver request:

  • total number and the backgrounds of APs sponsored by the Member;
  • number of branch offices and guaranteed introducing brokers (“GIBs”) operated by the Member;
  • experience and background of the Member’s supervisory personnel;
  • number of the Member’s APs who had received training from firms which have been closed for fraud, the length of time those APs worked for those firms and the amount of time which has elapsed since those APs worked for the disciplined firms;
  • results of any previous NFA examinations;
  • cost effectiveness of the taping requirement in light of the firm’s net worth, operating income and related telemarketing expenses;
  • whether the Member assesses commissions, fees and other charges that are based on all of the relevant circumstances, including the expense of executing orders and the value of services the Member renders based on its experience and knowledge; and
  • whether the Member adequately discloses the amount of commissions, fees and other charges before transactions occur in light of a retail customer’s trading experience and the impact that the commissions, fees and other charges may have on the likelihood of profit.

Conditions on Waiver

Even if the TPWC grants a full or partial waiver, it will still impose certain requirements on the firm. The firm must:

  • notify the NFA of any actions charging it with violation of CFTC, SEC, or other self-regulatory organization’s (“SRO”) regulations or rules;
  • notify the NFA of any customer complaints involving sales practices or promotional material;
  • not change ownership;
  • not have any material deficiencies noted during any SRO examination;
  • not hire additional APs from Disciplined Firms;
  • execute a written acknowledgement that the firm understands the conditions of the waiver;
  • and may include any other conditions deemed by the TPWC to be appropriate in consideration of a total or partial waiver from the enhanced supervisory requirements.

If the firm violates these conditions, the TPWC may revoke or amend the wavier that was previously granted.


The ESRs impose more strict requirements on Member firms.  It is important for a firm to evaluate the employment history of its APs and Principals to determine whether the firm meets the criteria set forth in NFA Interpretive Notice 9021 and must therefore adopt the ESRs or seek a waiver from such requirements. If a firm receives a notice from the NFA that it must adopt ESRs and it wishes to request a waiver, it should act quickly. Failure to file a petition within 30 days will bar the firm from filing a request for at least 2 years after it adopts the ESRs.


Cole-Frieman & Mallon LLP provides comprehensive legal services to CFTC registered managers.  The firm also provides NFA registration and compliance support.  Bart Mallon can be reached directly at 415-868-5345.

Independent Directors for Failed Offshore Hedge Fund Found Personally Liable

Weavering Case Overview

An August 26, 2011 judgment of the Grand Court of the Cayman Islands, Financial Services Division, held two independent directors personally liable for “wilful neglect or default” in exercising their supervisory responsibilities as directors of the Weavering Macro Fixed Income Fund Limited (the “Fund”). The two independent directors were ordered to pay US $111 million plus costs.

The judgment is notable because it gives guidance for directors of Cayman Islands companies in discharging their “duty to exercise independent judgment, to exercise reasonable care, skill and diligence and to act in the interests of the [Fund].”  The guidance is likely to impact the manner in which offshore directors supervise functions that are delegated to professional service providers, including investment managers and administrators.  The court indicated that the exercise of the power of delegation “does not absolve [independent directors] from the duty to supervise the delegated functions.”  “They are not entitled to assume the posture of automatons . . . without making enquiry . . . on the assumption that the other service providers have all performed their respective roles . . . .”

The following points made by the court in the opinion provide useful guidance for independent directors as well as the professional service providers in coordinating with and responding to the supervision of independent directors.

Supervision During Fund Establishment Phase

  • Directors should satisfy themselves that the overall structure of a fund is consistent with Cayman Island industry standards and that the terms in the service providers’ contracts are reasonable.
  • Directors should understand the nature and scope of work of each of the professional service providers and determine that the division or responsibilities between the service providers is appropriate.
  • Directors should satisfy themselves that the hedge fund offering documents comply with the requirements of Cayman Islands law (in particular section 4(6) of the Mutual Funds Law). The court suggests that this may be done by making inquiry of the lawyers who have coordinated the work of developing the offering documents.

Supervision During Ongoing Operations

  • Directors should convene board meetings to discuss matters of substance and not simply to rubber stamp routine matters raised by the investment manager. Generally, an agenda should be prepared in advance of the meeting and the substance of discussions should be maintained in the minutes at least to the extent that it is necessary to understand the basis upon which any decisions were made and any resolutions passed.
  • Directors should review a fund’s balance sheet and other financial reports so that they can understand the fund’s general financial/NAV position and satisfy themselves that a fund is trading in accordance with any investment restrictions.
  • If directors accept a responsibility for a fund’s financial statements, they must exercise independent judgment in satisfying themselves that the financial statement do present fairly the fund’s financial condition.
  • Directors must be cognizant of issues that are likely to arise from side letters and determine whether there could be an adverse impact on a fund before approving or signing the letters.


We have talked previously about some of the offshore hedge fund structural considerations and we have discussed the issues involved with establishing a Cayman hedge fund, but we have not specifically written a post about the obligations of directors of offshore hedge funds.  Independent directors of offshore funds will need to be more cognizant about their duties going forward and the position needs to be taken seriously.  As with other high profile hedge funds that have failed, certain service providers and directors are being taken to task for not properly doing what they were supposed to do.  As more lawsuits go through the courts we are likely to see more lawsuits similar to this lawsuit.

The case can be found here: Weavering Judgement – Grand Court of the Cayman Islands


Cole-Frieman & Mallon LLP provides legal services to domestic and offshore hedge funds.  Bart Mallon can be reached directly at 415-868-5345.  Karl Cole-Frieman can be reached at 415-352-2300.


Series 31 Exam – Futures Managed Funds Examination

Overview of Series 31 Exam for Managed Futures Industry

In general persons who are selling futures related products are going to be required to have a Series 3 exam license.  However, some broker-dealer representatives may be able to take the Series 31 exam instead of the Series 3 exam if their activities are limited to selling interests in commodity pools and other similar activities.  This exam is required by the NFA for all individuals who want to sell futures funds, or those who want to receive trailing commissions on commodity pools or managed accounts guided by CTAs.

Series 31 Exam Basics

The following are some of the important items related to the exam:

  • Prerequisites – person taking the exam must (1) be registered with FINRA as a General Securities Representative and (2) limit their futures activities on behalf of their sponsor to soliciting funds, securities or property for participation in a commodity pool, soliciting discretionary accounts to be managed by CTAs or supervising persons who perform these same limited activities.
  • Time Limit – 60 minutes
  • Questions – 45 multiple choice questions.
  • Passing grade – 70%
  • Cost – $70
  • Who – exam is required for those individuals who intend to sell managed futures.
  • Exam topics –
    • Exchange Rules and Regulations
    • CPO and CTA Rules and Regulations
    • Advertising and Disclosure (including NFA Compliance Rule 2-29)
    • Customer Accounts
    • Discretionary Rules
    • Market Terminology.
    • For more information on the exam topics, please see the NFA Study Outline – Series 31.

Other Items

Signing up

A person can take the exam at most Pearson VUE or Prometric testing centers.  You can register for the exam by submitting a Form U-10 through the IARD system.  Please note that, effective September 15, 2010, FINRA requires individuals to use either their CRD number or FINRA ID number in order to schedule an exam and no longer accepts social security numbers.  For more information, please see the NFA Guide to Sign up for Futures Exams.

Studying for the Series 31 Exam

Like the other FINRA and NFA exams, you should use a study guide and practice exams to prepare.  The Series 31 does not have as many materials available as some of the more popular exams (Series 7, 65, 3, etc) but there are some materials which can be found through a simple Google search.   [Note: we have not reviewed any Series 31 exam study guide so we cannot make any recommendations on any materials.]  As with other exams, we recommend taking at least two to three practice exams prior to taking the actual test; persons not familiar with the managed futures industry might want to take more.

The actual exam

The exam is computer-based and will initially instruct you on how to properly answer and mark the following questions.  Note that the beginning of the exam will most likely include the easiest questions, and then the questions will proceed to get harder as you reach the middle.  Always attempt to make the most educated guess on questions that you do not understand.

The exam is fairly short so you should not need to take a break in the middle of the exam.  You should remember that there is always have the option of marking the question for review so you should not spend an extended period of time  on any one question. After you have completed the questions, you will

have the option of changing any of your answers.  After completely answering everything, you will receive your score immediately.

If you don’t pass

A number of individuals who take the exam do not pass.  If this is the case, you will need to wait 30 days before re-taking the exam.  If you do not pass the exam the second time, you will need to wait another 6o days before taking the exam.  If you do not pass either the third or fourth attempt, you will need to wait at least 180 days before taking the exam again.  There is no limit on the number of times allowed for taking a test.


Cole-Frieman & Mallon LLP provides legal advice to the managed futures industry.  Bart Mallon can be reached directly at 415-868-5345.

Hedge Fund Events September 2011

The following are various hedge fund events happening this month. Please contact

us if you would like us to add your event to this list.


September 8

September 8 – 9

September 8 – 9

September 12 – 13

September 12- 14

September 13

September 14

September 14

September 14

September 14 – 15

September 14 – 15

September 14 – 15

September 15

September 15

September 15 – 16

September 15 – 16

September 15 – 16

September 18 – 20

September 19

September 19

September 19 – 20

September 19 – 20

September 19 – 20

September 20

September 20

September 21

September 21

September 21 – 23

September 22 – 23

September 22 – 23

September 25

September 25 – 27

September 25 – 27

September 26 – 28

September 27

September 28


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.


Hedge Fund State and Local Business Requirements

Compliance Guide for New Hedge Fund Managers

Like any new business a hedge fund manager must comply with state and local ordinances, and make local business filings.  However, when launching a hedge fund, a manager may become so consumed with preparing launch documents, opening prime brokerage accounts and, most importantly, meeting with potential investors that these formalities might be overlooked.  In response to numerous questions from our clients, we prepared this guide for managers located in New York, San Francisco, and Chicago.  Please contact your attorney if you have questions about these or any other locations.

Because most manager entities are formed in Delaware, but are operating in another state, it is necessary to register them in their home state; this process is also known as qualifying the entity to conduct business, or applying for authority to conduct business, in the state where they are located.  Additional requirements typically include state and local taxes, payroll and other employment matters and city business licenses.

A checklist and quick reference table are provided as links at the bottom of this post.  All forms, procedures, fees, taxes or other requirements discussed below are subject to change by the state and local authorities; this guide is not intended to be an exhaustive list of all possible requirements in these locations.   Please confirm any requirements with your attorney or the authority in question before making any filings.

New York, New York

New York State Authority to Conduct Business.  Delaware limited liability companies (“LLCs”) and limited partnerships (“LPs”) must apply for authority to conduct business in New York State by filing an Application for Authority (“NY Application”) with the Department of State – Division of Corporations, along with a Certificate of Existence (called a Certificate of Good Standing in Delaware) from the state of formation (“COE”).   New York requires that the COE is dated within one year of the date the NY Application will be filed.

New York State Certificate of Publication.  Once the NY Application has been certified by the Department of State, the manager must publish in two newspapers a copy of the application for authority or a notice related to the qualification of the entity.  Publication must be done in the specific newspapers designated by the clerk of the county in which the manager is located.  After publication, the printer or publisher of each newspaper will provide an affidavit of publication.  A Certificate of Publication with the affidavits of publication of the newspapers attached must be submitted to the Department of State – Division of Corporations.  The publication process must be completed within 120 days after the filing of the NY Application.

Please also see our post on the New York Publication Requirement.

New York State Workers’ Compensation.  Any business operating in New York State must have workers’ compensation coverage for all employees.  Employers can obtain a workers’ compensation insurance policy with a private carrier, with the New York State Insurance fund or through self-insurance.  Failure to carry workers’ compensation insurance constitutes a misdemeanor or a felony punishable by a fine of $1,000 up to $50,000.  The level of offense depends upon whether an employer has five or more employees and whether the violation is a first or a repeated offense.  The Workers’ Compensation Board may also issue a stop work order to any business that fails to obtain a policy or owes a fine to the Board.  Failure to keep the required records is punishable by fines of $5,000 to $10,000 for a first-time violation.

New York State Disability Coverage.  Any business operating in New York State with employees must also provide disability benefits coverage.  The law provides for the payment of cash benefits to employees who have become disabled because of injuries or illnesses that have no connection to their employment, and for disabilities arising from pregnancies.  The law allows, but does not require, an employer to collect contributions from its employees to offset the cost to provide this benefit.  Employers may obtain coverage through a private carrier, the New York State Insurance fund or through self-insurance.  Failure to obtain disability benefits coverage constitutes a misdemeanor, punishable by a fine of $100 to $500 and/or imprisonment for not more than one year.  Additionally, an employer without coverage will be liable for any benefits due to an injured employee.

New York State Unemployment Insurance.  Employers must file a Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return with the New York State Department of Labor.  Generally, all employment performed for an employer is covered whether it is on a part-time, full-time, temporary, seasonal, or casual basis.  If all required parts of the return are not received by the due date, the return is considered delinquent.  The penalty for failure to file is the greater of $1,000 or $50 per employee listed on the latest quarterly return, up to a maximum fine of $10,000.

New York City Unincorporated Business Income Tax.  The Unincorporated Business Tax (the “UBT”) is imposed on partnerships and limited liability companies, which would include most hedge funds and investment managers.  The UBT is equal to four percent of taxable income allocable to New York City, but the net effective tax rate for hedge fund managers could be near two percent after tax credits and deductions.  This stems from the deductibility of local business tax payments on federal taxes, and a twenty-three percent credit for UBT taxes against New York City personal income liability.  At present, the New York City Administrative Code taxes fees earned by managers, but carried interest may be exempt.  To obtain some relief from this tax, managers located in New York City typically form a separate entity to serve as the general partner of their onshore funds, rather than having the manager serve as general partner.

New York City Commercial Rent Tax.  A business must file a Commercial Rent Tax Return if the occupied premises are located in Manhattan, south of 96th Street, and the annual or annualized gross rent paid for such location is at least $250,000.  This tax also applies to: (i) those who occupy space in buildings they themselves own, individually or jointly with another person other than a spouse; (ii) those who occupy space in buildings owned by corporations where they are an officer or holder of all or part of the corporation stock; (iii) a corporation, occupying space in a building that is owned by a subsidiary corporation or by a parent corporation; and (iv) a corporation, occupying a space in building owned by an officer or stockholder of the corporation.

New York City Waste Removal and Recycling.  A commercial business is required to dispose of its waste, including recyclable materials, through a private disposal company.  All businesses are required to recycle office paper, corrugated cardboard, magazines, catalogs, and newspapers.  Businesses must post signs notifying employees, and customers where relevant, about what and how to recycle and must place labeled recycling containers where waste is routinely discarded.  Usually the building management makes arrangements with a disposal company for removal of recycling and waste for the entire building.  Regardless of a building's recycling arrangements, every company is required by law to maintain separate labeled recycling bins for paper.  Fines will be levied for violations.

San Francisco, California

California Business Registration.  LLCs and LPs must qualify to transact business in California by filing an Application for Registration  (“CA Application”) and a COE with the California Secretary of State.   In addition, within 90 days after the CA Application has been filed, an LLC must file a Statement of Information (“SOI”) with the California Secretary of State.  Thereafter, the SOI is due every other year on or before the anniversary of the initial SOI filing. LPs are not subject to the SOI filing requirements.

California Franchise Tax Board.  Registered LLCs and LPs are subject to an $800 annual tax even if they conduct no business in California.  They may also be subject to an annual fee based upon total income from all sources derived or attributable to California.  Additionally, an entity that has members or partners who are not residents of California must file consents signed by the nonresident individuals and foreign entity members to show their consent to California’s jurisdiction to tax their distributive share of income attributable to California sources.  The LLC or LP must pay the tax for every nonresident member or partner who does not sign the consent.

California Withholding on Distributions.  LPs and LLCs must withhold 7% on distributions of California source income made to nonresident partners or members when distributions to a particular partner or member exceed $1,500 for the calendar year.  LPs and LLCs must withhold on allocations of California source income to foreign partners and members (payees) at the maximum applicable California tax rate.

California Payroll Taxes.  A business becomes subject to state payroll taxes upon paying wages over $100 in a calendar quarter to one or more employees.  Wages include cash payments, commissions, bonuses, and the reasonable cash value of noncash payments (such as meals or lodging) for services performed.  Once subject, an employer must complete and submit a registration form to the Employment Development Department (“EDD”) within 15 days.  After registering, a business will receive a State Employment Identification Number.  Employers must report wages paid, taxes withheld and pay unemployment insurance, state disability insurance and employment training tax on employee wages.

California Workers’ Compensation.  California Labor Code requires employers with at least one employee to carry workers’ compensation insurance.  Employers may finance liability for workers’ compensation through self-insurance, private insurance or through the California State Compensation Insurance Fund.  Failure to carry workers’ compensation coverage is a misdemeanor punishable by a fine up to $10,000 and/or one year in jail.  The Division of Labor Standards Enforcement can issue a stop order preventing an employer from using employee labor until coverage is obtained.

San Francisco Business Registration and Renewal.  Every person or entity doing business in the City and County of San Francisco must have a valid Business Registration Certificate (“SF Certificate”).  A certificate is required for businesses located outside of San Francisco that transact business or perform services within San Francisco.  The registration fee varies based on a business’s estimated annual payroll tax expense.

The SF Certificate is issued annually and must be renewed by February 28th of each year.  All businesses must report their taxable payroll tax expense, even if it was zero, as part of the Business Registration Renewal process.   Businesses meeting a specified payroll threshold (which may be adjusted each year) are required to submit an additional Payroll Expense Tax Statement.

San Francisco Payroll Expense Tax.  The tax amount is equal to 1.5% of a business’ annual San Francisco payroll expense.  The recently-passed Proposition Q raised the payroll tax exemption for small businesses whose payroll expense for the year is $250,000 or less and extended the applicability of payroll expense tax to include compensation for personal services paid to owners of LPs, LLCs and other entities.  If a business has at least four W-2 employees based in San Francisco, the amount of payroll included for each individual owner of a pass-through entity may be calculated under the “safe harbor provision” by adding to his or her base salary an amount equal to 200% of the average annual compensation paid to the W-2 employees of the pass-through entity whose compensation is in the top 25% of that entity's employees based in San Francisco.

Please also see our post on San Francisco Proposition Q.

San Francisco Assessor Tax.  A business entity’s property is reappraised annually.  This includes all property owned or leased by a business except licensed vehicles, business inventory, intangible assets or application software.  Businesses that receive a property statement from the Assessor’s Office or that own taxable property with a total cost of $100,000 or more must file a 571-L business property statement each year by April 1st.  The filing must detail the costs of all supplies, equipment, and fixtures, improvements, land improvements, and land and include other information requested on the form at each location.  The 2010 tax rate for business property was 1.159% of the value of assessable property.  Such value is determined based upon cost, tax, freight, installation and depreciation.

San Francisco Labor Laws.  Three San Francisco labor laws generally apply to all employers with employees performing work within the City of San Francisco.  First, the Health Care Security Ordinance requires for-profit businesses with twenty or more employees to spend a minimum amount on health care for each employee working eight or more hours per week in San Francisco.  The Paid Sick Leave Ordinance entitles all employees (no minimum) working in San Francisco to paid time off when they or family members are sick or need medical care.  It also sets a minimum rate of accrual for sick leave of 1 hour for every 30 hours worked; fractional accruals are not permitted.  Finally, San Francisco has a minimum wage of $9.79 per hour for all employees who work in San Francisco more than two hours per week.

Exemptions for Businesses Located within the Presidio.  The Presidio is an area in the city that is owned by the federal government.  The Presidio Trust Act explicitly gives the Presidio Trust immunity from state and local taxes, which extends to property interests of third parties under “leases, concessions, permits and other agreements associated with Trust properties.”  Under federal law only income and use taxes can be levied on federal enclaves.  Because the business registration fees and payroll taxes discussed above are not income or use taxes, businesses located in the Presidio are exempt from these requirements imposed on businesses located elsewhere in San Francisco.

Chicago, Illinois

Illinois Admission to Conduct Business.  An LLC must submit an Application for Admission to Transact Business and a COE authenticated within the last 60 days to the Illinois Secretary of State.  An LP must submit a similar “Application for Certificate of Authority” along with a COE authenticated within the last 30 days (either, the “IL Application”).

Illinois Department of Revenue Registration.  A business must register with the Illinois Department of Revenue to receive a Certificate of Registration and Illinois Business Tax number.  Registration must be completed before a business makes sales, or when it hires employees.  This certificate must be displayed in a prominent location

Illinois Unemployment Insurance.  If a business hires employees to work in Illinois, it must register with the Department of Employment Security (“IDES”) within 30 days of the date it starts doing business in the state to receive an Illinois Unemployment Account number.  On a quarterly basis, employers must file an “Employer’s Contribution and Wage Report” and pay contributions to IDES.  The penalty for failure to file the report is the lesser of $5 for each $10,000 or fraction thereof of the total wages for insured work during the period, or $2,500 for each month or part thereof of such failure to file the report.  The amount of the total fine is capped at the lesser of $5,000 or $10 for each $10,000 or fraction thereof of the total wages for insured work during the period.

Illinois Workers’ Compensation.  All employers must obtain workers’ compensation insurance, post a notice in the workplace listing the insurance carrier and workers’ rights, and keep records of work-related injuries.  Accidents involving more than three lost workdays must be reported to the Workers’ Compensation Commission.  Employers may be fined up to $500 for each day without insurance, with a minimum fine of $10,000.  The commission may issue a stop-work order for a knowing failure to carry insurance.  Corporate officers may be held personally liable and/or sent to prison.

City of Chicago Business License.  All persons who “conduct, engage in, maintain, operate, carry on or manage a business” in the City of Chicago must obtain a business license from the Department of Business Affairs and Consumer Protection (the “BACP”), unless exempted by state law or regulated by another license category.  Applicants must complete a Business Information Sheet listing the business name, a detailed business description,

square footage, address, ownership information, and Illinois and federal tax numbers.  Businesses operating in a properly zoned area will be automatically approved when applying; these businesses need only file a tax registration form with the city.

The business license must be posted in a conspicuous place.  In the event of a violation, the BACP may issue a notice, a cease and desist order and depending on the type of business, the BACP may also confiscate personal property or make an arrest.  Additionally, fines may be imposed ranging from $200 to $10,000 per day.

Chicago Employers’ Expense Tax.  Businesses that employ fifty or more full-time employees who perform 50% or more of their work per calendar quarter in the City of Chicago and who earn more than $900 in a calendar quarter must pay the Employers’ Expense Tax.  The tax is equal to $4.00 per employee per month.  In determining the number of employees, employees of a “unitary business group” will be combined, i.e., a group of people under common ownership or control, whose business activities are in the same general line and whose members are functionally integrated through centralized management.

To help managers keep track of the filings that they should complete we have created a checklist, please see Checklist for State and Local Business Filings.  For information on division contact persons that can help with information on how to complete the above filings, please see our Quick Reference and Contact Information guide.  If you have questions on any of the items in this post, please feel free to contact us.


Cole-Frieman & Mallon LLP provides a variety of legal services to hedge fund managers including entity formation, general business issues, legal advice with respect to hedge fund seeding, employment matters and matters related to hedge fund formation.  Karl Cole-Frieman can be reached at 415-352-2300; Bart Mallon can be reached directly at 415-868-5345.


Hedge Fund Events March 2011

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.


March 3

March 3-4

March 4

March 7

March 8-9

March 9

March 14

  • Sponsor: IMN
  • Event: The
  • Location:

March 14-15

March 15-16

March 15-18

March 16

March 17

March 17-18

March 17-18

March 21

March 22

March 22

March 22

March 28-29

March 30-31

March 28 – April 1


Bart Mallon, Esq. runs the hedge fund law blog and provides hedge fund registration and compliance services to hedge fund managers through Cole-Frieman & Mallon LLP, a leading hedge fund law firm.  He can be reached directly at 415-868-5345.

CFTC Proposes Increased Registration and Reporting for CPOs and CTAs

Proposal to Rescind 4.13(a)(3) & 4.13(a)(4) CPO Exemptions

Pursuant to rulemaking required under the Dodd-Frank Act, the CFTC is jointly proposing with the SEC that CPOs and CTAs which are dually registered (that is with the CFTC and as an investment adviser with the SEC) file certain information on a new Form PF.   In addition, the CFTC is proposing to eliminate two widely used exemptions from CPO registration – the 4.13(a)(3) exemption (de minimis futures trading) and the 4.13(a)(4) exemption (the only investors are QEPs).  Another exemption applicable to mutual funds – the 4.5 exemption – may also potentially be rescinded under the proposed rulemaking.  The CFTC is proposing minor changes to regulations in addition to the more onerous registration and reporting requirements.

Rescinding CPO Registration Exemptions

We have discussed the requirements for these and other CFTC registration exemptions in a post on CPO registration.  The CFTC is proposing to rescind the following exemptions:

Regulation 4.13(a)(3) – this exemption is normally utilized by managers who use just a small amount of futures.  In the event that this exemption isrescinded, a large number of managers would be required to register.  This also means that managers could not trade any futures contracts in a fund structure without being registered as a CPO.  Obviously this will increase the regulatory burden for managers and will likely lead some managers to simply cease using futures.

Regulation 4.13(a)(4) – this exemption is normally utilized by those managers who only have investors who are qualified eligible persons.

Note: Rescinding both the (a)(3) and (a)(4) exemptions will likely mean the fund-of-fund managers will also be required to register as CPOs.  Form more information please see our post on fund-of-fund CPO exemptions.

Regulation 4.5 – this exemption applies to mutual funds that have funds which invest in futures.  In general, mutual fund managers who invest in futures do so indirectly and are able to escape registration as a commodity pool operator.  This means that mutual funds, while they must be approved by the SEC, receive no regulatory scrutiny from the CFTC.  Late last year, the NFA submitted a petition to the CFTC asking the CFTC to amend Regulation 4.5 to require those managers that indirectly invest in futures products to register as a CPO.

New Reporting Requirements

The CFTC is proposing that CPOs and CTAs face increased reporting requirements on new forms Form PF, Form CPO-PQR and Form CTA-PRQ.  The increased reporting requirements will apply to two groups of CFTC registrants: (i) dual registrants and (ii) CFTC-only registered firms.

New Forms

Form PF – Form PF was designed to provide government agencies with information about the basic operations and structure of private funds.  The creation of Form PF was required by Section 404 of the Dodd-Frank Act.  The SEC and CFTC are working together to develop Form PF Sections 1 and 2 as those sections are relevant to firms registered with both agencies.

Form CPO-PQR and Form CTA-PQR – these forms will require firms to provide similar information as will be required in Form PF, with appropriate modifications made so that the information is relevant with respect to commodity futures managers.

In general, all forms will allow some information to be treated as confidential.

Dual registrant reporting

Dual registrants are firms which are registered with the SEC (as an IA) and with the CFTC (as a CPO or CTA).  The following are the proposed filing requirements:

Dual registrants with less than $1 billion of AUM:

  • Annual filing of Form PF
  • Complete only Section 1 of Form PF

Dual registrations with less than $1 billion of AUM:

  • Quarterly filing of Form PF
  • Complete Sections 1 and 2 of Form PF

CFTC-Only Registrants

CFTC-only registrants are firms registered with only the CFTC

(as a CPO or CTA).  The amount of information to be required on the new CFTC only forms, and the timing of filing, will depend on the registered firm’s size and AUM.

Forms CPO-PQR and CTA-PQR will be filed directly with the NFA.

Other Proposed Changes

The CFTC is also proposing some other changes:

  • Managers using the Regulation 4.7 exemption will be required to have certified financial statements for any 4.7 exempt pool which they advise.  [Note: currently there is no certification requirement.]
  • Managers using any of the 4.5, 4.13 or 4.14 exemptions will need to annually certify the notice of exemption.  [Note: currently there is no requirement to certify the exemption on an annual basis.]
  • Risk disclosure language to be updated to include discussion of swaps, if appropriate for the manager.
  • Certain changes to make the regulations internally consistent.

The CFTC overview can be found here: CFTC Rescinding Exemption Overview

The CFTC Q&A sheet can be found here: CFTC Rescinding Exemption Q&A


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