Category Archives: compliance

Proposed Investment Adviser Regulations Overview

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As we discussed in an earlier post, the SEC proposed new rules and amendments to existing rules under the Investment Advisers Act (the “Act”) to implement certain provisions of the Dodd-Frank Act related to hedge fund registration.

In summary, the new rules:

  • clarify eligibility for SEC registration for hedge fund and other asset managers
  • establish reporting requirements for certain “exempt reporting advisers”
  • require greater disclosure by registered IAs and each managed private fund in Form ADV
  • clarify the scope of new exemptions from SEC registration
  • propose amendments to the “pay to play” rules of the Act

This post will provide an overview of these proposals in greater depth.  Please feel free to comment below or contact us with your thoughts on the new rules as we are currently in the process of drafting a comment letter to the SEC about the proposed rules.

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Rule 203A-1 Switching to or from SEC Registration

The new Rule 203A-1 provides state and SEC registered IAs with information on the time requirements for switching registration status.

State-registered switching to SEC-registered: After filing an annual amendment indicating eligibility for SEC registration (and not relying on an exemption from registration under sections 203(l) or 203(m) of the Act discussed below), apply for registration with the SEC within 90 days.

SEC-registered switching to State-registered: After filing an annual amendment indicating you are no longer eligible for SEC registration (and not relying on an exemption from registration under sections 203(l) or 203(m) of the Act discussed below), you must file Form ADV-W to withdraw SEC registration within 180 days of your fiscal year end (unless you are then eligible for SEC registration).  Note: during dual registration, the Act and applicable state laws apply.

For full text and overview please see our post on Rule 203A-1.

Rule 203A-5 IA Registration Transition Rules

IAs registered with the SEC on July 21, 2011 must report their AUM (via amendment to Form ADV) to the SEC by August 20, 2011, or 30 days after the effective date of the amendments, and to report the market value of its AUM determined within 30 days of the filing.  If such IAs are at that time below the threshold for SEC registration, the IA must withdraw from SEC registration by October 19, 2011 (and generally be registered with the state in which the adviser’s maintains its principle office and place of business).

In addition, the SEC is also proposing amendments to Form ADV which will require registered IAs to provide additional information regarding: (i) the private funds they advise, including AUM, the nature of the investors in the fund and the fund’s service providers; (ii) their advisory business, including information about the types of clients they have and potentially significant conflicts of interest; and (iii) additional information about non-advisory activities and financial industry affiliations.

For full text and overview please see our post on Rule 203A-5.

Rule 204-4 Reporting by Exempt Reporting Advisers:

Certain “exempt reporting advisers” exempt from SEC registration pursuant to Sections 203(l) and 203(m) of the Act (discussed below) must file Form ADV (but not Form ADV Part 2) with the SEC, following instructions specifically pertaining to such advisers.  Such advisers must file their initial Form ADV no later than August 20, 2011.

For full text and overview please see our post on Rule 204-4.

Rule 202(a)(30)-1 Foreign Private Adviser Exemption

This new exemption from SEC registration applies to “foreign private advisers.”

A “foreign private adviser” is an investment adviser that:

  • has no place of business in the U.S;
  • has less than $25 million in aggregate assets under management from U.S. clients and private fund investors;
  • has fewer than 15 U.S. clients and private fund investors; and
  • neither holds itself out to U.S. investors as an investment adviser nor acts as an investment adviser to any investment company registered under the Investment Company Act or any company that has elected to be a business development company.

“Foreign private advisers” do not need to comply with the reporting requirements under the new Section 204-4.

For full text and overview please see our post on Rule 202(a)(30)-1.

Rule 203(l)-1 Venture Capital Fund Exemption

This new exemption from SEC registration applies to advisers that solely advise “venture capital funds.”

A “venture capital fund” is a private fund that:

  • represents it is a venture capital fund;
  • invests in only equity securities of a portfolio company and 80% of such securities must have been acquired directly from the portfolio company;
  • has a management company which provides guidance to the portfolio company regarding management and operations of the portfolio company or the fund must control the portfolio company;
  • uses less than 15% leverage which may only be short term; and
  • provides fund investors with no withdrawal rights except in extraordinary circumstances.

The proposed rule also provides a grandfathering provision for certain presently existing venture capital funds.

For full text and overview please see our post on Rule 203(l)-1.

Rule 203(m)-1 Private Fund Adviser Exemption

This new exemption from SEC registration applies to advisers that solely advise private funds and have AUM in the U.S. of less than $150MM.  [HFLB note: the adviser may still be required to register pursuant to state law.]  The adviser must aggregate the value of all assets of the private funds it manages to determine whether it falls below the $150MM threshold.  AUM must be determined quarterly, with valuation based on the fair value of assets at the end of the quarter.  If an adviser’s AUM exceeds $150MM in private fund assets, the adviser must register as an investment adviser with the SEC within one calendar quarter.

For full text and overview please see our post on Rule 203(m)-1.

Rule 206(4)-5 Pay to Play Rules

Under the proposed amendment, an adviser would be permitted to pay a registered municipal advisor, instead of a “regulated person,” to solicit government entities on its behalf if the municipal advisor is subject to the Municipal Securities Rulemaking Board’s (the “MSRB”) pay-to-play rules.

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As with any proposed rulemaking process, there are a number of ambiguities with respect to the proposals and a number of questions regarding the application of certain rules to the certain situations.  These issues are expected to be identified during the comment process and hopefully the SEC will be able to modify the proposed rules as appropriate when the final rules are promulgated.  One central open issue is the change from SEC to state registration for managers with less than $100MM AUM – it seems pretty clear that most states will not be able to handle an increase in the amount of managers that will be subject to state regulation.

As discussed in the proposals, public comments are due on January 24, 2011.

A full copy of the proposed rules are available here.

Comments received by the SEC on the proposed rules are available for review here.

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Other related hedge fund articles:

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

Series 65 and Series 66 Passing Grade Increased

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IA Exams Pass Rates Expected to Plummet

The North American Securities Administrators Association (“NASAA”) recently announced that the two central investment advisor exams (the Series 65 and the Series 66) will become even more difficult.  Starting January 1, 2010 candidates will need to attain a score of 72% in order to pass the Series 65 exam and a 75% in order to pass the Series 66 exam.  NASAA did not make any statements on its website or at its Annual Conference earlier this year about the change or the reason for the change.

I had a chance to talk with Chuck Lowenstein of Kaplan Financial Education about the announcement.  “The exams have been oddities,” said Lowenstein, “everything else in the business requires a 70% to pass and the 65 had been kind of weird at 68.5% and the 66 as well at 71%. With these new numbers, NASAA has entered new territory. I suspect pass rates will plummet, unless they feel that the new exams will be so much easier (never happened in the past) that they need to bump up the minimum.”

Chuck went on to discuss the likely future performance for people taking the exams.  “Based on our students’ performance, this will have a devastating effect on the overall pass rate. A significant percentage of exam takers pass with little room to spare and bumping the requirements by 4 or 5 questions on these exams (the 68.5% on the 65 was 89 correct – 72% is 93.6 questions so they’ll either round up to 94 or down to 93, that has not yet been disclosed) is going to catch many exam takers.”

We do not recommend that exam takers study any differently for the exam, but we urge all potential exam takers make sure they are adequately prepared.  If an applicant does not pass the 65 or 66 on the first try, they will need to wait 30 days to take the exam again which will obviously have an effect on the timing of a hedge fund launch.

For more information please see NASAA’s post on the Series 65 and Series 66 exams.

Thank you to Chuck Lowenstein for bringing this issue to my attention.

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Other related hedge fund law articles:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

CPO Reporting Requirements | Commodity Pool Operator Compliance

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CFTC Regulation 4.22 Overview

CFTC registered commodity pool operators have a number of regulatory and compliance issues to be aware of.  In addition to a having a compliance program which addresses the business and regulatory issues applicable to the manager, one of the more important compliance requirements is found in CFTC Regulation 4.22 which provides the reporting framework with respect to (i) periodic reports to investors and (ii) annual reports to investors and the NFA.  While many hedge fund administration firms provide a monthly or quarterly report/statement, generally those reports/statements do not provide the detailed information that is required for commodity pools.  This article provides an overview of the information required to be included in the periodic and annual statements and will also discuss other aspects of the regulation.

Overview of the Statements

Generally CPOs are required to distribute, within 30 days of end of the required period (see below), an account statement to each investor the fund.  The account statement must included an itemized “statement of operations” and “statement of changes in net assets” which is presented and computed in accordance with generally accepted accounting principles (“GAAP”).

The statement of operations must separately itemize the following:

  • Realized net gain/loss on commodity interest positions
  • Unrealized net gain/loss on commodity interest positions
  • Total net gain/loss on other transactions (including interest and dividends earned), unless the gain/loss from trading are part of a related trading strategy (see 4.22(e)(3))
  • Total management fees during period
  • Total advisory fees during period (including performance fees/allocations)
  • Total brokerage commissions during period
  • Total of other fees for investment transactions
  • Total of other expenses incurred or accrued by the fund during period

Note: most of the above items must be itemized according to 4.22(e)(1) and special allocations should be noted according to 4.22(e)(2).

The statement of changes in net assets must separately itemize the following:

  • Fund NAV at beginning of period
  • Fund NAV at end of period
  • Total contributions to fund during period
  • Total redemptions (voluntary or involuntary) during period
  • Total fund income/loss during period
  • Total value of investor’s interest in the fund at the end of the period

Monthly or Quarterly Commodity Pool Reporting

For funds which have more than $500,000 of assets, the account statements must be sent to investors on a monthly basis.  The account statement is due to the investor within 30 days of the end of the month.  For funds which have less than $500,000 of assets, the account statements must be sent to investors on (at least) a quarterly basis.  The account statement is due to the investor within 30 days of the end of the quarter.  In both cases, a final report for the year does not need to be sent to fund investors if the CPO’s annual report (described below) is sent to pool participants within 45 calendar days after the end of the fiscal year.

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.*

Annual 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 onve ownership class or series.

In the event that the CPO will not be able to file the annual report with the NFA within the 90 day period, the CPO can file an extension under certain circumstances.  It is very important that the CPO provides the annual report on time or files for the exemption.  If a CPO cannot file the report within the time frame required and does not file for the exemption, the NFA will take action against the CPO see CFTC Fines CPOs For Late Annual Reports.

*Note: if the fund is organized offshore then the CPO may be able to prepare and calculate the annual report in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board, please generally see 4.22(d)(2).

Statements Required to be Signed by Principals

Both the account statement and the annual report must contain a signed affirmation (usually provided by a principal or associated person of the CPO) that the information contained in the account statement is accurate and complete.

Such information shall include:

  • Name of individual signing
  • Capacity of individual signing
  • Name of the CPO
  • Name of the fund

Other Items

Regulation 4.22 is intricate and there are many specifics for certain fund managers.  Specifically, if a commodity fund invests in other commodity funds there are certain rules which I have not covered in-depth in this overview.

With regard to the fiscal year, most commodity pools will elect to have their fiscal year be the calendar year.  A fund can elect to have the fiscal year end on a different date under certain circumstances, see generally 4.22(g).

With regard to account statements and annual reports, these can be provided to fund investors electronically (either through email or through a password-protected website).  In the event a fund manager wants to provide statements in this way, the manager will need to make sure the commodity pool’s offering documents specifically discusses this possibility.  Additionally, the manager should make sure the fund’s subscription documents include a specific place for the investor to consent to the electronic delivery of the account statement or annual report.

Conclusion

Regulation 4.22 is detailed and, for some groups, complicated.  The NFA has shown a willingness to send a message to firms which do not follow NFA rules or CFTC regulations.  If you are a CPO and have questions with regard to your account statements or annual reports, please feel free to contact us.

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog as well as the forex registration website.  He can be reached directly at 415-868-5345.

CFTC Amends CPO Reporting Regulations

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CFTC Regulation 4.22 Amended

Earlier this year the Commodities Futures Trading Commission (“CFTC”) proposed amendments to certain Part 4 Regulations.  Last week, after a lengthy comment and revision period, the CFTC published the amendments in the Federal Register.  The effective date of the amendments is December 9, 2009 and will apply to commodity pool annual reports for fiscal years ending December 31, 2009 and later.  [HFLB note: as we have discussed earlier, spot forex hedge fund managers generally are not required to be registered as forex CPOs with the CFTC.  However, when the forex registration rules go into effect, such forex CPOs are going to need to be aware of these reporting requirements.]

The following press release can be found here. The full discussion of the CFTC’s amendment making process and the amendments can be found in Federal Register at 74 FR 57585.  For more information regarding commodity trading and regulation, please see our CTA/CPO Registration and Compliance Guide.

The full amended text of CFTC Regulation 4.22 is reprinted below.

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Release: 5746-09
For Release: November 9, 2009

CFTC Adopts Amendments to Reporting Requirements for Commodity Pool Operators

Washington, DC —The Commodity Futures Trading Commission (CFTC) has adopted amendments to its regulations regarding periodic and annual reporting requirements applicable to commodity pool operators (CPOs). The amendments:

  • specify detailed information that must be included in the periodic account statements and annual reports for commodity pools with more than one series or class of ownership interest;
  • clarify that the periodic account statements must disclose either the net asset value per outstanding participation unit in the pool or the total value of a participant’s interest or share in the pool;
  • extend the time period for filing and distributing annual reports of commodity pools that invest in other funds;
  • codify existing Commission staff interpretations regarding the proper accounting treatment and financial statement presentation of certain income and expense items in the periodic account statements and annual reports;
  • codify exemptions staff has provided to CPOs that operate offshore funds that elected to use non-United States GAAP in the preparation of pool financial statements;
  • streamline annual reporting requirements for pools ceasing operation; and
  • clarify and update several other requirements for periodic and annual reports prepared and distributed by CPOs.

The amendments will become effective 30 days from publication in the Federal Register; changes that affect annual reporting requirements will be applicable to commodity pool annual reports for fiscal years ending December 31, 2009 and later.

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Full Text of Regulation 4.22 (effective December 9, 2009)

PART 4—COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
Subpart B—Commodity Pool Operators

§ 4.22   Reporting to pool participants.

(a) Except as provided in paragraph (a)(4) or (a)(6) of this section, each commodity pool operator registered or required to be registered under the Act must periodically distribute to each participant in each pool that it operates, within 30 calendar days after the last date of the reporting period prescribed in paragraph (b) of this section, an Account Statement, which shall be presented in the form of a Statement of Operations and a Statement of Changes in Net Assets, for the prescribed period. These financial statements must be presented and computed in accordance with generally accepted accounting principles consistently applied. The Account Statement must be signed in accordance with paragraph (h) of this section.

(1) The portion of the Account Statement which must be presented in the form of a Statement of Operations must separately itemize the following information:

(i) The total amount of realized net gain or loss on commodity interest positions liquidated during the reporting period;

(ii) The change in unrealized net gain or loss on commodity interest positions during the reporting period;

(iii) The total amount of net gain or loss from all other transactions in which the pool engaged during the reporting period, including interest and dividends earned on funds not paid as premiums or used to margin the pool’s commodity interest positions;

(iv) The total amount of all management fees during the reporting period;

(v) The total amount of all advisory fees during the reporting period;

(vi) The total amount of all brokerage commissions during the reporting period;

(vii) The total amount of other fees for commodity interest and other investment transactions during the reporting period; and

(viii) The total amount of all other expenses incurred or accrued by the pool during the reporting period.

(2) The portion of the Account Statement that must be presented in the form of a Statement of Changes in Net Assets must separately itemize the following information:

(i) The net asset value of the pool as of the beginning of the reporting period;

(ii) The total amount of additions to the pool, whether voluntary or involuntary, made during the reporting period;

(iii) The total amount of withdrawals from and redemption of participation units in the pool, whether voluntary or involuntary, for the reporting period;

(iv) The total net income or loss of the pool during the reporting period;

(v) The net asset value of the pool as of the end of the reporting period; and

(vi)(A) The net asset value per outstanding participation unit in the pool as of the end of the reporting period, or

(B) The total value of the participant’s interest or share in the pool as of the end of the reporting period.

(3) The Account Statement must also disclose any material business dealings between the pool, the pool’s operator, commodity trading advisor, futures commission merchant, or the principals thereof that previously have not been disclosed in the pool’s Disclosure Document or any amendment thereto, other Account Statements or Annual Reports.

(4) For the purpose of the Account Statement delivery requirement, including any Account Statement distributed pursuant to §4.7(b)(2) or 4.12(b)(2)(ii), the term “participant” does not include a commodity pool operated by a pool operator that is the same as, or that controls, is controlled by, or is under common control with, the pool operator of a pool in which the commodity pool has invested.

(5) Where the pool is comprised of more than one ownership class or series, information for the series or class on which the account statement is reporting should be presented in addition to the information presented for the pool as a whole; except that, for a pool that is a series fund structured with a limitation on liability among the different series, the account statement is not required to include consolidated information for all series.

(6) A commodity pool operator of a pool that meets the conditions specified in paragraph (d)(2)(i) of this section and has filed notice pursuant to paragraph (d)(2)(ii) of this section may elect to follow the same accounting treatment with respect to the computation and presentation of the account statement.

(b) The Account Statement must be distributed at least monthly in the case of pools with net assets of more than $500,000 at the beginning of the pool’s fiscal year, and otherwise at least quarterly; Provided, however, That an Account Statement for the last reporting period of the pool’s fiscal year need not be distributed if the Annual Report required by paragraph (c) of this section is sent to pool participants within 45 calendar days after the end of the fiscal year. The requirement to distribute an Account Statement shall commence as of the date the pool is formed as specified in paragraph (g)(1) of this section.

(c) Except as provided in paragraph (c)(7) or (c)(8) of this section, each commodity pool operator registered or required to be registered under the Act must distribute an Annual Report to each participant in each pool that it operates, and must electronically submit a copy of the Report and key financial balances from the Report to the National Futures Association pursuant to the electronic filing procedures of the National Futures Association, within 90 calendar days after the end of the pool’s fiscal year or the permanent cessation of trading, whichever is earlier; Provided, however, that if during any calendar year the commodity pool operator did not operate a commodity pool, the pool operator must so notify the National Futures Association within 30 calendar days after the end of such calendar year. The Annual Report must be affirmed pursuant to paragraph (h) of this section and must contain the following:

(1) The net asset value of the pool as of the end of each of the pool’s two preceding fiscal years.

(2)(i) The net asset value per outstanding participation unit in the pool as of the end of each of the pool’s two preceding fiscal years, or (ii) The total value of the participant’s interest or share in the pool as of the end of each of the pool’s two preceding fiscal years.

(3) A Statement of Financial Condition as of the close of the pool’s fiscal year and preceding fiscal year.

(4) Statements of Operations, and Changes in Net Assets, for the period between (i) The later of: (A) The date of the most recent Statement of Financial Condition delivered to the National Futures Association pursuant to this paragraph(c); or (B) The date of the formation of the pool; and (ii) The close of the pool’s fiscal year, together with Statements of Operations, and Changes in Net Assets for the corresponding period of the previous fiscal year.

(5) Appropriate footnote disclosure and such further material information as may be necessary to make the required statements not misleading. For a pool that invests in other funds, this information must include, but is not limited to, separately disclosing the amounts of income, management and incentive fees associated with each investment in an investee fund that exceeds five percent of the pool’s net assets. The management and incentive fees associated with an investment in an investee fund that is less than five percent of the pool’s net assets may be combined and reported in the aggregate with the income, management and incentive fees of other investee funds that, individually, represent an investment of less than five percent of the pool’s net assets. If the commodity pool operator is not able to obtain the specific amounts of management and incentive fees charged by an investee fund, the commodity pool operator must disclose the percentage amounts and computational basis for each such fee and include a statement that the CPO is not able to obtain the specific fee amounts for this fund;

(6) Where the pool is comprised of more than one ownership class or series, information for the series or class on which the financial statements are reporting should be presented in addition to the information presented for the pool as a whole; except that, for a pool that is a series fund structured with a limitation on liability among the different series, the financial statements are not required to include consolidated information for all series.

(7) For a pool that has ceased operation prior to, or as of, the end of the fiscal year, the commodity pool operator may provide the following, within 90 days of the permanent cessation of trading, in lieu of the annual report that would otherwise be required by § 4.22(c) or § 4.7(b)(3):

(i) Statements of Operations and Changes in Net Assets for the period between—

(A) The later of: (1) The date of the most recent Statement of Financial Condition filed with the National Futures Association pursuant to this paragraph (c); or (2) The date of the formation of the pool; and (B) The close of the pool’s fiscal year or the date of the cessation of trading, whichever is earlier; and

(ii)(A) An explanation of the winding down of the pool’s operations and written disclosure that all interests in, and assets of, the pool have been redeemed, distributed or transferred on behalf of the participants;

(B) If all funds have not been distributed or transferred to participants by the time that the final report is issued, disclosure of the value of assets remaining to be distributed and an approximate timeframe of when the distribution will occur. If the commodity pool operator does not distribute the remaining pool assets within the timeframe specified, the commodity pool operator must provide written notice to each participant and to the National Futures Association that the distribution of the remaining assets of the pool has not been completed, the value of assets remaining to be distributed, and a time frame of when the final distribution will occur.

(C) If the commodity pool operator will not be able to liquidate the pool’s assets in sufficient time to prepare, file and distribute the final annual report for the pool within 90 days of the permanent cessation of trading, the commodity pool operator must provide written notice to each participant and to National Futures Association disclosing:

(1) The value of investments remaining to be liquidated, the timeframe within which liquidation is expected to occur, any impediments to liquidation, and the nature and amount of any fees and expenses that will be charged to the pool prior to the final distribution of the pool’s funds;

(2) Which financial reports the commodity pool operator will continue to provide to pool participants from the time that trading ceased until the final annual report is distributed, and the frequency with which such reports will be provided, pursuant to the pool’s operative documents; and

(3) The timeframe within which the commodity pool operator will provide the final report.

(iii) A report filed pursuant to this paragraph (c)(7) that would otherwise be required by this paragraph (c) is not required to be audited in accordance with paragraph (d) of this section if the commodity pool operator obtains from all participants written waivers of their rights to receive an audited Annual Report, and at the time of filing the Annual Report with National Futures Association, certifies that it has received waivers from all participants. The commodity pool operator must maintain the waivers in accordance with § 1.31 of this chapter and must make the waivers available to the Commission or National Futures Association upon request.

(8) For the purpose of the Annual Report distribution requirement, including any annual report distributed pursuant to §4.7(b)(3) or 4.12(b)(2)(iii), the term “participant” does not include a commodity pool operated by a pool operator that is the same as, or that controls, is controlled by, or is under common control with, the pool operator of a pool in which the commodity pool has invested; Provided, That the Annual Report of such investing pool contain financial statements that include such information as the Commission may specify concerning the operations of the pool in which the commodity pool has invested.

(d)

(1) The financial statements in the Annual Report must be presented and computed in accordance with generally accepted accounting principles consistently applied and must be audited by an independent public accountant. The requirements of § 1.16(g) of this chapter shall apply with respect to the engagement of such independent public accountants, except that any related notifications to be made may be made solely to the National Futures Association, and the certification must be in accordance with § 1.16 of this chapter, except that the following requirements of that section shall not apply:

(i) The audit objectives of § 1.16(d)(1) concerning the periodic computation of minimum capital and property in segregation;

(ii) All other references in § 1.16 to the segregation requirements; and

(iii) Section 1.16(c)(5), (d)(2), (e)(2), and (f).

(2)

(i) The financial statements in the Annual Report required by this section or by § 4.7(b)(3) may be presented and computed in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board if the following conditions are met:

(A) The pool is organized under the laws of a foreign jurisdiction;

(B) The Annual Report will include a condensed schedule of investments, or, if required by the alternate accounting standards, a full schedule of investments;

(C) The preparation of the pool’s financial statements under International Financial Reporting Standards is not inconsistent with representations set forth in the pool’s offering memorandum or other operative document that is made available to participants;

(D) Special allocations of ownership equity will be reported in accordance with § 4.22(e)(2); and

(E) In the event that the International Financial Reporting Standards require consolidated financial statements for the pool, such as a feeder fund consolidating with its master fund, all applicable disclosures required by generally accepted accounting principles for the feeder fund must be presented with the reporting pool’s consolidated financial statements.

(ii) The commodity pool operator of a pool that meets the conditions specified in this paragraph (d)(2) may claim relief from the requirement in paragraph (d)(1) of this section by filing a notice with the National Futures Association, within 90 calendar days after the end of the pool’s fiscal year.

(A) The notice must contain the name, main business address, main telephone number and the National Futures Association registration identification number of the commodity pool operator, and name and the identification number of the commodity pool.

(B) The notice must include representations regarding the pool’s compliance with each of the conditions specified in § 4.22(d)(2)(A) through (D), and, if applicable, (E); and

(C) The notice must be signed by the commodity pool operator in accordance with paragraph (h) of this section.

(e)

(1) The Statement of Operations required by this section must itemize brokerage commissions, management fees, advisory fees, incentive fees, interest income and expense, total realized net gain or loss from commodity interest trading, and change in unrealized net gain or loss on commodity interest positions during the pool’s fiscal year. Gains and losses on commodity interests need not be itemized by commodity or by specific delivery or expiration date.

(2)

(i) Any share of a pool’s profits or transfer of a pool’s equity which exceeds the general partner’s or any other class’s share of profits computed on the general partner’s or other class’s pro rata capital contribution are ‘‘special allocations.’’ Special allocations of partnership equity or other interests must be recognized in the pool’s Statement of Operations in the same period as the net income, interest income, or other basis of computation of the special allocation is recognized. Special allocations must be recognized and classified either as an expense of the pool or, if not recognized as an expense of the pool, presented in the Statement of Operations as a separate, itemized allocation of the pool’s net income to arrive at net income available for pro rata distribution to all partners.

(ii) Special allocations of ownership interest also must be reported separately in the Statement of Partners’ Equity, in addition to the pro-rata allocations of net income, as to each class of ownership interest.

(3) Realized gains or losses on regulated commodities transactions presented in the Statement of Operations of a commodity pool may be combined with realized gains or losses from trading in non-commodity interest transactions, provided that the gains or losses to be combined are part of a related trading strategy. Unrealized gains or losses on open regulated commodity positions presented in the Statement of Operations of a commodity pool may be combined with unrealized gains or losses from open positions in non-commodity positions, provided that the gains or losses to be combined are part of a related trading strategy.

(f)

(1)

(i) In the event the commodity pool operator finds that it cannot distribute the Annual Report for a pool that it operates within the time specified in paragraph (c) of this section without substantial undue hardship, it may file with the National Futures Association an application for extension of time to a specified date not more than 90 calendar days after the date as of which the Annual Report was to have been distributed. The application must be made by the pool operator and must:

(A) State the name of the pool for which the application is being made;

(B) State the reasons for the requested extension;

(C) Indicate that the inability to make a timely filing is due to circumstances beyond the control of the pool operator, if such is the case, and describe briefly the nature of such circumstances;

(D) Contain an undertaking to file the Annual Report on or before the date specified in the application; and

(E) Be filed with the National Futures Association prior to the date on which the Annual Report is due.

(ii) The application must be accompanied by a letter from the independent public accountant answering the following questions:

(A) What specifically are the reasons for the extension request?

(B) Do you have any indication from the part of your audit completed to date that would lead you to believe that the commodity pool operator was or is not meeting the recordkeeping requirements of this part 4 or was or is not complying with the §4.20(c) prohibition on commingling of property of any pool with the property of any other person?

(iii) Within ten calendar days after receipt of an application for an extension of time, the National Futures Association shall:

(A) Notify the commodity pool operator of the grant or denial of the requested extension, or

(B) Indicate to the pool operator that additional time is required to analyze the request, in which case the amount of time needed will be specified.

(2) In the event a commodity pool operator finds that it cannot obtain information necessary to prepare annual financial statements for a pool that it operates within the time specified in either paragraph (c) of this section or § 4.7(b)(3)(i), as a result of the pool investing in another collective investment vehicle, it may claim an extension of time under the following conditions:

(i) The commodity pool operator must, within 90 calendar days of the end of the pool’s fiscal year, file a notice with the National Futures Association, except as provided in paragraph (f)(2)(v) of this section.

(ii) The notice must contain the name, main business address, main telephone number and the National Futures Association registration identification number of the commodity pool operator, and name and the identification number of the commodity pool.

(iii) The notice must state the date by which the Annual Report will be distributed and filed (the ‘‘Extended Date’’), which must be no more than 180 calendar days after the end of the pool’s fiscal year. The Annual Report must be distributed and filed by the Extended Date.

(iv) The notice must include representations by the commodity pool operator that:

(A) The pool for which the Annual Report is being prepared has investments in one or more collective investment vehicles (the ‘‘Investments’’);

(B) For all reports prepared under paragraph (c) of this section and for reports prepared under § 4.7(b)(3)(i) that are audited by an independent public accountant, the commodity pool operator has been informed by the independent public accountant engaged to audit the commodity pool’s financial statements that specified information required to complete the pool’s annual report is necessary in order for the accountant to render an opinion on the commodity pool’s financial statements. The notice must include the name, main business address, main telephone number, and contact person of the accountant; and

(C) The information specified by the accountant cannot be obtained in sufficient time for the Annual Report to be prepared, audited, and distributed before the Extended Date.

(D) For unaudited reports prepared under § 4.7(b)(3)(i), the commodity pool operator has been informed by the operators of the Investments that specified information required to complete the pool’s annual report cannot be obtained in sufficient time for the Annual Report to be prepared and distributed before the Extended Date.

(v) For each fiscal year following the filing of the notice described in paragraph (f)(2)(i) of this section, for a particular pool, it shall be presumed that the particular pool continues to invest in another collective investment vehicle and the commodity pool operator may claim the extension of time; Provided, however, that if the particular pool is no longer investing in another collective investment vehicle, then the commodity pool operator must file electronically with the National Futures Association an Annual Report within 90 days after the pool’s fiscal year-end accompanied by a notice indicating the change in the pool’s status.

(vi) Any notice or statement filed pursuant to this paragraph (f)(2) must be signed by the commodity pool operator in accordance with paragraph (h) of this section.

(g)

(1) A commodity pool operator may initially elect any fiscal year for a pool, but the first fiscal year may not end more than one year after the pool’s formation. For purposes of this section, a pool shall be deemed to be formed as of the date the pool operator first receives funds, securities or other property for the purchase of an interest in the pool.

(2) If a commodity pool operator elects a fiscal year other than the calendar year, it must give written notice of the election to all participants and must file the notice with the National Futures Association within 90 calendar days after the date of the pool’s formation. If this notice is not given, the pool operator will be deemed to have elected the calendar year as the pool’s fiscal year.

(3) The commodity pool operator must continue to use the elected fiscal year for the pool unless it provides written notice of any proposed change to all participants and files such notice with the National Futures Association at least 90 days before the change and the National Futures Association does not disapprove the change within 30 days after the filing of the notice.

(h)

(1) Each Account Statement and Annual Report, including an Account Statement or Annual Report provided pursuant to §4.7(b) or 4.12(b), must contain an oath or affirmation that, to the best of the knowledge and belief of the individual making the oath or affirmation, the information contained in the document is accurate and complete; Provided, however, That it shall be unlawful for the individual to make such oath or affirmation if the individual knows or should know that any of the information in the document is not accurate and complete.

(2) Each oath or affirmation must be made by a representative duly authorized to bind the pool operator, and

(i) for the copy of a commodity pool’s Annual Report submitted to the National Futures Association, such representative shall satisfy the required oath or affirmation through compliance with the National Futures Association’s electronic filing procedures, and

(ii) for a commodity pool Account Statement or Annual Report distributed to participants, a facsimile of the manually signed oath or affirmation of such representative may be used so long as the manually signed original is retained in accordance with §4.23.

(3) For each manually signed oath or affirmation, there must be typed beneath the signed oath or affirmation:

(i) The name of the individual signing the document;

(ii) The capacity in which he is signing;

(iii) The name of the commodity pool operator for whom he is signing; and

(iv) The name of the commodity pool for which the document is being distributed.

(i) The Account Statement or Annual Report may be distributed to a pool participant by means of electronic media if the participant so consents; Provided, That prior to the transmission of any Account Statement or Annual Report by means of electronic media, a commodity pool operator must disclose to the participant that it intends to distribute electronically the Account Statement or Annual Report or both documents, as the case may be, absent objection from the participant, which objection, if any, the participant must make no later than 10 business days following its receipt of the disclosure.

(Approved by the Office of Management and Budget under control number 3038–0005)

(Secs. 2(a)(1), 4c(a)–(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17, Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)–(d), 6f, 6g, 6k, 6m, 6n, 12a, 19 and 21; 5 U.S.C. 552 and 552b))

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47 FR 57011, Dec. 22, 1982; 52 FR 41986, Nov. 2, 1987; 65 FR 81334, Dec. 26, 2000; 67 FR 77411, Dec. 18, 2002; 68 FR 47234, Aug. 8, 2003; 68 FR 52837, Sept. 8, 2003; 71 FR 8942, Feb. 22, 2006]

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog as well as the forex registration website.  He can be reached directly at 415-868-5345.

Hedge Fund Manager Registration to Cost Taxpayers $140 Million (at least)

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CBO Calculates Cost of House Hedge Fund Bill

This past week the Congressional Budge Office (“CBO”) released a cost estimate of H.R. 3818, the Private Fund Investment Advisers Registration Act of 2009.  In a number of private conversations I have had about hedge fund registration over the last 9-12 months one of the issues that was continually raised was appropriate funding for the SEC.  As we have seen recently (most notably from the Inspector General’s Madoff report), the SEC’s budget is not large enough to adequately fulfill their investor protection mandate.  Adding hedge fund registration would obviously further burden the cash-strapped agency (for more see Schumer Proposal to Double SEC Budget).  According to the CBO, and based on the SEC’s estimates that it will need to add 150 employees, the estimated outlays over four years will be equal to $140 million.

However, taxpayers should understand that this assumes that registration will only be required for those managers with at least $150 million in assets under management.   At the $150 million AUM level, the CBO expects that 1,300 hedge fund managers would be required to register.  The current draft of the Senate hedge fund registration bill calls for managers with $100 million in AUM to register – lowering the AUM exemption threshold will increase the amount of managers required to register.  Additionally, there are outstanding political issues.  First, it is unclear whether the final bill will require private equity fund managers and venture capital fund managers to register – we do not necessarily understand the arguably arbitrary carve-out for these industries.  Second, it is clear that a majority of the state securities commissions are unable and unwilling to be responsible for overseeing managers with up to $100 million in assets.  Hedge fund managers who would subject to state oversight would rightly want to be subject to SEC oversight (which does not say much for many state securities commissions).  These issues will continue to be addressed during the political sausage-making process.

Of additional interest – the CBO estimates that hedge fund registration is likely to cost around $30,000 per each SEC registrant which is welcome news to investment adviser compliance consultants and hedge fund lawyers!

For full report, please see full CBO Hedge Fund Cost Estimate.

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Other related hedge fund law articles include:

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

Hedge Funds and Insider Trading after Galleon

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By Bart Mallon, Esq. (www.colefrieman.com)

High Profile Case Highlights Issues for Hedge Fund Managers to Consider

Insider trading is now an operational issue for hedge fund managers.  The high profile insider trading case involving RR and the Galleon hedge fund has put the spotlight directly on hedge funds again and has also sparked a debate of sorts on the subject.  Given the potential severity of penalties for insider trading, it is surprising that we still periodically hear about such cases, but nevertheless it is something that is always going to be there – human nature is not going to change.

As such hedge fund managers need to be prepared to deal with this issue internally (through their compliance procedures) and also will need to be able to communicate how they have addressed this issue to both the regulators and institutional investors.  While managers always need to be vigilant in their enforcement of compliance policies and procedures, during this time of heightened insider trading awareness, managers need to be even more vigilant about protecting themselves.  As the Galleon liquidation too vividly shows, a lapse in operational oversight can and will take down an entire organization.

Insider Trading Overview and Penalties

We have discussed insider trading before, but as a general matter insider trading refers to the practice of trading securities based on material, non-public information.  Whether information is material depends on case law.  In general information will be material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision (see TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).  Information is non-public if it has not been disseminated in a manner making it available to investors generally. An insider is generally defined as officers, directors and employees of a company but it can also refer to a company’s business associates in certain circumstances (i.e. attorneys, accountants, consultants, and banks, and the employees of such organizations).  Additionally, persons not considered to be insiders may nevertheless be charged with insider trading if they received tips from insiders – such persons generally are referred to as tippees and the insider is generally referred to as the tipper.  [HFLB note: more information on insider trading generally can be found in the discussion of Regulation FD on the SEC website.]

The penalties for insider trading are potentially harsh – censures, cease and desist orders, fines, suspension and/or revocation of securities licenses are all potential penalties.  Depending on the severity of the insider trading there may be criminal sanctions in addition to the listed civil penalties.  Securities professionals (or other business professionals like an attorney or accountant) may jeopardize their ability to work in their industry if they are caught engaging in insider trading which, for most people, would be a large enough deterrent to engage in such activity.

Addressing Compliance Inside the Firm

Insider trading is usually addressed in the firm’s compliance policies and procedures.  Indeed, Section 204A of the Investment Adviser Act of 1940 requires SEC registered investment advisers to maintainpolicies and procedures to detect against insider trading.

Usually such policies and procedures forbid employees from trading on material non-public information (as well as “tipping” others about material non-public information).  Additionally, employees typically are required to disclose any non-public material information they receive to the chief compliance officer (“CCO”) of the firm.  The employee is generally prohibited from discussing the matter with anyone inside or outside of the firm.  The policies and procedures may require the CCO to take some sort of action on the matter.  There are a number of different ways that the CCO can handle the situation including ordering a prohibition on trading in the security (including in options, rights and warrants on the security).  The CCO may also initiate a review of the personal trading accounts of firm employees.  Usually when the CCO is informed of such information the CCO would contact outside counsel to discuss the next course of action.

Dealing with Regulators

While many large hedge fund managers are registered as investment advisors with the SEC, many still remain unregistered in reliance on the exemption provided by Section 203(b)(3).  With the Private Fund Investment Advisers Registration Act likely to be passed within the next year, managers with a certain amount of AUM (either $100 million or $150 million as it now stands) will be forced to register with the SEC.  Of course, this means that such managers will be subject to examination by the SEC and insider trading will be one of the first issues that a manager will likely deal with in an examination.

As we discussed in an earlier insider trading article, the SEC has unabashedly proclaimed war against insider trading and they will be aggressively pursuing any leads which may implicate managers.

Some compliance professionals believe that the SEC comes in with a view that the manager is guilty until proven innocent.  While I do not necessarily subscribe to this blanket viewpoint, I do believe that managers, as a best practice, should be able to show the SEC the steps they have taken to ensure that compliance with insider trading prohibitions is a top priority of the firm.  The firm and CCO should be prepared to describe their policies and structures that are in place to deal with this issue.

Institutional Standpoint

Potentially more important than how a firm deals with the SEC, is how a firm describes their internal compliance procedures to institutional investors.  The question then becomes, how are institutional investors going to address this risk with regard to the managers they allocate to – what will change?

Right now it appears a bit unclear.  Over the past week I have talked with a number of different groups who are involved hedge fund compliance, hedge fund consulting, and hedge fund due diligence and I seem to get different answers.  Some groups think that institutional investors will be focusing on this issue (as many managers know, one of the important issues for institutional investors is the avoidance of “headline risk”); other groups seem to think that this is an issue that institutional groups are not going to focus on because there are other aspects of a manager’s investment program and operations which deserve more attention.

We tend to agree more with the second opinion, but we still believe that robust insider trading compliance policies and procedures are vital to the long term success of any asset management company.  We also encourage groups to discuss their current procedures with their compliance consultant or hedge fund attorney.

Outsourcing and Technology solutions

Many large managers have implemented compliance programs which have technology solutions designed to track employee trading.  Presumably there will be technology programs developed to address this concern for manager.  Although I do not currently know of any specific outsourced or technology solutions which address this issue, I anticipate discussing this in greater depth in the future – perhaps there is some data warehousing solution.  [HFLB note: please contact us if you would like to discuss such a solution with us.]

Final Thoughts

The Galleon insider trading case could not have happened at a worse time for the hedge fund industry which is trying to put its best face forward as Congress determines its future regulatory fate.  However, increased awareness of this issue will force managers to address it from an operational standpoint which will only help these managers down the road.  While the full effect of this case will not be understood for a while, in the short term it is likely to cost managers in terms of time and cost to review and implement increased operational awareness and procedures.

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Other related hedge fund law articles:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and the Series 79 exam website.  He can be reached directly at 415-868-5345.

Insider Trading Overview

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In light of the recent focus on insider trading, we are publishing the SEC’s discussion on Insider Trading which can also be found here.  The information below contains a broad overview of some of the important aspects which hedge fund managers should understand about the insider trading prohibitions.

For a greater background discussion on the legal precedents which helped shaped the state of law today, please see Insider Trading—A U.S. Perspective, a speech by staff of the SEC.

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Insider Trading

“Insider trading” is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. For more information about this type of insider trading and the reports insiders must file, please read “Forms 3, 4, 5” in our Fast Answers databank.

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the SEC are cases against:

  • Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;
  • Friends, business associates, family members, and other “tippees” of such officers, directors, and employees, who traded the securities after receiving such information;
  • Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
  • Government employees who learned of such information because of their employment by the government; and
  • Other persons who misappropriated, and took advantage of, confidential information from their employers.

Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.

The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues where the courts have disagreed. Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is “aware” of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

Rule 10b5-2 clarifies how the misappropriation theory applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.

For more information about insider trading, please read Insider Trading—A U.S. Perspective, a speech by staff of the SEC.

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and the Series 79 exam website.  He can be reached directly at 415-868-5345.

Section 204A | Investment Advisers Act of 1940

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Section 204A — Prevention of Misuse of Nonpublic Information

Every investment adviser subject to section 204 shall establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser’s business, to prevent the misuse in violation of this Act or the Securities Exchange Act of 1934, or the rules or regulations thereunder, of material, nonpublic information by such investment adviser or any person associated with such investment adviser. The Commission, as it deems necessary or appropriate in the public interest or for the protection of investors, shall adopt rules or regulations to require specific policies or procedures reasonably designed to prevent misuse in violation of this Act or the Securities Exchange Act of 1934 (or the rules or regulations thereunder) of material, nonpublic information.

Public Comments on SEC Proposed “Pay to Play” Rules

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SEC Proposed Pay to Play Rules Draw Many Comments

Earlier this year the SEC proposed so-called “pay to play” rules which would restrict SEC registered investment advisers from managing money from state and local governments under certain circumstances.  According to the SEC press release, “the measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials.” The rule would do four major things:

  1. Restricting Political Contributions
  2. Banning Solicitation of Contributions
  3. Banning Third-Party Solicitors
  4. Restricting Indirect Contributions and Solicitations

The comment period, which ran for 60 days, produced some very good points.  As a general matter most groups opposed the proposed rules for some reason or another.  Below I have gathered some of the more interesting or important points which were raised in the comments which are publicly available here.  All of the following quotes are directly from the comments of the submitters which are identified.

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Joan Hinchman – Executive Director, President and CEO, of NSCP (National Society of Compliance Professionals Inc.)

  • The practical result of the ban will be that an adviser will be economically compelled to end its relationship with a governmental entity.
  • The ban will deprive participants and beneficiaries of public funds of well qualified advisers and drive up the cost of investment advisory services due to higher compliance costs.
  • The Rule will affect at a minimum all registered investment advisers that not only advise governmental public pension funds, but also may cover investment companies in which governmental pension funds choose to invest.
  • Advisers lacking capital to hire employees to obtain government clients or the experience and sophistication to do so would be placed at a material competitive disadvantage.

These comments can be found here.

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Jeffrey M. Stern and Robert W. Schwabe – Managing Partners of Forum Capital Securities, LLC

Forum Capital Concurs wholeheartedly with those persons and entities that have commented on the Proposed Rule to date that banning investment advisers from compensating third-party placement agents for securing capital commitments from public pension fund investors would:

  • Unfairly advantage private investment firms large enough to employ an internal marketing and investor relations staff over those firms that cannot afford to employ such a staff internally;
  • Limit the universe of investment opportunities presented to public pension funds for their consideration;
  • Deprive private investment firms of the services of legitimate placement agents that have contributed to the success of many investment advisers already existing and thriving prior to the promulgation of the Proposed Rule, thereby limiting the opportunities of new private investment firms to successfully raise funds, execute their investment strategies and grow into market leading investment firms;
  • Reduce competition within the investment advisory business in general and the various alternative investment asset classes in particular; and
  • Reduce the amount of capital available to companies that rely on private investment firms for their financial support.

These comments can be found here.

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Sue Toigo – Chairman of Fitzgibbon Toigo Associates in Los Angeles California

  • Without placement agents, the ability of emerging asset management firms, the majority of which are minority- and women-owned firms, to gain the business of the large public pension funds becomes virtually impossible.
  • Under the proposed regulation, small emerging companies will find it increasingly challenging to market their investment products to pension funds.

These comments can be found here.

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William J. Zwart – BerchWood Partners, LLC

  • Emerging managers would not be able to effectively access or approach the public entity investment community without the support of the placement agent community.

These comments can be found here.

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R. Dean Kenderdine – Executive Director and Secretary to the Board of Trustees of State Retirement and Pension System of Maryland

  • The strict outright prohibition of investment management firms’ use of placement agents to implement their marketing efforts to public pension funds would result in increased costs to the investment firms and a reduction in viable investment opportunities being presented to public pension funds.
  • Public funds will not be presented with the broadest array of investment opportunities and hinder the competitiveness of the investment management marketplace.
  • Placement agents being prohibited would have an adverse impact on our return potential and increase our cost of operations.

These comments can be found here.

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Fernando Ortiz Vaamonde – Managing Partner of ProA Capital de Inversiones

  • An outright ban on placement firms would unfairly disadvantage small- and mid-size firms, many of which are unlikely to be able to recruit and retain significant in-house fund-raising capabilities.

These comments can be found here.

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Keith Breslauer – Managing Director of Patron Capital Limited

  • With the new rule, Patron would not be able to without great difficulty, expand its investor base to include public pension plans.
  • The effect of the new rule is to harm the fund raising abilities of funds like Patron and materially impact the investing opportunities of public pension plans.

These comments can be found here.

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Brian Fitzgibbon – CEO of Fitzgibbon Toigo & CO., LLC

  • Without placement agent assistance, some of the best fund managers may never get to market.
  • A ban on placement agents is unfair, irrational and harmful to Private Equity. There will always be some corrupt public officials and organizations that want to game the system.

These comments can be found here.

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B. Jack Miller – General Motors Asset Management

  • Many partnerships are too small to have their own marketing staff and rely on third party PA’s to introduce them to investors.

These comments can be found here.

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Jake Elmhirst – Global Co-Head Private Funds Group of UBS Securities, LLC

USB strongly believes that:

  • Registered placement agents play a beneficial role in the capital markets;
  • The proposed ban would be detrimental to both private equity managers and their public pension plan investors;
  • The proposed ban in lA-291O is unnecessary and overbroad, and the Commission can regulate registered broker-dealer placement agents through other means;
  • The placement agent ban in IA-2910 purports to be modeled on MSRB Rule G-38 but is in fact inconsistent with that rule and the policies supporting it; and
  • The Commission should consider alternatives to a ban on all intermediaries, including an exemption for registered broker-dealer placement agents, and increasing regulation of properly registered placement agents.

These comments can be found here.

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Thomas P. DiNapoli – State Comptroller

  • Under the proposed SEC rule, it is not clear if the investment adviser would subsequently be prohibited from earning compensation for advisory services provided to the Fund.
  • It is important that the final rule adopted by the SEC clearly articulate what behavior is prohibited in making contributions or soliciting or coordinating payments to state or local political parties.

These comments can be found here.

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Melinda Gagyor – Fulcrum Financial Inquiry, LLC

The proposed placement agent ban should be eliminated because:

  • It will devastate the placement agent business and cause severe job losses in an already troubled economy;
  • The vast majority of emerging, small and middle-market investn1ent managers will simply not survive or be forced to operate at a huge disadvantage;
  • Pension funds will see a significant reduction in their access to potential investment opportunities; and
  • Pension funds will no longer be able to use placement agents to help them pre-screen potential investment manager candidates

These comments can be found here.

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Ron S. Geffner – Partner of Sadis & Goldberg, LLP

While we strongly support the SEC’s efforts to eliminate corruption in connection with “pay to play” practices, the proposed ban on placement agents’ solicitation of government investors is overreaching and will:

  • Deprive government investors of the benefits provided by placement agents, namely access to a broader range of potential investment opportunities and assistance with due diligence efforts, and
  • Hinder smaller advisory firms in their efforts to attract government investors, as smaller firms generally have less in-house resources and rely more on the use of placement agents in soliciting government investors.

These comments can be found here.

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Fred Gortner – Managing Director of Paladin Realty Partners, LLC

  • Without quality placement agents like Triton Pacific, emerging small and mid-cap investment management firms like ours would be forced to operate at a significant and inequitable disadvantage to larger investment managers that have the financial resources to employ large, experienced teams of investor relations and in-house placement professionals.

These comments can be found here.

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Drew Maxwell

  • Your proposed ban on placement agents will unjustly penalize a huge percentage of emerging, small, minority-owned and middle-market investment managers, as these firms rely extensively on placement agents to help them.

These comments can be found here.

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Joseph M. Velli – Chairman and Chief Executive Office of BNY ConvergEx Group, LLC

  • While we believe that the general ban on third-party solicitors is unnecessary, we are concerned in particular about the vagueness of the rule’s definition of “related person”.
  • We believe it is critical for the SEC to clarify the test for control included in the definition of “related person”.

These comments can be found here.

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Frode Strand-Nielsen – Managing Partner of FSN Capital Partners A.S.

  • It would be highly challenging for us to raise capital from international in institutions unless we had the assistance of a legitimate placement agent.
  • If you take away the role of a placement agent, you will deprive firms like ours of the ability to raise capital in the United States, and you will also seriously impair the pension funds’ capacity to invest with the best private equity firms internationally.

These comments can be found here.

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Mark G. Heesen – President of National Venture Capital Association

  • It is in the interest of the entire venture capital community if firms retain the option of using placement agents for marketing to all potential investors, including public pension funds.

These comments can be found here.

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Richard H. Hurd, Jr. – President of Strategic Capital Partners

  • We know first hand the value that qualified placement agents can provide particularly to emerging, small and mid-cap investment management firms. Without such services, smaller firms have limited access to the institutional market. Likewise, pension fund will be prohibited from participating in the entrepreneurial strategies and success of companies like ours.

These comments can be found here.

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Other related hedge fund law articles:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog.  If you are a hedge fund manager who is looking to start a hedge fund or if you have questions about your investment advisor compliance program, please contact us or call Mr. Mallon directly at 415-868-5345.