Category Archives: Hedge Fund Questions and Answers

Hedge Fund Websites – How to Run a Hedge Fund Website

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A common question from start-up hedge fund managers is what kind of a website can I have and how do I go about getting investors through an internet solicitation? The unfortunate answer is that hedge fund managers must be very careful when they are designing their website. In general, websites for a hedge fund or a hedge fund manager need to be very low key and potentially password protected. This is especially important in the current regulatory enviornment because securities officials, at both the federal and state level, are becoming more and more vigilant about enforcing the website solicitation rules. This article will briefly detail the legal background and some website best practices.

Regulation D – no “public offering”

Most hedge funds are offered to investors through a Regulation D private placement offering. One of the requirements of the Reg. D offering is that the sale of securities (interests in the hedge fund) is not done through a “public offering.” While there is no exact definition of “public offering,” it will generally mean that the hedge fund is not allowed to offer or sell interests through general solicitation or general advertising. According to the SEC, the analysis can be broken down into two main questions: (i) is a communication a general solicitation or advertisement, and, if so, (ii) is it being used to offer or sell securities? If the answer to either of these questions is negative, the fund is not in violation of public offering rules.

Regulation D – the “pre-existing” relationship

If a private placement is offered to potential investors with whom the hedge fund manager has no pre-existing relationship, the SEC may conclude that there was a general solicitation in violation of the Reg D rules.

Frequently, an issuer can satisfy the pre-existing relationship requirement through prior investment or other business dealings with the potential purchaser. The pre-existing relationship generally involves at least some degree of contact between the issuer and the prospective purchaser prior to the offering – generally 30 days from a “first contact.”

[HFLB note: there are a couple of very important no-action letters on this subject. I will be posting these in the next couple of days.]

Website Best Practices

We will generally recommend that all web presence be minimized. The two most important principles with regard to web presence and web communications are (1) do not name the hedge fund and (2) do not personally, or by fiat, write that you manage a hedge fund. Besides those two overriding items, we recommend that the web presence is minimal at all times. However, we are aware that from a business standpoint, the manager would like to have a web presence.

There are five important parts to a hedge fund website:

The Splash Page

The hedge fund manager should have an initial “splash page” which might include the name of the management company (do not say you are an “investment advisor” unless registered as such in your state of residence or with the SEC). The splash page should include very minimal information.

Note: you should not include your phone number or contact information on this splash page.

Registration Page

This page should have questions to determine if a viewer is qualified to be viewing the fund’s information over the internet. Generally this will include the accredited investor qualifications; it may also mean that the qualified client qualifications are also included.

Login Page (may be on the splash page)

This page will be for viewers who are either currently invested in your fund or who have met the qualifications of registration.

Password protected content

All identifying information of the fund and management company should be password protected. You should never post the fund’s offering documents on the internet unless there are stringent controls in place to make sure that the offering documents can only be viewed by the one investor they are intended for – even if there are these stringent controls, we would normally recommend against this practice.

General disclaimer

The site should have a general disclaimer which should be prepared by an attorney. Additionally, all performance information within the password protected portion of your website should have all appropriate disclaimers.

Note: it is recommended that once you have an almost final draft of the website, you should have your lawyer review before it goes live.

Legal Developments and Conclusion

The regulators are very sensitve about website solicitations. For example,the State of Massachusetts is trying to fine activist hedge fund manager Phillip Goldstein, of Bulldog Investors, because of how he designed his fund’s website. The famed investment adviser is under prosecution by Massachusetts for allowing potential investors unrestricted access to Bulldog’s website. [HFLB to insert the complaint.]

Because of this and other activity it is extremely important that you have your hedge fund attorney discuss the website rules with you. Please contact us if you have further questions or if you would like help launching your hedge fund website.

Blue sky laws and filings for hedge funds

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The term “blue sky laws” refers, generically, to any of the securities laws of the individual states.  Each state has a set of laws on its books dealing with securities.  These laws have many similarities to the securities laws at the federal level (the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisers Act of 1940); in fact, many of the state blue sky laws are based on the laws at the federal level.  The state blue sky laws are enforced by the state securities administrator which is the state’s enforcement agency – it serves a similar function as the SEC does at the federal level.  Additionally, the state securities administrator may work in conjunction with the SEC in certain matters.

There are two distinct instances when, in virtually all of the states, blue sky laws become applicable to hedge fund managers (even unregistered hedge fund managers).

Blue Sky Anti-Fraud Authority

The first instance is when the state administrator pursues an action (i.e. request information, etc.) against a hedge fund manager (even if the hedge fund manager is unregistered) pursuant to its anti-fraud authority.  While each state’s anti-fraud statutes will differ, they are all drafted very broadly to give the state administrator wide lattitude for going after potential hedge fund frauds.  However, under this authority, the state administrator can also go after honest hedge fund managers.  While uncommon, it may happen in certain instances.  If it does, you should contact an experienced attorney immediately.  For most all unregistered hedge fund managers, this should not be something to worry about.

Blue Sky Filing Requirements

The second and more common instance when blue sky laws are implicated is when a fund will need to make a “blue sky filing.” As a general statement, a hedge fund will need to make a “blue sky filing” in each state where one of its investors resides.  The filing will generally need to be made within 15 days of the date of the investment into the hedge fund and the investment manager will need to pay a fee which will usually range anywhere from $75-$300 or more.  (Please note: for investors from New York a manager will need to make the blue sky filing prior to an initial investment into the fund.  The New York filing fee is going to be approzimately $1,400.)

To make a blue sky filing, you will first need to provide your hedge fund attorney or your compliance consultant with a few items of information including:

1. state where the investor resides
2. amount of the investment (including the amount of all previous investments)
3. the minimum investment amount (can be found in the hedge fund offering documents)
4. the management fee (can be found in the hedge fund offering documents)

After recieving this information your lawyer will complete a Form D and a Form U-2 and will help coordinate the filing of these documents with the appropriate state administrator.  The lawyer will also send a copy of Form D to the SEC for filing.  Form D filings are searchable through the SEC Edgar search engine.

Blue Sky Questions

Question: Does the fund or the management company pay the blue sky filing fees?

Answer: Most all offering documents which I have seen specifically name blue sky filing fees as an expense of the fund.  However, if this is not specifically named as a fund expense in your fund’s offering documents, it will likely still be a fund expense as most fund’s have a general catch-all for expenses like these.  If you have any specific questions, it is best to get clarity from your attorney.

Question: Does a manager have to pay the blue sky filing fee to each state on a yearly basis?

Answer: This is a good question.  As with many blue sky questions, it will depend on the specific state.  Some states only require a one-time filing fee, other states require that the filing fee be paid on an annual basis.  New York is a combination of these two as its filing fee is good for four years.  Your attorney or compliance professional should be able to discuss this with you on a state by state basis.

Hedge fund institutional investor due diligence

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The goal of many hedge funds is to reach a point where they can start attracting investments from institutional investors. Many hedge funds (especially those with pedigreed managers) are able to start with backing from institutional investors while others (including many start up hedge funds) will need to develop a track record before seriously courting these types of investors. This article describes institutional investors and details some of the hedge fund due diligence procedures which institutional investors will put a fund through prior to investing.

What is an institutional investor?

Institutional hedge fund investors include state and corporate retirement and pension plans, endowments (non-profit and educational), banks, insurance companies and other types of corporations and companies. Sometimes there are very large hedge funds which will themselves invest in small and start up hedge funds – in such instances the large hedge fund will be acting as an institutional investor and will require many of the same due diligence materials. Institutional investors are important for the hedge fund community because they provide a very large potential base for investments.

What is hedge fund due diligence?

Hedge fund due diligence is the process that an investor goes through in order to vet a potnetial investment in a hedge fund. Due diligence will include the following:

  • background checks on all of the managers and employees of the management company
  • thorough review of all of the hedge fund offering documents
  • review of the management company’s risk management procedures

Due diligence document request

The timeline for an investment by an institutional investor is likely to be much longer than the time an individual investor will take to invest in your fund. Typically an investment will need to be approved by the managing director in charge of investments or alternatives; then the institutional investor’s compliance department will typically make a request for certain documents and/or other information. A sample list of the documents requested might look like the following:

Please provide the following information:

  1. Brokerage Agreement with [name of hedge fund broker]
  2. Copies of the executed partnership agreement(s)
  3. Copy of executed opinion of legal counsel relating to the legality of the interests [HFLB note: this is not a legal requirement and many funds do not receive an opinion of counsel with regard to these matters]
  4. Copy of executed opinion of legal counsel with respect to U.S. Federal Income Tax Consequences [HFLB note: this is not a legal requirement and many funds do not receive an opinion of counsel with regard to these matters]
  5. Any other legal opinions rendered in connection with the Partnership
  6. Reference name, title and telephone number for each auditor, legal counsel, clearing broker, custodian, consultant, administrator engaged by the Partnership of General Partner for the past two years
  7. A description of valuation policies and procedures [HFLB note: this may not be applicable to a fund; will depend on the investment strategy and the potential investments]

Depending on the nature of the institutional investor, you will see different levels of analysis of the actual trading style and returns of the fund. A sample reqest for information might include the following:

A detailed information on the trading program including:

  • list of investments
  • execution
  • frequency
  • diversification
  • liquidity

A detailed examination of historical returns including:

  • weekly/monthly/annual returns (best/worst/average)
  • sharpe ratio
  • sortino ratio
  • standard deviation
  • VaR
  • drawdown analysis

While I have hit upon most of the high points, any one institutional investor may have requests which are completely different from the items requested above. If you have any questions on the due diligence process or an investment into your fund from institutional investors, please don’t hesitate to contact me directly.

CTA registration requirement and exemption

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Question: does my commodity/futures trading firm need to register as a CTA?

Answer: Generally Section 6m(1) of the Commodities Exchange Act (“CEA”) requires that any person (or firm) which falls within the definition of a CTA be registered as such. Section 6m(1) of the CEA states:

“It shall be unlawful for any commodity trading advisor or commodity pool operator, unless registered under this chapter, to make use of the mails or any means or instrumentality of interstate commerce in connection with his business as such commodity trading advisor or commodity pool operator”

The Commodities Exchange Act (“CEA”) specifically defines a Commodity Trading Adviser (“CTA”) as:

“any person who– (i) for compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in– (I) any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market or derivatives transaction execution facility; (II) any commodity option authorized under section 6c of [the CEA]; or (III) any leverage transaction authorized under section 23 of [the CEA]; or (ii) for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to in clause (i)”

Because the above definition is quite broad, Congress specifically excluded certain groups from the definition. These groups include:

  • any bank or trust company or any person acting as an employee thereof;
  • any news reporter, news columnist, or news editor of the print or electronic media, or any lawyer, accountant, or teacher;
  • any floor broker or futures commission merchant;
  • the publisher or producer of any print or electronic data of general and regular dissemination, including its employees;
  • the fiduciary of any defined benefit plan that is subject to the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.);
  • any contract market or derivatives transaction execution facility; and
  • such other persons not within the intent of this paragraph as the Commission may specify by rule, regulation, or order.

I have previously discussed how to register as a CTA in the article titled How to register as a CPO or CTA.

Question: are there any exemptions from CTA registration?

Answer: Yes. Section 6m(1) of the CEA states:

That the [registration] provisions of this section shall not apply to any commodity trading advisor who, during the course of the preceding twelve months, has not furnished commodity trading advice to more than fifteen persons and who does not hold himself out generally to the public as a commodity trading advisor. [emphasis added]

To fall within the above exemption, both elements must be met. That is, the CTA must

  • have less than 15 clients over the preceeding 12 months and
  • not hold himself out generally to the public as a CTA

The question then becomes what does “holding out” as a CTA entail?

The CFTC views “holding oneself out as a CTA” to include such conduct as promoting advisory services through mailings, directory listings, and stationery, or otherwise initiating contact with prospective clients. Thus, unless a CTA restricts his clients to family, friends, and existing business associates, a CTA generally will be viewed as holding himself out to the public as a CTA and would not be able to claim the exemption from registration in Section 6m(1).

The CFTC specifically gave such guidance in the following letter.

CFTC Letter No. 97-26
March 26, 1997
Division of Trading & Markets

Re: Section 4m(1): Exemption from CTA Registration

Dear [_______]:

This is in response to your letter dated January 29, 1997 to the Division of Trading and Markets (the “Division”) of the Commodity Futures Trading Commission (the “Commission”), whereby you inquire as to whether you may claim an exemption from registration as a commodity trading advisor (“CTA”) pursuant to Section 4m(1) [now 6m(1)] of the Commodity Exchange Act (the “Act”). *

Based on your letter, we understand the pertinent facts to be as follows. You intend to sell subscriptions to a fax service (the “Service”) entitled “A”, of which you are the sole designer. The Service will provide subscribers with buy and sell recommendations for Eurodollar futures and option contracts traded on “X”.

Section 4m(1) [now 6m(1)] of the Act generally requires that a person who provides commodity interest trading advice to the public must register as a CTA. Section 4m(1) does, however, provide an exemption from registration as a CTA for a person who satisfies two conditions: (1) during the course of the preceding twelve months, he has not furnished commodity trading advice to more than fifteen persons; and (2) he does not hold himself out generally to the public as a CTA. The Division views “holding oneself out as a CTA” to include such conduct as promoting advisory services through mailings, directory listings, and stationery, or otherwise initiating contact with prospective clients.** Thus, unless a CTA restricts his clients to family, friends, and existing business associates, a CTA generally will be viewed as holding himself out to the public as a CTA and would not be able to claim the exemption from registration in Section 4m(1) [now 6m(1)]. This is true whether or not the CTA is advising fifteen or fewer persons, since in order to qualify for the Section 4m(1) exemption, the CTA must satisfy both conditions. [Emphasis added]

Thus, if you plan to solicit clients other than immediate family members, friends, and business associates, you would be holding yourself out as a CTA and would be required to register as such prior to marketing the Service. You would also be required to comply with all other provisions of the Act and Commission’s regulations thereunder applicable to registered CTAs, including Section 4b and Section 4o,*** the antifraud provisions of the Act, Part 4 of the Commission’s regulations applicable to CTAs, and the reporting requirements for traders set forth in Parts 15, 18, and 19 of the Commission’s regulations.

The advice provided herein is based upon the representations that you have made to us. Any different, changed or omitted facts or conditions might require us to reach a different conclusion. In this connection, we request that you notify us immediately in the event your activities change in any way from those as represented to us.

If you have any questions concerning this correspondence, please feel free to contact me or Monica S. Amparo, an attorney on my staff, at (202) 418-5450.

Very truly yours,

Susan C. Ervin

Chief Counsel

* 7 U.S.C. §6m(1) (1994).

** Division of Trading and Markets Interpretative Letter 91-9, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,189 (Dec. 30, 1991). We have enclosed a copy of this letter for your reference.

*** 7 U.S.C. §§ 6b and 6o (1994).

What licenses do you need to start or manage a hedge fund?

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Question: What licenses do you need to start or manage a hedge fund?

Answer: This is a question that comes up quite often. Many people wonder whether they need a series 7 license or the series 65 license or the series 3 to manage a hedge fund. First, a potential hedge fund manager does not need to have a series 7 license in order to manager a hedge fund. The series 7 license is the general securities representative licese which allows an individual to be a representative (broker) of a FINRA registered member firm (brokerage firm or broker-dealer). The series 7 allows a representative to take and place trades for a customer. It is also a prerequisite for many of the other FINRA exams (such as the series 24). Because the hedge fund in not regulated as a broker, a hedge fund manager does not need to have a series 7 license (assuming that the manager is also concurrently acting as a broker-dealer representative).

Second, a start up hedge fund manager may need to have a series 65 license in order to become registered as an investment adviser. There are two potential ways a hedge fund manager would be required to register as an investment adviser – under the federal rules (the Investment Advisers Act of 1940) or under the various state rules (commonly referred to as the state blue sky laws). If a manager is required to register with the SEC under the Advisers Act* then, for federal purposes, the manager will not need to have taken the Series 65. However, the Advisers Act allows states to impose certain requirements on all federally registered investment advisers with a place of business in their state. Generally the states will require all federally registered investment advisers to “notice file” in their state which entails paying a fee to the state. The state can also require that all investment adviser representatives have the series 65 license. This means that anyone who talks to clients/investors or makes any trading decisions or analysis will need to have this license. The definition of investment adviser representative basically encompasses every employee or owner of the investment adviser other than secretary type employees. If you are a federally registered investment adviser you should discuss whether members of your team need to be licensed as representatives at the state level.

If you are not a federally registered investment adviser (generally all managers with less than 30 million of assets under management) then you will need to determine whether your management firm needs to be registered as an investment adviser at the state level. Many states require investment advisers with a place of business** in the state to register. Some popular states that require investment adviser registration are California, Texas, Washington and Colorado. However, there are many states which have exemptions from the registration requirements. Some popular states that have exemptions (through regulation or special order) from investment adviser registration for hedge fund managers are New York, Connecticut, Florida and Georgia. Again, you should speak with your legal counsel or compliance professional to determine whether your hedge fund management firm will need to be licensed as an investment adviser in the state.

Finally, if the hedge fund trades futures or commodities then the manager may need to be registered as a commodity pool operator with the National Futures Association. In order to register as a commodity pool operator at least one person at the management company will need to take the Series 3 exam. For more information on the Series 3 exam and this part of the registration process please read how to register as a CPO or CTA.

* Many potential hedge fund managers are confused with whether a management company will need to be registered as an investment adviser with the SEC. The answer is that in most cases a hedge fund manager will not have to be registered as an investment adviser with the SEC because of an exemption provision within the investment advisers act. Section 203(b)(3) of the Advisers Act specifically exempts from the registration provisions “any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser …” The term “client” in the hedge fund context means a “corporation, general partnership, limited partnership, limited liability company, trust …, or other legal organization … to which you provide investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries…”

This means that as long as a hedge fund manager will not need to count the investors in the hedge fund as his “client” and that the hedge fund itself is the only “client.” You will probably recall that a couple of years ago the SEC proposed a change to the rules under the Advisers Act that required a manager to count all of the investors in the hedge fund as clients. Under the proposed rule hedge fund managers would have been required register with the SEC (if they had at least $30 million under management), but Phillip Goldstein successfully challenged the SEC in court. His successful challenge to the rule change allows hedge fund managers to escape SEC regulation.

** “Place of business” of an investment adviser means: (1) An office at which the investment adviser regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients; and (2) Any other location that is held out to the general public as a location at which the investment adviser provides investment advisory services, solicits, meets with, or otherwise communicates with clients.

What is a hedge fund?

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In short, hedge funds are pooled investment vehicles. That is, a hedge fund is a company which pools money from its investors (owners) and makes investments pursuant to the fund’s stated investment objective. There are many different types of hedge funds, which can invest in everything from stocks and bonds to more esoteric investments like derivatives, commodities and real estate. In addition to investments in a wide variety of financial or other instruments, hedge funds can “short” certain financial instruments and can also borrow to “leverage” their investments.

Unlike mutual funds, hedge funds are not registered with the U.S. Securities and Exchange Commission. While this means that hedge funds are not subject to the same level of government scrutiny as mutual funds, it does not mean that the SEC and the states cannot bring enforcement actions against hedge fund managers who break the law or make misrepresentations to investors.

While hedge funds are not subject to the more rigorous standards of mutual funds, they will need to comply with the U.S. securities laws regarding “private placements.” Hedge funds are generally sold to investors in “private placements” which means that hedge fund managers cannot advertise and that, generally, investors will need to be “accredited investors” that is they must have either (i) a one million dollar net worth or (ii). The investment managers will also need to adhere to certain filings within each state in which an investor resides. This will generally mean that they must file a “Form D” notice with each state within 15 days of the date in which each investor invests in the fund. The “Form D” must also be filed with the SEC within this time period.

What expenses does a hedge fund pay for?

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Question: What costs does a hedge fund pay for and what costs does the hedge fund management company pay for?

Answer: This is another very common question. Most hedge fund offering documents provide a boilerplate approach for splitting costs between the hedge fund and the management company. The general rule of thumb is that any cost which is directly associated with the fund’s investment activities (e.g. brokerage costs) will be paid for by the hedge fund. Any cost which is directly associated with the management company’s operations or overhead (e.g. salaries) will be paid for by the management company.

There are some costs which, arguably, could go either way – one such item is a Bloomberg terminal. A Bloomberg terminal could arguably be an expense of the management company (a Bloomberg is an informational tool similar to magazines and other information that a manager must use to shape its decision-making process) or of the hedge fund (information from the Bloomberg is directly attributable to investment decisions which are made). I do not have a bias as to which entity should pay these fees; however, a hedge fund manager with a smaller asset base that pays for the Bloomberg out of the fund must beware of the effect of Bloomberg’s costs on the fund’s performance.

Hedge Fund Expenses

  • hedge fund management fee
  • hedge fund performance allocation
  • offering and other start-up related expenses (often the management company will pay these expenses)
  • the administrator’s fees and expenses
  • accounting and tax preparation expenses
  • auditing
  • all investment expenses (such as brokerage commissions, expenses related to short sales, clearing and settlement charges, bank service fees, spreads, interest expenses, borrowing charges, short dividends, custodial expenses and other investment expenses)
  • costs and expenses of entering into and utilizing credit facilities and structured notes, swaps, or derivative instruments
  • quotation and news services (Bloomberg, NASDAQ) (or can be a management company expense)
  • ongoing sales and administrative expenses (e.g. printing)
  • legal and fees and expenses related to the fund (include Blue Sky filing fees)
  • optional: professional fees (including, without limitation, expenses of consultants and experts) relating to investments
  • optional: the management company’s legal expenses in relation to the Partnership
  • optional: advisory board fees and expenses
  • optional: reasonable out-of-pocket expenses of the management company (such as travel expenses related to due diligence investigations of existing and prospective investments)
  • other expenses associated with the operation of the hedge fund, including any extraordinary expenses (such as litigation and indemnification)

Hedge Fund Management Company Expenses

  • offering and other start-up related expenses (often the fund will pay these expenses)
  • salaries, benefits and other related compensation of the management company’s employees
  • rent
  • maintenance of its books and records
  • fixed expenses
  • telephones
  • computers
  • general purpose office equipment

While the above list of expenses is fairly standard, please remember that these expenses can be switched around to a certain extent. If you are a hedge fund manager, you should discuss with your attorney how the expenses are split between the hedge fund and the management company.

Should a start-up hedge fund have an audit?

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Question: Should a start-up hedge fund have an audit?

Answer: This is a question which we will get very often for funds that aim to launch on July 1 or later.  While there is generally no legal requirement for a hedge fund to have their performance results audited, a vast majority of hedge funds have their returns audited because it will aid in the marketing efforts by lending credibility to performance results.

With regard to this question, and as with most business-issue oriented hedge fund questions, the answer is going to depend on the manager’s program and what the manager plans to accomplish during the first 6, 12 and 18 months of operations.

Generally, first year hedge fund manager’s are going to need to focus on costs. Not only from a cash flow perspective, but also from a return perspective. Any costs (which the fund bears) affect performance. Accordingly, many start-up hedge fund managers may forgo an audit of the fund’s track record during the first year. The manager then may have the fund audited after the end of the fund’s second year. A manager might consider doing this in a couple of situations. The first situation is when the fund starts trading during mid-year or later. In this instance it will probably not make a lot of sense to have an audit for fund operations of less than one year. An exception to this generality is if you have a decent amount of AUM and you are looking to begin courting institutional investors. If this is the case, then it will generally be a good idea to have an audit.

The second situation when a start-up hedge fund manager might not choose to have an audit after the first year is if the manager has a longer term hedge fund incubation program. This might be the case if the hedge fund manager has a longer term trading strategy (buy and hold) or when the manager does not plan to seek institutional money during the second year. Many managers will go with this slow and steady approach to asset raising in order to understand the back end operations of their fund. As noted in numerous places, one of the main reasons why hedge funds fail is inadequate back office operations.

If a start-up hedge fund manager plans to start with a larger asset base, say $10 million or more, and plans to aggressively court the institutional market during the first half of the coming year, then it might be wise to think about an audit. While the decision to forgo a first year audit is strictly a business decision, it is recommended that you discuss this decision with both your legal team and your potential auditor.  Additionally, if you will be using the services of a third party marketer, you will want to discuss this decision with the third party marketer.