Category Archives: Investment Advisor

NASAA’s Proposed Model Rule to Exempt Private Fund Advisors from State Registration

One of the consequences of the Dodd-Frank Act is that federal and state jurisdiction over investment advisor firms will change. In general, fund managers with less than $150 million in AUM will not be subject to registration with the SEC.* While such managers will not be subject to SEC registration, they may be subject to investment adviser registration in the manager’s state of operation. Laws from state to state on this issue differ widely but the North American Securities Administrator Association (NASAA) is trying to bring some continuity and certainty with respect to state registration requirements. NASAA is proposing that states adopt regulations which requires private fund managers to register as investment advisers with the state unless that manager only provides advice to funds which are exempt under Section 3(c)(7).

*note: if a fund manager also has separately managed accounts, the manager will need to be SEC registered unless the manager has less than $100 million in AUM.

Of course it will be up to the states to decide whether or not to adopt the proposed rule, but if the proposal is adopted by any state, it would mean that many more managers would need to register at the state level if such managers were not registered with the SEC (in many, but perhaps not all cases). I have written a number of times that most state securities divisions do not have the resources to handle an increase in IA registrations so I believe it unlikely that states securities divisions will lobby the legislatures for an increase in registrations under the NASAA proposal (for many states). This proposal is essentially the first step toward states discussing the larger issue of how the securities laws will change in response to the changes from Dodd-Frank – we are likely to hear more about this story in the coming months as the SEC and states begin to more fully understand how legislative changes will affect their normal operating routines with respect to investment advisers.

Below we have provided some background on the proposed rule and the text of the proposed rule.

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Background & NASAA’s Proposed Model Rule

Prior to Dodd-Frank, the “private adviser exemption” from SEC registration applied to any investment advisor who during the course of the preceding 12 months had fewer than 15 clients (a fund is counted as one client) and who did not generally hold itself out to the public as an investment advisor. Most hedge fund managers generally would utilize this exemption from IA registration with the SEC. Title IV of the Dodd-Frank Act eliminated this exemption and in its place, created new registration and reporting rules for private fund advisers.

As we noted above, certain managers (including managers to venture capital funds and private equity funds) with less than $150 million in AUM will be exempt from SEC registration. These managers exempt from SEC registration are called “exempt reporting advisers” (ERAs) and, although exempt from “registration” with the SEC, must still submit reports to the SEC (see Exempt Reporting Adviser Requirements). In addition, these managers may still be required to register at the state level.

NASAA is proposing that managers of Section 3(c)(7) funds be exempt from state registration and that all other fund managers be subject to registration with the state securities division. The stated rationale for this proposal is that investors in Section 3(c)(7) funds must be qualified purchasers and therefore do not need managers to be registered with the state securities commission. To qualify for the NASAA exemption at the state level, the adviser must:

not be subject to a disqualification (which includes various criminal, civil, and regulatory disciplinary events),
solely advise 3(c)(7) fund(s),
file with the state the report that is required by the SEC (the condensed Form ADV, discussed in the Exempt Reporting Advisers article), and
pay applicable fees.

IA representatives associated with the ERA firm would also be exempt from state registration and licensing requirements.

NASAA’s proposed model rule would not apply to advisers of private funds with $150 million or more in AUM which are required to register with the SEC and satisfy any state notice filing requirements.

Request for Comments

NASAA is seeking comments on this proposed model rule. Comments should be submitted electronically to [email protected] or by mail to NASAA, Attn: Joseph Brady, 750 First Street, NE, Suite 1140, Washington, DC, 20002 by January 24, 2011.

NASAA’a proposed model rules are reprinted below and can be found here.

Our Thoughts

We have not heard states discussing the NASAA proposal. We also do not think that anything will be happening with this model rule immediately as states will be focusing on trying to figure out how to deal with the expected increase in state applications because of Dodd-Frank.

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Proposed NASAA Model Rule on Private Fund Adviser Registration and Exemption Rule XXX. Registration exemption for exempt reporting advisers

a. Subject to the provisions of paragraph (b) herein, an investment adviser solely to one or more private funds, shall be exempt from the registration requirements of Section XXX [identify authority] and shall be considered an exempt reporting adviser in this state if the adviser satisfies the following conditions:

(1) neither the adviser nor any of its advisory affiliates are subject to a disqualification as described in Section 230.262 of title 17, Code of Federal Regulations, or any successor thereto;

(2) the adviser acts as an adviser solely to private funds that qualify for the exclusion from the definition of “investment company” under Section 3(c)(7) of the Investment Company Act of 1940;

(3) the adviser files with the state a copy of each report and amendment thereto that an exempt reporting adviser under the Investment Advisers Act of 1940 would be required to file with the Securities and Exchange Commission pursuant to SEC Rule 275.204-4, along with a consent to service of process complying with Section XXX [identify authority]; and

(4) the adviser pays the fees specified in Section XXX [identify authority].

b. A federal covered investment adviser shall not be eligible for this exemption and shall comply with the state notice filing requirements applicable to such advisers.

c. An investment adviser representative is exempt from the registration requirements of Section XXX [identify authority] if he or she is employed by or associated with an adviser that is exempt from registration in this state pursuant to paragraph (a.) above.

d. As used in this rule a private fund means an issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for sections 3(c)(1) or 3(c)(7) of the Act.

e. The report filings described in paragraph (a.)(3) above shall be made electronically through the IARD. A report shall be deemed filed when the report and the fee required by Section XXX [identify authority] are filed and accepted by the IARD on the state’s behalf.

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Bart Mallon is an attorney who works with both state and SEC registered fund managers. His firm, Cole-Frieman & Mallon LLP, routinely provides regulatory and compliance services to registered investment advisers. He can be reached directly at 415-868-5345.

SEC Study on Enhancing IA Examinations

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Recommendations for Enhancing IA Exams

Under Section 914 of the Dodd-Frank Act, the SEC was required to conduct a study with respect to the need for enhanced examination and enforcement resources for investment advisers. SEC staff recently released the study which is designed to provide Congress with recommendations with respect to the findings of the study. In general, the study found that the SEC is not currently properly equipped to appropriately handle IA examinations because of capacity issues. The study presents a number of statistics which show that IA registrations have greatly increased while the funding for the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has been subject to cutbacks in staff.

To strengthen the IA examination process, the SEC staff recommended that Congress take one of three different courses of action:

Impose user fees on SEC-registered investment advisers
Authorize one or more SROs to examine SEC-registered investment advisers
Authorize FINRA to examine dual registrants (firms registered as both IAs and BDs)

SEC Recommendations

The Study provides three different options that Congress should consider with respect to the issue of instituting the most appropriate infrastructure for IA examinations. These options and some of the positive and negative implications are discussed below.

1. User Fees

Congress could authorize the SEC to implement user fees for registration. These fees would go directly to the OCIE and pay for the IA examination program.

Discussion items:

would provide scalable resources (i.e. resources would increase or decrease in proportion to the number of registered investment advisor firms) – these resources would not be subject to the Congressional appropriations process
may be less expensive than instituting a new SRO regime and would utilize the existing OCIE staff expertise and knowledge
avoid all of the issues which would exist with establishing an SRO structure (inefficiencies, authority, membership, governance, and funding issues)
supported by some parts of the IA industry

2. Delegation to SRO or SROs

Congress could authorize the SEC to delegate examination responsibilities to FINRA or another self regulatory organization(s).

Below are some of the points both for and against delegation to an SRO or multiple SROs:

scalable resources (i.e. funded by membership fees)
additional rulemaking – IA firms would be subject to laws (Investment Advisers Act of 1940), regulations (SEC Rules) and member (SRO) rules
SEC would need to oversee the SRO and subject the SRO to periodic audit/examination
an SRO would provide for more examination of IAs – for example, FINRA and NFA have examined more BDs and CPOs/CTAs than the SEC has examined IAs
many logistical issues involved with instituting any SRO and/or allowing FINRA to take over these responsibilities
multiple SROs (for different types of IAs) would likely create even more logistical issues
unclear how the SRO structure would work with state registered IAs
potential conflict of interest if the SRO (FINRA) was the same for the buy side and the sell side

3. Authorize FINRA to examine dual IA-BD registrants

Congress could expand FINRA’s jurisdiction to oversee those firms which are registered as both an IA and as a BD.

only marginally helpful – only 5% of IAs are also registerd as BDs and many of these firms are the largest broker-dealer firms
gets rid of inefficiency by having two examinations – one from FINRA on the BD side and one from the OCIE on the IA side
risk of different interpretation of provisions of the Investment Advisers Act

Conclusion

This study simply states the obvious – the SEC does not have the resources it needs to adequately do its job. It seems like the major conclusion has already been reached – IA firms are going to need to pay for their oversight because Congress will not pay for it. The only question is whether managers will be making payments to the SEC (first option) or to FINRA or other SRO(s) (second two options). Whatever Congress ultimately decides, it is likely that managers will be facing more fees in the future.

The full text can be found here: Study on Enhancing Investment Adviser Examinations

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Bart Mallon is an attorney focused on the investment management industry and provides investment adviser registration and compliance services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

2011 Final Renewal Statement for Registered Investment Advisers

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As we noted previously, registered investment advisory firms and firm representatives must renew their registration annually by paying a fee to FINRA. In November FINRA issued a Preliminary Renewal Statement for each registered IA firm which stated the amount of renewal fees which were due by December 13, 2010.

While most firms should have by now paid the preliminary statement, each firm can now review their Final Renewal Statement. The final statement is now available through the IARD system and reflects the firm’s and representatives’ final registration status as of December 31, 2010. The final statement also reflects any adjustments as a result of registration approvals or terminations since the preliminary statement was issued. Firms and representatives should check their final statement to ensure all renewal fees are paid in full. If 40 mg levitra the firm has any amounts due, payment should be made by February 4, 2011.

Below is information on how to access your Final Renewal Statement.

Accessing Your Final Renewal Statement

To check your firm’s Final Renewal Statement, follow these instructions:

Log onto IARD here.
Enter your firm’s ID and password.
Review and accept the terms and conditions.
Under the “Accounting” tab at the top of the page, select “Renewal Account.”
Under the “Renewal Statement” link in the “Accounting” section, you can retrieve the Final Renewal Statement, which will state “Paid in Full” or “Amount Due.”

If an amount is due, the balance must be received by FINRA and posted to the Renewal Account by February 4, 2011. Any renewal overpayments should have automatically been transferred to your Daily Account.

Additional information about the Final Renewal Statement can be found here.

If you have any questions regarding your renewal statement or any other investment adviser registration issue, please feel free to contact Mallon P.C. for more information.

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

Investment Adviser and IA Representative Registration Renewal

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

Background

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

Submitting Payment

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

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

Payment by Check

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

U.S. Mail:

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

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

Express Delivery:

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

(240) 386-4848

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

Payment via CRD/IARD E-Pay

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

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

Automatic Daily Account-to-Renewal Account Transfer

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

Other Payment Methods

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

Confirming Payment

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

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

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

California Adopts New Part 2 of Form ADV

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At the end of July, the SEC adopted amendments to Form ADV Part 2 and the related rules. The amended Form ADV Part 2 will be used by SEC-registered advisers to meet their disclosure obligations and generally describe the adviser’s services, fees, and strategies.

On September 1, 2010, the California Department of Corporations followed suit and announced its adoption of the new Part 2 as well, effective October 12, 2010 (see California ADV Part 2 Announcement). This effective date corresponds with the effective date of the SEC’s rule changes. The Department’s decision will help bring consistency between state and SEC investment adviser registration requirements.

New ADV Part 2

The amended Form ADV Part 2 consists of three parts:

the “Firm Brochure” (Part 2A),
a Wrap Fee Program Brochure (Part 2A, Appendix 1), and
the “Brochure Supplement (Part 2B).

Every investment adviser must complete the Firm Brochure and the Brochure Supplement. The Firm Brochure, which is filed electronically with the SEC on the IARD system, will include information about the adviser and its business. The Brochure Supplement, which is a brief disclosure document about certain personnel of the adviser, will be provided to clients but not filed with the SEC.

In addition, the new Part 2 will no longer be in the check-the-box format. Instead, it will take the form of a narrative brochure written in plain English–the purpose of which is to provide clients with a more clear disclosure of the adviser’s business practices, conflicts of interest, and background.

Compliance Dates

Effective October 12, 2010, for California registered investment advisers, the relevant compliance dates for the new ADV Part 2 are:

As of January 1, 2011 all new investment adviser applicants will have to file, through the IARD, the new Part 2 of Form ADV as part of their application.
As of January 1, 2011 all licensed investment advisers will need to incorporate the new Part 2 of Form ADV with their next filing of an amendment to Form ADV, or their annual updating amendment to Form ADV.
Between October 12, 2010 and January 1, 2011 applicants and current licensed investment advisers filing amendments to their Part II of Form ADV may use either the current Part II or the new Part 2.

With this change, investment advisers should review and become familiar with the new Part 2. Advisers that are currently registered with the California Securities Regulation Division will have to incorporate the new Part 2 when they file amendments to Form ADV and also when they file the required annual update. For most advisers with a December 31, 2010 year-end, the deadline for the annual update will be March 31, 2011.

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Other related hedge fund law articles:

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

Series 66 Exam

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This exam is required by certain states for an individual who wants to register as an investment adviser representative and securities agent. Passing the Series 66 would be equivalent to passing both the Series 63 and Series 65 exams. Additionally, individuals are required to pass the Series 7 exam as a prerequisite for taking the Series 66. This post will provide an overview on the Series 66 exam and some thoughts on both taking and passing the exam.

The Series 66 Basics

What: The exam has a time limit of two hours and 30 minutes and a total of 110 questions, 10 of which are “pretest” questions and do not count in your final score. The exam covers the following topics: Economic Factors and Business Information; Investment Vehicle Characteristics; Client Investment Recommendations and Strategies; and Laws, Regulations, and Guidelines, including Prohibition on Unethical Business Practices. You must earn at least 75% to pass the exam.

Where: You can take the exam at most Pearson VUE or Prometric testing centers.

When: You should probably sign up for the exam at least a week prior to taking it, and you can choose the time and date on either the Pearson or Prometric website when you register.

Why: The exam is required for those individuals who want to become both securities agents (generally brokers) and investment adviser representatives.

How to sign up

You can register for the exam by submitting a Form U-4 or Form U-10 through the IARD system online. Please not that, effective September 15, 2010, FINRA requires individuals to use either their CRD number or FINRA ID number in order to schedule an exam and no longer accepts social security numbers. If you have any questions regarding registering for an exam, be sure to ask your law firm, compliance consultant, or feel free to contact us.

The cost to take the exam is $128.

How to study for the exam

It is recommended that you obtain a study guide and thoroughly read the entire guide. NASAA (North American Securities Administration Association) provides a study guide available for download on their website. Also, Kaplan provides a useful study guide that presents the study material in a simple and easy-to-understand way, and their practice questions are very similar to questions you are likely to see on the actual exam.

Take at least two to three practice exams prior to taking the test, possibly more. Use memory refreshers such as note cards or other review materials. Do not cram the morning of the test, as this will probably only make you more anxious. In fact, it is recommended that you take the exam in the morning after a full night’s rest.

Day of exam

Arrive at the testing center at least 45 minutes prior to taking the exam to allow yourself time to review some of your notes beforehand. The proctor will require you take off your jackets and place your belongings, including your study material, in a provided locker. Be sure to have woken up early enough to eat breakfast beforehand and be fully alert during the test.

The exam

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

The length of the exam might require you to pause and use the restroom or take a break. Allow yourself time to step away from the computer for a moment, take a drink, and gather your thoughts. When you encounter difficult questions, you always have the option of marking the question for review. Never spend an extended period of time on a question, as you will just waste time on answering other questions you might know better.

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

If you don’t pass

A number of managers who take the exam do not pass or only come close to passing. If this is the case, you will need to wait another 30 days before re-taking the exam. If you do not pass the exam the second time, you will need to wait another 60 days before taking the exam. If you do not pass either the third or fourth attempt, you will need to wait at least 180 days before taking the exam again. There is no limit on the number of times allowed for taking a test.

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

Business Continuity Plans (Disaster Recovery Plans) | Investment Adviser Registration

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The following post is part of our hedge fund compliance guide for managers who will be required to register as investment advisers with the SEC. After the Dodd-Frank bill, managers with either $1ooM of AUM (if managing a fund and separate accounts) or $150M of AUM (if managing a fund only) will be required to register and also to implement a compliance program. Under SEC Rule 206(4)-7 those managers will need to generally institute compliance policies and procedures (subject to annual review) and appoint a chief compliance officer. Part of that process will be to institute a business continuity or disaster recovery plan.

Rule 206(4)-7

The full rule provides:

Rule 206(4)-7 — Compliance Procedures and Practices

If you are an investment adviser registered or required to be registered under section 203 of the Investment Advisers Act of 1940 it shall be unlawful within the meaning of section 206 of the Act for you to provide investment advice to clients unless you:

a. Policies and procedures. Adopt and implement written policies and procedures reasonably designed to prevent violation, by you and your supervised persons, of the Act and the rules that the Commission has adopted under the Act;

b. Annual review. Review, no less frequently than annually, the adequacy of the policies and procedures established pursuant to this section and the effectiveness of their implementation; and

c. Chief compliance officer. Designate an individual (who is a supervised person) responsible for administering the policies and procedures that you adopt under paragraph (a) of this section

Background on BCP Requirement

While the rule does not specifically mention a “business continuity plan,” the SEC has stated that an adviser has a fiduciary obligation to protect client assets from risks resulting from the adviser being unable to provide advisory services. Thus, an adviser must create and maintain a business continuity plan which is “reasonably designed” to enable the adviser to meet client obligations in the event of a natural disaster, emergency, or significant business disruption.

In the accompanying Adopting Release Report to Rule 206(4)-7, the SEC specifically noted that, at a minimum, policies and procedures established must address, among a number of other issues, the investment adviser’s or the fund’s business continuity plan. [HFLB Note: Other issues the adviser’s policies and procedures should address include: (1) portfolio management, (2) trading practices, (3) proprietary trading and personal trading activities, (4) the accuracy of disclosures, (5) safeguarding client assets, (6) the accurate creation and maintenance of required records, (7) marketing advisory services, (8) process to value client holdings and assess fees based on valuations, and (9) safeguards for the privacy protections.]

The SEC did not, however, detail specific requirements for a business continuity plan, other than to state that it must adequately address the procedures necessary for the investment adviser or the fund to fulfill its fiduciary obligation to protect its clients’/investors’ interests from being placed at risk as a result of the investment adviser’s or the fund’s inability to provide investment advisory or related services after a disaster or disruption occurs.

Because the SEC did not provide direct guidance in this respect, we can, among other resources, look toward FINRA rules on this topic.

FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information)

On April 7, 2004, the SEC approved NASD Rules 3510 and 3520 requiring member firms to establish and maintain business continuity plans that meet specified requirements. FINRA Rule 4370 superseded these rules following the consolidation of NASD and other member regulation, enforcement and arbitration functions of the NYSE regulation into FINRA. FINRA Rule 4730 is nearly identical to the previous NASD rules. The following sets forth the rule.

Establishing and Maintaining a BCP. Requires firms to create and maintain a business continuity plan that identifies procedures related to an emergency or other significant business disruption and is “reasonably designed to enable the member [firm] to meet its existing obligations to customers.” The business continuity plan procedures must address existing relationships with other broker-dealers and counter-parties. The business continuity plan must be made available upon request by FINRA staff.
Updating Requirements. The firm must update the business continuity plans in the event of any material change to the adviser’s operations, business, structure, or location. In addition, the business continuity plans must be reviewed at least annually.
BCP Details. The rules do not provide specific detailed requirements. Instead, they provide a framework for minimum compliance. The following is a non-exhaustive list of 10 key areas that the business continuity plans should address to the extent applicable and necessary.

1. Data back-up and recovery (hard copy and electronic);
2. All mission critical systems;
3. Financial and operational assessments;
4. Alternate communications between the member and its customers;
5. Alternate communications between the member and its employees;
6. Alternate physical location of employees;
7. Critical business constituent, bank, and counter-party impact;
8. Regulatory reporting;
9. Communications with regulators; and
10. How the member will assure customers’ prompt access to their funds and securities in the event that the member determines that it is unable to continue its business.

If a firm does not include one of the elements addressed above, it must document the reason. If the firm relies on another entity to perform certain functions, it must document the relationship with that other entity.

Plan Approval. The firm must designate a member of senior management who is also a registered principal to approve the business continuity plan and to conduct the annual review.
Disclosure Requirements. The firm must disclose how the business continuity plan can address and how the firm will respond to future business disruptions of varying scope. The disclosure must, at a minimum, be made in writing to customers at account opening, posted on the firm’s web site (if one exists), and mailed to customers upon request.
Designating Emergency Contacts. The firm must designate two emergency contact persons. The emergency contact persons must be associated persons. At least one contact person must be both a member of senior management and a registered principal of the firm. If the second contact person is not a registered principal, that person must be a member of senior management who has knowledge of the firm’s business operations. If a firm only has one associated person, then the second contact person must be an individual who has knowledge of the firm’s business operations.
Updating Requirements. The firm must update the emergency contact information in the event of any material change. In addition, the firm’s Executive Representative or designee must review and if necessary, update the information within 17 business days after the end of each calendar quarter.

Conclusion

Having an appropriately tailored business continuity plan for your business is essential from both a regulatory and best practices perspective. Managers should have robust programs in place and be ready to show examiners that all statements in the business continuity plan are completely accurate.

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Cole-Frieman & Mallon LLP provides comprehensive registration and compliance services for SEC registered investment advisers. Bart Mallon, Esq. can be reached directly at 415-868-5345.

Bart Mallon Quoted in Wall Street Journal on Hedge Fund Registration

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(www.hedgefundlawblog.com)

In an article published today in the Wall Street Journal, Bart Mallon of Cole-Frieman & Mallon LLP was quoted discussing the current and future role of the state securities divisions with respect to hedge funds. After the implementation of the new SEC registration thresholds under Dodd-Frank, previously SEC registered hedge fund managers will be required to de-register from the SEC and register with the states. Outside of the logistical hurdles involved with this process, the central issue for managers and investors is whether the states have the resources or expertise to deal with an increased workload. This is an especially important question as more and more states like California face budget shortfalls and institute furlough days.

For more information on this specific topic, please see our survey on state securities divisions which includes information on number of examiners, number of furlough days, and the frequency of audits of investment advisers.

The Wall Street Journal article can be found here.

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Cole-Frieman & Mallon LLP provides legal support and hedge fund start up services to all types of investment managers. Bart Mallon, Esq. can be reached directly at 415-868-5345.

Costs to Complete New Form ADV Part 2

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SEC Estimates Preparation Costs of $3,000 to $5,000 for SEC Registered Advisers

We have been reviewing the SEC release related to the amendments to Form ADV Part 2. Specifically we were interested, like many managers, in the amount of time it will likely take to complete the new Part 2. Unlike the old Part 2, which was mostly check the box answers along with a Schedule F which required some prose, the new Part 2 will be in full “plain English” prose. While most SEC registered firms have not yet begun the process to switch to the new Part 2, such advisers will likely begin the process soon and will want to know how much it will cost to complete new Part 2.

According to the SEC, most small and mid-sized SEC registered investment advisers will likely pay anywhere from $3,000 to $5,000 to have a law firm or compliance group complete the new Part 2 on their behalf. Additionally, many states will be requiring new Part 2 so this means that state registered investment advisers will likely need to budget for these expected compliance costs. Below we have reprinted the discussion from the release which specifically discusses the costs involved.

Please note that Mallon P.C. can help registered investment advisers complete new Form ADV Part 2.

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Release No. IA-3060; File No. S7-10-00
Amendments to Form ADV

Starting at page 84

We estimate that some advisers may incur a one-time initial cost for outside legal and compliance consulting fees in connection with preparation of Part 2 of Form ADV. While we received no specific comments on our estimate regarding outside legal costs in the Proposing Release, one commenter did state that compliance consultants assist a significant percentage of advisers in preparing their Form ADV. As a result, we are changing our estimate to reflect a quarter of small advisers using compliance consulting services and a quarter of small advisers using outside legal services and to reflect half of medium advisers using compliance consulting services in lieu of outside legal services and a quarter of medium advisers still using outside legal services. We estimate that the initial per adviser cost for legal services related to preparation of Part 2 of Form ADV would be $3,200 for small advisers, $4,400 for medium-sized advisers, and $10,400 for larger advisers. [324]

[324] Outside legal fees are in addition to the projected hourly per adviser burden discussed above. $400 per hour for legal services x 8 hours per small adviser = $3,200. $400 per hour for legal services x 11 hours per medium-sized adviser = $4,400. $400 per hour for legal services x 26 hours per large adviser = $10,400. The hourly cost estimate of $400 on average is based on our consultation with advisers and law firms who regularly assist them in compliance matters.

We estimate that the initial per adviser cost for compliance consulting services related to initial preparation of the amended Form ADV will range from $3,000 for smaller advisers to $5,000 for medium-sized advisers.[325]

[325] Outside compliance consulting fees are in addition to the projected hourly per adviser burden discussed above. Based on consultation with compliance consulting firms who regularly assist investment advisers in Form ADV preparation, we estimate that small advisers will incur expenses of $3000 per year for the initial preparation of the new Form ADV and medium advisers will incur expenses of $5000 per year for the initial preparation of the new Form ADV.

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Cole-Frieman & Mallon LLP provides legal support and hedge fund compliance services to all types of investment managers. Bart Mallon, Esq. can be reached directly at 415-868-5345.

Form ADV Part 2 and State Registration

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A couple of weeks ago the SEC announced that they approved certain updates for Form ADV Part 2 . While these forms will be required for managers who are subject to registration with the SEC (under the new rules, those managers with either $100 or $150 million of assets under management depending on the circumstance), the states are still determining how they are going to handle new Part 2. We have done a preliminary investigation by calling a number of the more popular states and found that most states are planning to implement new Part 2, but are not sure when the requirement will be finalized. From our research, Texas is the only state that has set a date for implementation of new Part 2.

The list of states is below. We will continue to update this list.

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Arizona – will require but not sure starting when
California – will require but not sure when
Colorado – will require but not sure starting when
Connecticut – discussing now and will have a decision at the end of the month
Illinois – will require but not sure starting when
Massachusetts – will require but not sure starting when
Texas – will require starting 01/11

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Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides legal support and hedge fund compliance services to all types of investment managers. Bart Mallon, Esq. can be reached directly at 415-868-5345.