Category Archives: compliance

Form PF Filings to be Submitted via FINRA

SEC Mandates FINRA to Receive Form PF Filings

SEC has chosen FINRA to accept Form PF filings on its behalf when and if Form PF is adopted.  As background, on January 26, 2011 the SEC issued a proposed Rule 204(b)-1 under the Investment Advisers Act of 1940 which would require SEC registered investment advisers to file a new Form PF with the SEC on either a quarterly or annual basis.  Although the rest of the proposed rule is still under consideration, the SEC has determined that if Form PF is adopted, investment advisers would file Form PF electronically through FINRA.  FINRA currently is the operator of IARD, the system through which investment advisers electronically file their Form ADV and make necessary notice filings to states.  If the rule is passed, FINRA will develop and maintain the filing system for Form PF as well.

The SEC initially anticipated that the proposed rule implementing Form PF would have an initial compliance date of December 15, 2011 – this appears less likely as we get closer to that date and plan to provide updates as appropriate.

Form PF Filing Process and Filing Fees

Because the filing system for Form PF will likely be an extension of the current IARD filing system, we expect the process will be substantially similar to the current process of filing Form ADV.  Investment advisers filing Form PF will likely have to go through the entitlement process and then fund their accounts with the fees necessary to submit the filing through the system.  Managers will have to make quarterly annual filing based on their assets under management. Regardless of assets under management, the filing fees shall be as the same for each filing:

  • $150 for each Form PF annual update
  • $150 for each Form PF quarterly update


FINRA is the logical choice to accept and manage the filing of Form PF because, as the current operator of the IARD system, they are uniquely situated to develop and deploy the Form PF filing system in a timely manner.  The SEC believes that having FINRA expand its existing platform to accommodate this additional filing would be result in greater efficiency for both the advisers and the SEC.  However, managers should be wary of the continued consolidation of filing platforms as FINRA continues to move towards becoming the SRO for hedge fund managers and other investment advisers.

The text of FINRA’s letter regarding Form PF can be found here: FINRA Form PF Letter

The text of SEC’s notice of intent to have Form PF filed through FINRA can be found here: SEC Form PF Announcement – IA-3297


Cole-Frieman & Mallon LLP provides comprehensive registration and compliance services to hedge fund managers, including help with filing Form PF.  Bart Mallon can be contacted directly at 415-868-5345.

States to Begin Proposing Rules on Expert Networks

Massachusetts Proposes Compliance Rules for Using Expert Networks

Expert networks have been a major topic over the last few months and we are seeing the states, in addition to the SEC, focus on this area as a compliance issue for investment advisers.  Massachusetts recently revoked the state investment adviser license of a manager who was using expert networks to gain inside information and then trade on that information.  Massachusetts is now proposing regulations which would require state registered managers to develop certain policies with respect to use of expert


The proposed regulation provides generally that investment advisers may not use expert network services unless the adviser receives a signed certification from the consultant (sourced by the expert network firm) that:

  • describes the confidential restrictions the consultant has regarding confidential information and
  • the consultant affirmatively states that he will not provide any confidential information to the adviser

In addition to this new compliance requirement, the proposal codifies the general prohibition against trading on inside information.

The full text of the proposed regulation is printed below and can be found here.  The Massachussets Securities Division will hold a public hearing on these and other proposed regulations on June 23 and will accept written comments until June 24.


Preamble to Proposed Regulation

Investment Advisers Using Matching or Expert Network Services – Dishonest or Unethical Conduct in the Securities Business

The Division proposes to add a new section under 950 CMR 12.205(9)(c)(16) to the existing list of dishonest and unethical practices. The Division believes this addition is necessary to address the rising use of expert network firms by investment advisers to facilitate paid consultations between investment advisers and industry experts.

As alleged in In the Matter of Risk Reward Capital Management Corp., RRC Management LLC, RRC BioFund LP, and James Silverman, Docket No. E-2010-057, some investment advisers have paid expert networks and consultants to access confidential information about

publicly traded companies. The rise of expert network firms, and the number of abuses which have been addressed by regulators, make it clear that additional measures are required to ensure that confidential information is not being accessed and traded upon. The Division's proposed regulations, while not altering investment advisers' existing duty not to trade on insider information, seek to provide investment advisers with greater clarity as to what is impermissible conduct when paying consultants for information.


Proposed Regulation

Investment Advisers Using Matching or Expert Network Services – Dishonest or Unethical Conduct in the Securities Business

Add the following new subsection (16) to 950 CMR 12.205(9)(c) (non-exclusive list of practices by an investment adviser which shall be deemed “dishonest or unethical conduct or practices in the securities business”):

16. a. To retain consulting services, for compensation that is provided either directly to the consultant or indirectly through a Matching or Expert Network Service, unless the adviser obtains a written certification, signed by the consultant that:

(i) describes all confidentiality restrictions that the consultant has, or reasonably expects to have, regarding Confidential Information; and
(ii) affirmatively states that the consultant will not provide any Confidential Information to the adviser.

b. Notwithstanding section (a) an investment adviser who comes into possession of material Confidential Information through a consultation is precluded from trading any relevant security until such time as the Confidential Information is made public.

c. Definitions. For purposes of this section:

(i) “Confidential Information” means any non-public information, which one is bound by a confidentiality agreement or fiduciary (or similar) duty not to disclose.
(ii) “Matching or Expert Network Service” means a firm that for compensation matches consultants with investment advisers.


Cole-Frieman & Mallon LLP is a boutique hedge fund law firm.  In addition to investment adviser registration and compliance, we provide expert network compliance consulting services to SEC and state registered hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.


Compliance Update for California Hedge Funds – Presentation

As part of the Hedge Fund Networking Summit Webcast Series, Bart Mallon of Mallon P.C. led an hour long presentation on compliance matters for California based hedge fund managers.  The presentation covered the following topics:

  • New SEC and CA Hedge Fund Registration Requirements
  • Registration Overview & Major Issues
  • Compliance Overview
  • Discussion of Other Current Regulatory Issues

There were of number of questions asked by the audience regarding many of the new compliance requirements for registered managers.  We have had good experience with the following groups:

If you attended the event and have follow up generic propecia online pharmacy questions, please feel free to contact us and we will try to get back to you as soon as possible.  The full powerpoint can be downloaded here: CAHF Powerpoint (April 2011) Final

Many thanks to Ron Niemaszyk of Patke & Associates for moderating the event.


Cole-Frieman & Mallon LLP provides investment adviser registration & compliance services to hedge fund managers.  For more information, please call Bart Mallon at 415-868-5345.


Massachusetts Proceeds Against Fund Manager Using Expert Networks

Revocation of Investment Adviser License & Disgorgement of Profits

Managers are becoming more aware of the various securities laws and compliance issues involved with the use of expert networks.  While the SEC has recently been active in this area (both in the RR insider trading complaint and the recent expert network action), the states are also becoming more aware of the potential issues involved with expert networks.  Recently the Massachusetts Securities Division instituted an administrative complaint against a Massachusetts state registered fund manager who utilized expert networks to gain inside information.  This post will provide an overview of that compliant.


James Silverman was registered as an investment adviser representative for a Massachusetts registered IA firm which was managing the RRC Bio Fund, LP (“Fund”).  The IA firm was subject to a routine announced examination by the Massachusetts Securities Division (“Division”).  During that routine examination, the examiners found a number of violations of the various state securities laws including the fact that Silverman was trading on inside information obtained from an expert network firm.

The examiners found that Silverman started using the expert network firm after the Fund suffered a long period of losses.  After utilizing the expert network firm, the Fund posted consecutive years of gains in excess of 50%.  During the course of the relationship with the expert network firm, the Fund paid $80,000 a year to the firm so that Silverman could have access to certain consultants in the biotechnology industry.  Many of these consultants were either insiders or otherwise bound to confidentiality agreements with respect to their activities in the industry.  The expert network firm did not monitor their consultants in any way but, pursuant to the firm’s policies, the consultants’ had a duty to identify and avoid any disclosure that would violate a confidentiality agreement.  The agreement that Silverman signed with the expert network fir

m provided that Silverman agreed not to elicit or otherwise obtain any “material nonpublic or otherwise confidential information” from the expert consultants.

In addition to the insider trading, Silverman and the IA firm engaged in either blatantly illegal or egregiously sloppy business practices, especially once the examination began.  For example, the complaint states that Silverman did the following:

  • deleted notes containing study results prior to producing the notes to the Division in response to its subpoena
  • deleted certain documents and correspondence
  • failed to maintain required records
  • made false filings with the Division
  • violated minimum financial requirements
  • violated document retention requirements
  • improperly assessed performance fees
  • left client data vulnerable

The Order

The consequences for breaking the securities laws, whether at the state or federal level, are severe.  The Enforcement Section of the Massachusetts Securities Division sought the following items in its action against Silverman:

  • accounting and disgorgement of all ill-gotten gains as a result of insider trading
  • disgorgement of direct and indirect remuneration from the insider trading
  • revocation of the IA registration for the firm and Silverman
  • enjoining Silverman from performing any investment advisory services for compensation on behalf of any person or entity within the Commonwealth of Massachusetts
  • imposition of a fine

Protecting Your Firm – Developing Compliance Programs

This case and the earlier SEC actions do not mean that fund managers can no longer use expert network firms.  However, managers need to be careful and the best practice is for managers to develop compliance policies for all interaction with expert network firms.  These policies and procedures need to be tailored to the business practices of each manager and need to be followed consistently.


Cole-Frieman & Mallon LLP is a boutique hedge fund law firm.  We provide hedge fund compliance and registration services to SEC and state registered hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.


NFA Annual Compliance Overview 2011

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.


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 (, 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.


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 Changes Post CFTC Audit

The results of the CFTC’s audit of the NFA were released a few weeks ago and we have already begun to see a few changes to the way the NFA operates.

Access to BASIC Security Manager

Previously newly formed entities which were registering with the CFTC could start the registration process prior to formally being established.  Now, the NFA must have proof that the entity is in existence prior to granting security manager status.  Accordingly, groups wishing to register must wait until the entity is in existence and then submit the security manager form.  This will usually delay an initial application by about a week. We believe it would be more effective if the NFA made sure that the entity was established prior to submitting a registration application.  Absent such procedures, we believe that the security manager process should be streamlined and that access should be granted next day via email.  There is no good reason to have such a slow process just to access the online registration system.

Client withdrawals from account

Previously it was common for some CTAs to have some sort of lock-up period with respect to a trading program.   Now, the NFA will not allow a CTA to have a lock-up period because the client is always able to go to the FCM and cancel the account.  While from a technical perspective the client always has access to its own account and the CTA can’t control access to the account, many CTAs preferred the implicit protection afforded through the contractual agreement that the account would stay open during the lock-up.   By not allowing the lock-up language, CTAs will potentially be subject to greater and more frequent withdrawals from investors.

Revising Disclosure Documents

Many NFA Member firms will find out about the various new NFA procedures during the disclosure document revision process.  Moving forward, various deficiencies with disclosure documents that have been approved by the NFA in the past will need to be fixed (even though the documents were previously approved) as the managers revise the documents and seek instant filing or regular filing.

Please let us know if you have experienced any other changes with the NFA.


Other related hedge fund law articles:

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.

Dodd-Frank Establishes New Laws Regarding Spot Commodities and Spot Forex

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”) has changed a number of laws in all of the securities acts including the Commodity Exchange Act.  Two specific changes deal with certain transactions in commodities on the spot market.  Specifically, Section 742 of the Act deals with retail commodity transactions.  In this section, the text of the Commodity Exchange Act is amended to include new Section 2(c)(2)(D) (dealing with retail commodity transactions) and new Section 2(c)(2)(E) (prohibiting trading in spot forex with retail investors unless the trader is subject to regulations by a Federal regulatory agency, i.e. CFTC, SEC, etc.).  According to a congressional rulemaking spreadsheet, these are effective 180 days from the date of enactment.

We provide an overview of the new sections and have reprinted them in full below.

New CEA Section 2(c)(2)(D) – Concerning Spot Commodities (Metals)

The central import of new CEA Section 2(c)(2)(D) is to broaden the CFTC’s power with respect to retail commodity transactions.  Essentially any spot commodities transaction (i.e. spot metals) will be subject to CFTC jurisdiction and rulemaking authority.  There is an exemption for commodities which are actually delivered within 28 days.  While the CFTC wanted an exemption in which commodities would need to be delivered within 2 days, various coin collectors were able to lobby congress for a longer delivery period (see here).

It is likely we will see the CFTC propose regulations under this new section and we will keep you updated on any regulatory pronouncements with respect to this new section.

New CEA Section 2(c)(2)(E) – Concerning Spot Forex

The central import of new CEA Section 2(c)(2)(E) is to regulate the spot forex markets.  While the section requires the CFTC to finalize regulations with respect to spot forex (which were proposed earlier in January), it also, interestingly, provides  oversight of the markets to other federal regulatory agencies such as the CFTC.  This means that in the future, different market participants may be subject to different regulatory regimes with respect to trading in same underlying instruments.  A Wall Street Journal article discusses the impact of this with respect to firms which engage in other activities in addition to retail forex transactions.  The CFTC’s proposed rules establish certain compliance parameters for retail forex transactions, requires registration of retail forex managers and requires such managers to pass a new regulatory exam called the Series 34 exam.  We do not yet know whether the other regulatory agencies will adopt rules similar to the CFTC or if they will write rules from scratch.


CEA Section 2(c)(2)(D)


‘‘(i) APPLICABILITY.—Except as provided in clause (ii), this subparagraph shall apply to any agreement, contract, or transaction in any commodity that is—

‘‘(I) entered into with, or offered to (even if not entered into with), a person that is not an eligible contract participant or eligible commercial entity; and

‘‘(II) entered into, or offered (even if not entered into), on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis.

‘‘(ii) EXCEPTIONS.—This subparagraph shall not apply to—

‘‘(I) an agreement, contract, or transaction described in paragraph (1) or subparagraphs (A), (B), or (C), including any agreement, contract, or transaction specifically excluded from subparagraph (A), (B), or (C);

‘‘(II) any security;

‘‘(III) a contract of sale that—

‘‘(aa) results in actual delivery within 28 days or such other longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved; or

‘‘(bb) creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver and accept delivery, respectively, in connection with the line of business of the seller and buyer; or

‘‘(IV) an agreement, contract, or transaction that is listed on a national securities exchange registered under section 6(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)); or

‘‘(V) an identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C.27(b)).

‘‘(iii) ENFORCEMENT.—Sections 4(a), 4(b), and 4b apply to any agreement, contract, or transaction described in clause (i), as if the agreement, contract, or transaction was a contract of sale of a commodity for future delivery.

‘‘(iv) ELIGIBLE COMMERCIAL ENTITY.—For purposes of this subparagraph, an agricultural producer, packer, or handler shall be considered to be an eligible commercial entity for any agreement, contract, or transaction for a commodity in connection with the line of business of the agricultural producer, packer, or handler.’’.


CEA Section 2(c)(2)(E)


‘‘(i) DEFINITION OF FEDERAL REGULATORY AGENCY.—In this subparagraph, the term ‘Federal regulatory agency’ means—

‘‘(I) the Commission;

‘‘(II) the Securities and Exchange Commission;

‘‘(III) an appropriate Federal banking agency;

‘‘(IV) the National Credit Union Association; and

‘‘(V) the Farm Credit Administration.


‘‘(I) IN GENERAL.—Except as provided in subclause (II), a person described in subparagraph (B)(i)(II) for which there is a Federal regulatory agency shall not offer to, or enter into with, a person that is not an eligible contract participant, any agreement, contract, or transaction in foreign currency described in subparagraph (B)(i)(I) except pursuant to a rule or regulation of a Federal regulatory agency allowing the agreement, contract, or transaction under such terms and conditions as the Federal regulatory agency shall prescribe.

‘‘(II) EFFECTIVE DATE.—With regard to persons described in subparagraph (B)(i)(II) for which a Federal regulatory agency has issued a proposed rule concerning agreements, contracts, or transactions in foreign currency described in subparagraph (B)(i)(I) prior to the date of enactment of this subclause, subclause (I) shall take effect 90 days after the date of enactment of this subclause.


‘‘(I) IN GENERAL.—The rules and regulations described in clause (ii) shall prescribe appropriate requirements with respect to—

‘‘(aa) disclosure;

‘‘(bb) recordkeeping;

‘‘(cc) capital and margin;

‘‘(dd) reporting;

‘‘(ee) business conduct;

‘‘(ff) documentation; and

‘‘(gg) such other standards or requirements as the Federal regulatory agency shall determine to be necessary.

‘‘(II) TREATMENT.—The rules or regulations described in clause (ii) shall treat all agreements, contracts, and transactions in foreign currency described in subparagraph (B)(i)(I), and all agreements, contracts, and transactions in foreign currency that are functionally or economically similar to agreements, contracts, or transactions described in subparagraph (B)(i)(I), similarly.’’.


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Cole-Frieman & Mallon LLP provides legal support and forex registration services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Disclosure Document Guidance for CTAs and CPOs

NFA Provides Overview of Manager Background (Bio) Disclosure Requirements

CFTC registered CTAs and CPOs need to have their disclosure documents reviewed by the NFA prior to using those documents to solicit clients or investors.  As any manager who has gone through this NFA review process understands, the NFA will take their time to scrutinize the documents.  One issue which comes up again and again is the background information that must be disclosed for any principals or managers disclosed in the disclosure document.  Managers should take note of the following points:

  1. Each bio must include a complete and detailed business background for the last 5 years (any gaps must be explained);
  2. Business background further back than 5 years does not need to be disclosed; and
  3. If a manager chooses to mention anything that happened in the manager’s business background further back than 5 years, the manager must disclose all subsequent employment.

The third point is really the most important for this discussion.  Let’s say a manager makes a general reference that he has been in the investment management business for 16 years – that means that the manager will need to provide a description of each job, including dates of employment (month and year) over the last 16 years.  Because in practice this would lead to ridiculously long bios (for some managers), it is generally recommended to leave the bio to the last 5 years so that the bio is manageable.

The NFA recently released a member notice, reprinted below, discussing this issue and the various questions that arise.  The following NFA Notice can be found here.


Notice I-10-12

May 11, 2010

NFA provides guidance for disclosure of business background information 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 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 communicated to NFA its expectations as to the type and breadth of information that must be disclosed regarding the background of CTAs, CPOs, and relevant individuals. NFA is providing the following guidance to clarify the requirements of the applicable regulations regarding the disclosure of business background.

CFTC Regulations 4.24 and 4.34 require that disclosure documents include, for the previous five years from the date of the document, the business backgrounds of the CTA, the CPO, the major CTAs, the CPOs of major investee pools, the pool’s trading manager, and each principal of the foregoing who participates in making trading or operational decisions, or supervises persons so engaged. For each of the persons listed above, the document must include employers, business associations, or ventures (including the starting and ending month and year) for the same five year period, as well as a discussion of the duties performed by the person for each. When disclosing business background information, the discussion must be complete for the entire five year period. Any gaps in time must be explained.

Examples of disclosures within the most recent five year period:

Ms. Smith attended ABC University and graduated in June 2005 with a degree in Economics. In August 2008, she joined XYZ LP as an associated person.

The business background must disclose what Ms. Smith was doing during the period between June 2005 and August 2008. Additionally, if XYZ LP is not the entity for which the disclosure document has been prepared, a description of its main business must be included.

Mr. Jones has been a listed principal of XYZ Company, a commodity trading advisor, since January 2005. In 2007 Mr. Jones began publishing a monthly newsletter entitled “The Trading Corner,” which outlines Jones’ trading research in the energy markets.

The business background must disclose Mr. Jones’ duties at XYZ Company. The month in which Mr. Jones began publishing his newsletter and the name and main business of the employer, if any, for whom the newsletter is being published must also be disclosed.

Mrs. Green was registered as an associated person of LMN LLC, a commodity pool operator from March 2008 until May 2008. In June 2008, she formed PQR Limited Partnership (PQR), a commodity pool operator which became registered on November 1, 2008. Mrs. Green became a registered AP and listed principal of PQR on November 1, 2008.

The business background must be complete for the last five years. Specifically, it must disclose what Mrs. Green was doing prior to March 2008. Mrs. Green’s and PQR’s activities between June 2008 (when she formed PQR) and November 2008 (when she and the firm became registered) must also be disclosed.

As noted above, CFTC Regulations mandate disclosure of business background information for only the last five years from the date of the disclosure document. DCIO has advised NFA, however, that if a CTA or CPO elects to provide business background information beyond the previous five year period it must provide this information in the same level of detail as that required for the last five years. DCIO has further directed that a general reference regarding the length of an entity’s or individual’s experience or involvement in an industry serves to extend the time period for which disclosures must be made.

The following is an example of a disclosure recently submitted to NFA and an explanation as to why it would not comply with the above stated policy:

Example of disclosure beyond the most recent five year period:

Mr. Brown has been in the futures industry since October 1982 or Mr. Brown has over twenty eight years of management experience.

Mr. Brown’s business background must be disclosed from October 1982 to the present. The disclosure must be complete for the entire period including the name and main business of each employer, the nature of the duties performed for each employer, and the starting and ending dates (month and year) of employment, including an explanation of any gaps in employment.

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 Kaitlan Chi, Manager, Compliance ([email protected] or 312-781-1219).


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Cole-Frieman & Mallon LLP is a hedge fund law firm which provides CTAs and CPOs with comprehensive formation and regulatory support.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

NFA CPO/CTA Regulatory Seminar Recap

by Bart Mallon, Esq. of Cole-Frieman & Mallon LLP

On March 2, 2010 the NFA held an all-day seminar at the UBS Conference Center in Chicago for the futures and commodities communities.  With limited exceptions, the seminar provided useful information and allowed the audience to interact with the regulators directly through Q&A opportunities or by networking during the break periods.  This overview will provide a quick summary of the major items discussed and the notes I took during the day.  Full supporting materials for each session have been posted on the NFA’s website and the NFA will provide an audio CD of the seminar upon request.

Session One: The Current State of CPO/CTA Regulation

This session may have been mis-named as it focused solely on the potential changes with respect to the broader financial system.  Accordingly, much attention was (needlessly) focused on some of the proposed bills pending in the House and Senate (which may or may not ever become law).  After discussing the proposed bills in general, the panel moved to the proposed legislation with respect to the OTC derivatives markets (see CFTC thoughts on OTC derivatives regulation and Chairman Gensler’s Recent OTC regulation remarks).  Brief mention was also made regarding the CFTC proposal to limit energy positions.  A large part of the session was also devoted to issues dealing with harmonization between the CFTC and the SEC, which naturally included a discussion of the OTC derivites markets.

What did any of this have to do with CPO/CTA regulation as the title of the seminar indicates?

Not a lot, but the session did give the NFA a chance to frame some of the issues for the day and show that the mandate of the CFTC and NFA is broad.  Surprisingly, the panel did not even mention one of the major proposed regulations which would affect a large number of CPOs/CTAs (and bring many more firms under the CFTC’s jurisdiction) – that issue was the proposed retail forex regulations.

When the panel was asked about the proposed forex regulations the NFA’s Dan Driscol mentioned a couple of interesting things.  First, the NFA has been proceeding under the assumption that the forex registration rules will pass and that a large number of forex managers will need to be registered with the CFTC.  Accorindingly, the NFA has been building out its systems and apparently there is some sort of way for the NFA to earmark which firms are forex firms (perhaps for greater oversight).  The NFA also believes that during the registration process there is going to be a lot of hand holding, but also a lot of enforecment actions.

With respect other parts of the proposal, especially with respect to the increased margin requirements (100:1 leverage will move to 10:1 leverage under the proposed regulations), the NFA indicated that it will be providing the CFTC with a comment letter addressing its thoughts (see NFA Indicates Support for Greater Leverage).  Specifically the NFA indicated that they believe margin requirements should be based on the volatility of the underlying instrument (here, the major currencies).  While the NFA is not going to take a hard stance, the NFA is expected to provide the CFTC with more information on its experiences with respect to the margin requirements.  The comment period for the retail forex proposal ends on March 22 so we will report on the NFA’s comments when they are available.  [Note: Cole-Frieman & Mallon LLP will be providing comments on the proposed rules.]

Session Two: Disclosure Document and Performance Reporting

As all CTAs and CPOs probably have experienced, having a disclosure document reviewed and approved by the NFA can be an aggravating experience.  Notwithstanding my own opinions on this issue, the panel started by discusing the 4.13 exemptions.  The panel noted that the CFTC’s Part 4 regulations require very specific items from disclosure documents.  Generally most CTAs and CPOs are familiar with the more important parts – risk disclosures and risk factors, conflict of interests and fee information.

The lawyer on the panel made the case for overdisclosure – the framework which managers should use when thinking about the disclosure documents is that of an opposing counsel in the future.  In the event that something would go wrong in the future, what in your disclosure documents would opposing counsel point to?  Is there anything which you would be embarrassed about if it was brought before the jury?  Is there anything that is simply misstated or omitted?  These are the types of things that opposing lawyers would point to during a lawsuit and therefor all managers (whether registered or not) should always make sure anything they give to investors is accurate and discloses all material information.

The panel began in earnest by talking about common comments on disclosure documents.

Common comments

  • Forex. Under principal risk factors many forex managers have risk factors which have been modified from futures disclosure documents.  However, the futures and forex industries operate different therefore there is not the issue with clearing.  Also forex transactions are structured different than for futures transactions and therefore the cost structure is different.  [New NFA Rule 2-41.  Forex risk disclosure statement needs to be exactly as stated in the rule.]
  • Litigation statement. The litigiation needs to be up to date.  Many FCMs will continually update their litigation disclosure statement and if the most recent statement is not in the disclosure documents the NFA will check and will let you know in the deficiency letter that it needs to be updated.
  • Bios/manager background. It is a requirement for the managers bios to be included and the manager must include the dates of all employment (including unemployment or schooling) for the preceeding five years.  This means both month and date needs to be included.  Managers need to make sure the dates in the bio match with the dates in the Form 8R.

Litigation Statements

CTAs and CPOs are required to provide the litigation history for the firm and, more importantly, for the FCM and IB.  These litigation disclosures are dense paragraphs of legalese which is designed to inform the investor of the potential legal issues with the FCM or IB.  In practice these disclosures end up being pages long and, in my experience, are practically unreadable which brings up the question of their utility and if such disclosures really protect investors.

Notwithstanding the above, it is a requirement and CTAs and CPOs need to make sure that the ligitation statement is complete, accurate and up to date.  Firms should also realize that the litigation statement may change during the review process which is what happened recently to one of my clients.  The disclosure document received no comments from NFA staff except that the litigation statement for the firm’s FCM had just changed days earlier and would need to be updated.  This needlessly added weeks to client’s start date.

CTA and CPO Documents “Not Boilerplate”

The attorney on the panel stressed that disclosure documents are not boilerplate, no matter how similar they may appear.  He went on to note that there is a lot of detail in the documents and that it is essentially a manager’s contract with the investors.  He stressed that managers should know and understand every detail of their documents.  I completely agree.

One of the employees of a large CFTC registered firm noted that the manager needs to make sure that the disclosure document accurately reflects the way that business is conducted in the firm.  Managers should ask operational personnel to review the document to make sure the language captures the manner in which the firm operates – if there are discrepencies between the document and operational procedures, the document should be amended or revised.

Performance Capsules

There are a number of issues which arise in the context of performance capsules and therefore a firm must take care to make sure that the capsule mirrors the NFA requirements exactly.

Break-Even Analysis

Every CTA or CPO disclosure document needs to include a break-even analysis.  Generally this analysis will show a prospective investor or client the amount of gains necessary in order to break-even on the investment.  Naturally the break-even analysis is an inexact science and, therefore, it is arguably of little value.  For instance, the numbers in the table (at least for a newly registered CTA or CPO) are based on assumptions with respect to both level of assets as well as expected trading volume.

While there was no single or common issue discussed with regard to the break-even analysis, the NFA noted that for those managers which allocate or invest in underlying CTAs or CPOs, then the break-even analysis would also need to include the incentive fees payable at the underlying level.  The NFA went through the calculations involved with determining such expense.

Timing and Section 4.8

During the question and answer period, I asked the panel whether they often times see groups using the CFTC Regulation 4.8 exemption during the approval process.  I think that literally two or three of the representatives from the NFA said that they did not know what Regulation 4.8 was – I noticed that the attorney on the panel might have something to say and so I asked him if his clients had used it.  He explained Regulation 4.8 and noted that he did not recommend clients use it because it is awkward to go back to pool investors and explain the issue.

The NFA took the opportunity to say that managers should allow plenty of time to go through the registration process.

Session Three: Pool Financial Reporting

There were essentially two parts to this presentation: a discussion of the new reporting requirements for the NFA and a discussion on fair value and derivatives.

For the first part, Tracey Hunt of the NFA provided information on some of the new reporting changes for CFTC registered firms.  These include issues devoted to series funds, relaxed rules regarding liquidation statements, an extension for fund of fund filers.

Perhaps more importantly for many of the groups at the conference was the discussion of new NFA Rule 2-46 and a presentation of the reporting systems for the rule.  Rule 2-46 essentially requires certain operators who have reporting requirements under CFTC Regulation 4.22 to make a quarterly filing through the NFA’s EasyFile system.  CPOs will need to provide the NFA with the following information within 45 days of the end of the calendar quarter:

  1. Key Relationships – pool administrators, carrying brokers, trading managers, custodians
  2. Statement of Changes in NAV
  3. Monthly Rates of Return
  4. Schedule of Investments – all pool investments greater than 10% of fund NAV need to be disclosed (even if the positions are not futures/commodities)

We were provided with screen shots of the new filing system and it seemed both robust and complicated.  The NFA has noted that they have spent a lot of time to update their EasyFile system to accomodate the filers.  Even so, we believe their are likely to be bugs in the system and so we recommend that groups begin the EasyFile system as soon as possible to avoid missing the deadline because of technical issues. The system will have functionality to allow for many of the fields to populate automatically based on previous submissions.  There are also some specialized issues with respect to master-feeder and fund of fund structures – generally the system will require you to keep drilling down until you reach the actual investments, no matter how many organizational layers are in the structure.

The second part of the discussion included a powerpoint slide from Deloitte discussing new issues with financial reporting.  Essentially differences between level 2 and level 3 assets.

Keynote Speech from CFTC Commissioner Dunn

During lunch, which was actually quite nice, CFTC Commissioner Dunn delivered the keynote speech.  As all speakers from government agencies do, he noted that his comments were his own and not of the CFTC.  He spoke generally about the challenges facing the CFTC and that the issues are more complex than the issues the CFTC had to deal with in the past.  Additionally, with greater financial regulation looming, the CFTC’s job (in conjunction with the SEC in certain circumstances) has become even more important.

He also talked to varying degrees on the following issues:

  • The historic two day meeting between the SEC and the CFTC regarding harmonization
  • A potential uniform fiduciary duty for all investment advisers (or other groups under SEC and CFTC jurisdiction)
  • Potential future regulation of the OTC derivitatives markets – he noted his support of OTC derivitatives regulation and Chairman Gensler.  He did note, however, that there are many issues that would need to be worked out with any proposed legislation or regulation.  He also discussed the proposed position limits on certain energy contracts.
  • Retail forex and the large amount of comments which have been received.

Session Four: Sales Practices

Perhaps the most entertaining of the panel discussions was on sales practices.  The discussion was led by John J. Lothian who is well-known in the futures industry and created MarketsWiki.  John did a fantastic job of including all of the panelists which included Natalie Peters of DigiLog Capital LLC, and Dorothy Bobak and Alexandra Shipovskikh, both from the NFA.

Common Deficiencies

The NFA discussed the following common deficiencies:

  • websites often have many deficiencies including with the general disclaimer and ommissions –  it was stressed that the Member must be able to support all material statements of fact on the webiste
  • opinions should be clearly labeled as such
  • past trading performance will generllay have a lot of issues
  • general issue with stuff on third party websites – if you see something that is not correct, even if you did not place it there, you should ask the webmaster to revise or take it down.  a member may have some oversight responsibilities

Links from a Member’s Website

Generally a firm should have superviosry procedures in place for linking from a proprietary website to another unaffiliated website (note: Cole-Frieman & Mallon LLP generally recommends to clients that they do not link out to unrelated websites)

  • Members should make sure that outbound links adhere to requirements of NFA Rule 2-9 and NFA Rule 2-29
  • Member need to monitor outbound links through periodic review
  • With respect to reporting sites (i.e. AutumGold, Barclays) you need to make sure all of the information is accurate and all descriptions of the pool or trading program are complete.

Social Media

The NFA just recently amended Rule 2-29(h) and released a social media interpretive notice.  The new notice solidifies many of the principles of 2-9 and 2-29 but also deals with specific issues with sites like YouTube, Twitter, LinkedIn, Facebook, blogs, etc.  Interestingly, the NFA announced that it has a Facebook page which is used for recruiting new staff members.

With respect to the new rule and different media, the following was discussed:

  • Twitter. How do you comply with 2-29 (disclaimer rule) within 140 characters?  The media is necessarily different than a trditional website with a disclaimer.  One way might be to format your Twitter page with a prominent disclaimer.  You will need to make sure that all of the material you tweet is balanced pursuant to the promotional materials rule.  There is always a potential problem with re-tweets.  With respect to re-tweets, a Member may have an affirmative duty to ask another person to take down the re-tweet (which request itself, presumably, would be subject to record keeping requirements).  Suggestion: use software to complie an archive of tweets.  If you remove a tweet, you still need to keep a record of that tweet.  The software should be able to provide a record of this.  A firm should have a policy regard re-tweets (both by the Member or of the Member’s content).
  • Facebook. Many groups have a Facebook page.  The question was whether a simple Facebook page with basic information would constitute “promotional material” – the NFA said maybe.  The next question would be whether the firm was “soliciting” by having a Facebook page. Suggestion: a firm should institute the same oversight policies and procedures for a Facebook page as they would for other promotional materials.
  • YouTube. As both an audio and a video platform, a YouTube video will generally be subject to NFA Rule 2-29(h).  Generally this will require that any audio or video advertisement be submitted to the NFA prior to use.  If a member has something that was on YouTube prior to Febuary  1 then the member should take it down immediately and submit the media to the NFA for review – this material is not grandfathered into the amended rule.  It sounded like the NFA will be looking at YouTube in the future to catch violations.
  • Other Mediums. Podcasts, blogs, forums, public wikis, and other forms of media all have medium specific issues which managers should discuss with counsel prior to displaying material which might be considered promotional material.

A firm which uses any of the mediums described above should have policies regarding education of employees on rules and responsibilities and appropriate oversight of the employees.  If you firm needs to implement such policies and procedures, Cole-Frieman & Mallon LLP can provide guidance.

How to submit materials

In the event that a firm is subject to Rule 2-29(h) and therefore required to pre-file advertising materials, those materials can be submitted to the NFA in any format including CD, email, zip files, etc.  In the context of live feeds, webinars, and seminars – the Member firm should submit an outline of what will be discussed prior to the live performance then submit an recording of the performance after it has happened.  Such procedures are generally what you would do if an associated person or principal appeared on live television like CNBC or Bloomberg TV.

Session Five: The NFA Audit Process

Maybe one of the most important things that a firm should be ready for is an NFA audit.  For many firms this is a painful process which causes anxiety, but for other firms, it might be an opportunity to get an outside review of back end business operations for “free.”  Regardless of how a group views an audit, the discussion was helpful in identifying areas where managers can focus their attention in order to make the audit go as quickly as possible.

Who gets audited by the NFA?

There are no good answer with respect to when a member firm may expect to be audited by the NFA.  In general FCMs and very large managers are likely to face NFA audits on a more regular basis.  Forex firms can also expect to be audited more regularly than traditional futures only firms.  Traditional CTAs and CPOs are under no timeline requirement so these groups might not see an audit for up to three years or longer.

Audit Process

Generally the NFA will alert a member firm 2-3 weeks prior to the exam.  This gives the firm plenty of time to gether the inital records and other items requested by the NFA prior to their arrival.  While the amount of information requested might seem to be enormous, a firm should attempt to comply with each item as this will decrease the amount of time the NFA will spend at your place of business.

The actual audit may take place over a day or be 2-3 days long.  Larger firms can expect the NFA to be on site for a week or longer.  The amount of time obviously depends on a number of factors including the size of the member firm and complexity of operations.  During the audit there will likely be a lot of interaction between the compliance officer and the auditor.  At the end of the audit they will provide the firm with a request list.

One of the most important items to keep in mind during the process is to keep open communication with the auditor.  If you believe that the NFA findings are incorrect, you should discuss the issue with the auditor – at times they may see your point of view and side with you.

NFA Self-Exam Checklist

The most import item for Member firms to complete on yearly basis is their annual self-exam.  Cole-Frieman & Mallon LLP has provided easy to use NFA self-examination checklists.  Generally firms will need to take time to complete these lists on an annual basis and will need to keep a record of these actions pursuant to the firm’s recordkeeping policies.

Focus Areas

  • General. General issues which often are reviewed include proper registration, review of promotional material, performance reporting, trading (make sure recommendations appropriate), supervision, etc.
  • Valuation. If there are level 2 or level 3 assets there is likely to be greater review; principals need to make sure they sign off on level 2 or level 3 valuations.
  • Side Letters. This is a new focus area and the focus here will be to make sure the manager is doing what he says he will do in the side letter
  • Side pockets. Valuation of assets is going to be a focus area.

Common Audit Deficiencies

  • Promotional material. Issues include ridiculous performance numbers, withholding information from previous accounts, inaccurate numbers, etc.
  • Bylaw 1101. Requires that, as a NFA Member Firm, you only do business with other NFA Member Firms or firms that do not need to be registered; firms should have procedures in place to make sure other firms are either registered or not required to be registered (especially in the fund of funds context).
  • Inconsistencies. Your disclosure documents and compliance manual/ policies and procedures should be an accurate reflection of your firm’s actual operations.
  • Bunched orders. If a CTA firm bunches client orders, the CTA must conduct a quarterly review to make sure allocations to client accounts are done in a non-preferential manner.
  • NFA Rule 2-45. No loans from the pool to the manager for own personal use (ex. manager taking money out of pool to pay off mortgage)

Other items

  • Firms should remember that they need to distribute a privacy policy to customers on a yearly basis (perhaps send it out with December statement).
  • Disaster recovery plan (DRP) should be reviewed at least annually.  The DRP should be resonable based on operations.  This is an area where the auditors do not pay as much attention to.
  • Firm need to have ethics training procedures.  Many of these procedures are boilerplate.  Firms should make sure they follow their internal procedures.
  • Creating folders, filing and other systems on the front end will help the firm to remain organized and will help to keep the audit moving as quickly as possible.

Future Seminars

If you are interested in other seminars and conferences, I recommend the New York CTA Expo on April 21 which Cole-Frieman & Mallon LLP is sponsoring.  Also, the NFA is having another CPO/CTA conference in New York on April 22.  If you are in the San Francisco Bay area, we would also like to extend an invitation to the San Francisco Futures Professionals group which meets every couple of months to discuss issues relevant to members.


Other related hedge fund law blog posts include:

Cole-Frieman & Mallon LLP ( provides comprehensive legal and compliance services to commodity trading advisors and pool operators.  You can reach Bart Mallon, Esq. directly at 415-868-5345.

San Francisco Futures Professionals March Meeting | March 16, 2010

NFA Regulations and Capital Raising on Agenda

The San Francisco Futures Professionals Group (LinkedIn Group) will be meeting next week to discuss the most recent NFA Regulatory Seminar.  Bart Mallon of Cole-Frieman & Mallon LLP will be providing an overview of the major regulatory items discussed at the seminar including the new NFA rule on social media, issues with disclosure documents and performance reporting, and perhaps most, importantly, how to prepare for and deal with an NFA audit.

In addition to Mr. Mallon’s discussion, Bill Grayson has offered to join the group to discuss strategy and capital raising for emerging managers.

The meeting will take place at Mr. Mallon’s office suite (1 Ferry Building, Suite 255) on March 16th at 4pm.  After the discussion the futures professionals group will move to the Slanted Door for continued discussion, drinks and networking.

All bay area futures professionals are invited to attend (please RSVP).  Additionally, Cole-Frieman & Mallon LLP would like to welcome any bay area forex professionals to attend.  Many forex professionals will need to become NFA members after the CFTC’s proposed forex registration rules are adopted and we recommend that such forex professionals begin preparing for registration.  All bay area forex professionals are encouraged to join the San Francisco Forex Professionals LinkedIn group as well.


Other related hedge fund law blog posts include:

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.