Category Archives: Legal Resources

Over 100 Hedge Fund Managers Apply For PPIP

The Treasury announced today that they received over 100 applications from fund managers who want to participate in the Public Private Investment Program (PPIP). There have been a number of questions regarding the structure of investment vehicles under the PPIP. In addition to the Treasury release from earlier today, I have included below some additional information on the PPIP that might be useful to hedge fund managers who are thinking of participating in this program in the future.

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Treasury Announces Receipt of Applications to Become Fund Managers under Public Private Investment Program

Washington, DC — The Treasury Department today announced the receipt of more than 100 unique applications from potential fund managers interested in participating in the Legacy Securities portion of the Public Private Investment Program (PPIP). A variety of institutions applied, including traditional fixed income, real estate, and alternative asset managers.

Successful applicants must demonstrate a capacity to raise private capital and manage funds in a manner consistent with Treasury’s goal of protecting taxpayers. Treasury will also evaluate the applicant’s depth of experience investing in eligible assets. Finally, the applicant must be headquartered in the United States.

Treasury expects to inform applicants of their preliminary qualification around May 15, 2009. Once a fund receives preliminary qualification, it can begin raising the expected minimum of $500 million in private capital that will serve as the investment that, pending further approval, will be matched with taxpayer funds. As we have stated previously, Treasury anticipates opening the program to smaller fund managers in the future, which may result in a lower minimum private capital raising requirement.

Since announcing the program details on March 23, Treasury has encouraged small, veteran, minority and women owned private asset managers to partner with other private asset managers. On April 6, Treasury extended the deadline for fund manager applications to provide more time to facilitate these types of partnerships. We are pleased to see a number of creative partnership proposals among the applications we are currently evaluating.

Today’s announcement is the latest milestone in making operational the PPIP for legacy loans and securities, a key part of the Administration’s efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

For further information on the PPIP, please visit:

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Public-Private Investment Program

Updated: April 6, 2009

To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – has announced the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:

Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing t o lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.

Two Components for Two Types of Assets: The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:

Legacy Loans: The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.

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PPIP Whitepaper

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Legacy Securities Termsheet

Fund Structure

Treasury and a vehicle controlled by the applicable Fund Manager through which private investors will invest in a Fund (each, a “Private Vehicle”) will be the sole investors in a Fund. Additional detail with respect to Fund Structure can be found under “Fund Structure Detail” below.

Pre-Qualification of Fund Managers

Private asset managers wishing to participate in this program should submit the application found at http://www.financialstability.gov/ to Treasury as part of the selection process. Fund Managers will be pre-qualified based upon criteria that are anticipated to include:

Demonstrated capacity to raise at least $500 million of private capital.
Demonstrated experience investing in Eligible Assets, including through performance track records.A minimum of $10 billion (market value) of Eligible Assets under management.
Demonstrated operational capacity to manage the Funds in a manner consistent with Treasury’s stated Investment Objective while also protecting taxpayers.
Headquarters in the United States.

Other criteria are identified in the application. Treasury will consider suggestions from Fund Managers to raise equity capital from retail investors.

3 year lock up period

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Q&A on the Program

Legacy Securities FAQs

How are Legacy TALF and the Legacy Securities PPIP related?

Legacy TALF and the Legacy Securities PPIP are separate programs. Legacy TALF will be a Federal Reserve lending program with its own set of terms, conditions and eligibility requirements. Legacy TALF will be made widely available to investors (who meet Federal Reserve eligibility standards) regardless of whether or not they participate in the Legacy Securities PPIP. Pre-qualified Fund Managers in the Legacy Securities PPIP may choose to utilize leverage pursuant to the Legacy TALF program, when it becomes operational and subject to its terms and conditions. For the avoidance of doubt, a qualified investor utilizing Legacy TALF will do so on the same terms and conditions as a Legacy Securities PPIP investor utilizing Legacy TALF.

Will Treasury require pre-qualified Fund Managers to raise a minimum level of private capital?

Yes. In the initial group, pre-qualified Fund Managers will be expected to raise at least $500 million of private capital. However, as discussed above, Treasury currently anticipates opening the program to smaller Fund Managers in the future which may result in a lower minimum private capital raising requirement.

Will Treasury provide a public list of all pre-qualified Fund Managers?

Yes. Treasury expects to provide a public list including only the pre-qualified Fund Managers.

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Please contact us if you have a question on this issue or if you would like to start a hedge fund. If you would like more information, please see our articles on starting a hedge fund.

Series 30 Exam Information

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Overview of Series 30 Exam

The Series 30 exam is a National Futures Association sponsored exam which is required for those persons who are branch office managers of a NFA member firm (see our post on CPO and CTA Branch Office Information). Generally if a NFA Member firm (such as a CPO or CTA) has a branch office (any place of business other than the main office), the firm will need to make sure that a branch office manager is employed at each such branch office.

Exam Specifics

Branch Manager Examination.
50 True/False and Multiple Choice questions.
One hour long.
$70.
70% correct answers required to pass

Signing up for the Exam

The Series 30, like all of the other exams sponsored by the NFA, is administered by FINRA. Accordingly, an applicant will need to first register to take the exam by completing a FINRA Form U-10. After the U-10 has been completed, submitted and processed, the applicant will be “in the FINRA system” and will be able to sign up for an exam time at either a Prometric or Pearson testing facility. Applicants can determine available times and locations by visiting these websites. The test is generally given a number of times a day, six days a week.

Series 30 Exam Topics

BRANCH MANAGER EXAM—FUTURES

SERIES 30

The following is a general listing of the major subject areas covered by the examination and does not represent an exhaustive list of the actual test questions.

A. General

Books and records, preparation and retention
Order tickets, preparation and retention
Written option procedures
Handling of customer deposits
NFA Compliance Rule 2-9, supervision of employees
Business Continuity and Disaster Recovery Plan
Registration requirements—who needs to be registered, sponsor verifi cation, NFA Bylaw 1101, AP termination notices, temporary licenses
NFA disciplinary process
Reportable positions
NFA Arbitration Rules
On-site audits of branch offices
Bona fide hedging transactions
Trading on foreign exchanges

B. CPO/CTA General

Registration requirements
Books and records to be maintained
Reports to customers
Bunched orders

C. CPO/CTA Disclosure Documents

Management and incentive fees
Performance records
How long a CPO or CTA can use a disclosure document
Conflicts of interest
Pool units purchased by principals
Business backgrounds of principals
Amendments to disclosure documents
Disclosure of disciplinary actions
NFA review of document before each use

D. NFA Know Your Customer Rule

Client information required
Responsibility to obtain additional client information
Risk disclosures

E. Disclosure by CPOs and CTAs Required for Costs Associated with Futures Transactions

Disclosure of upfront fees and expenses
Effect of upfront fees and organizational expenses on net performance

F. Disclosure by FCMs and IBs Required for Costs Associated with Futures Transactions

Explanation of fees and charges to customers

G. IB General

Accepting funds from customers
Guarantee agreements
Responsibilities of guarantor FCM
Minimum net capital requirements
Time stamping of order tickets
Books and records to be maintained

H. General Account Handling and Exchange Regulations

Risk Disclosure Statement
Margin requirements
Stop loss orders
Preparing orders
Proprietary accounts
Positions limits and reporting requirements
Trade confirmations

I. Discretionary Account Regulation

Requirements relating to discretionary accounts
Supervision and review of discretionary accounts

J. Promotional Material (Compliance Rule 2-29)

Definition of promotional material
Standardized sales presentations
Use of a third-party consulting or advertising firm
Reprints of articles from industry publications
Recordkeeping of promotional material
Past performance
Hypothetical trading results
Written procedures for promotional material
Supervisory review of promotional material

K. Anti-Money Laundering Requirements

Developing policies, procedures and internal controls
Customer identification program and recordkeeping
Detection and reporting of suspicious activity
Training staff to monitor trading activity
Recordkeeping
Designation of individual or individuals (“compliance officer”) to be responsible for overseeing the program
Employee training program Independent audit function

Other NFA Information

The NFA also has this to say about the Series 30 exam:

Branch Manager Examination – Futures (Series 30)

NFA must receive evidence that individuals applying to be a branch office manager have passed the Series 30. However, NFA will not require evidence that they have passed the Series 30 if, since the date they last ceased acting as a branch office manager, there has not been a period of two consecutive years during which they have not been registered as an AP. Additionally, individuals whose sponsor is a registered broker-dealer may, in lieu of the Series 30, provide proof that they are qualified to act as a branch office manager or designated supervisor under the rules of FINRA.

Please contact us if you have a question on this issue or if you would like to start a hedge fund, CPO or CTA. If you would like more information, please see our articles on starting a hedge fund. Other related hedge fund law articles include:

NFA Fingerprint Cards

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Information on Requesting and Submitting NFA Fingerprint Cards

Those persons who are registering with the CFTC in any capacity (Associated Person of a CPO, CTA, IB) will need to submit fingerprint cards to the NFA prior to their registration being effective. It is also likely that the new forex registration rules will require fingerprint cards from Associated Persons of Forex CPOs, Forex CTAs and Forex IBs. Below are two announcements from the NFA regarding fingerprint cards.

You can request fingerprint cards from the NFA by calling: 312-781-1410 or 800-621-3570.

You can have the fingerprints done at any local police station.

You will send the fingerprint cards to this address:

NFA
Attn: Registration
300 South Riverside Plaza
Suite 1800
Chicago, Illinois 60606

Please note: recently we have seen clients who have had issues with having their fingerprint cards read by the NFA. If you do not have a local police station take your prints (i.e. you have a notary or other group take the prints), you risk the prints being illegible which will slow down the registration process. We recommend you always have your prints taken at a police station.

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Fingerprint Cards

Fingerprint cards are sent by NFA to the Federal Bureau of Investigation (FBI) to determine if the applicant has a criminal record. To conduct a check of its records the FBI must be able to analyze the print pattern of all 10 fingers. The FBI will reject fingerprint cards that do not have legible patterns for all 10 fingers. For this reason it is very important that you have your fingerprints taken by a person properly trained in rolling fingerprints.

NFA has issued a Registration Advisory [HFLB note: please see below] that provides guidance concerning fingerprinting to assist those who submit applications via the Online Registration System.

NFA can only accept and process a complete FBI “applicant card”. Applicants are encouraged to submit more than one set of fingerprints with their application to avoid delays in obtaining additional sets if necessary for processing.

We will return any fingerprint cards we receive which are incomplete or not an applicant card to the registrant and request new cards be sent as soon as possible.

NFA offers a fingerprinting service for NFA applicants at the Chicago office (300 South Riverside Plaza, Suite 1800) between the hours of 8:30 a.m. and 4:00 p.m. for $15 (cash, check or money order). In order to use NFA’s fingerprint service, visitors must be pre-registered in the building’s visitor registry. Visitors should contact NFA’s Information Center (either by phone at 312-781-1410 or send an email to [email protected]) to register their name and date of visit so they can receive access to NFA’s offices on the 18th floor. NFA recommends that visitors pre-register at least a day prior to their visit.

All individuals being fingerprinted will be required to present two forms of identification, one of which is a valid picture ID issued by a government agency, in order to verify the identity of the person being fingerprinted. NFA now submits digital images of fingerprints to the FBI for criminal background checks. Results are received in three days or less, and in some cases within several hours, resulting in a faster and more efficient registration process. If you have any questions regarding the fingerprint process, please contact NFA’s Information Center at 312-781-1410 or 800-621-3570.

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Registration Advisory – Fingerprinting
July 29, 2005

As part of a 2003 Report to Congress (GAO-03-795), the United States Government Accountability Office identified potential weaknesses in controls with respect to the fingerprinting of individuals who submit fingerprints in connection with registration applications in the futures and securities industries. NFA is providing the following guidance to assist Members who submit applications via NFA’s Online Registration System (ORS).

Members are responsible for performing due diligence and establishing appropriate procedures in the hiring process. Members are required to submit fingerprint cards for each of their applicants for registration as associated persons or for approval as a principal. Members should use all available information gathered in the hiring process (both from the ORS application information and from any other hiring due diligence procedures such as background checks and employment references) to confirm that the person being fingerprinted is the same person submitting an application via ORS.

Members should consider incorporating the following fingerprinting practices in connection with filing registration applications in the futures industry. These recommended practices are intended to enhance the integrity of the fingerprinting process and complement Members’ existing procedures used to verify that the fingerprint card contains the fingerprints of the person whose application has been filed.

Members that use their own personnel to take fingerprints should consider:

Establishing and communicating internal fingerprinting procedures, and periodically reviewing and updating them;
Limiting the number of employees who are responsible for the fingerprinting process;
Training those employees to roll high-resolution fingerprints that will be accepted by the FBI; and
Training those employees to require the person being fingerprinted to present two forms of identification, one of which is a valid picture ID issued by a government agency, in order to verify the identity of the person being fingerprinted.

Members that use third parties to take fingerprints should consider requiring individuals to be fingerprinted at a location where the persons taking the fingerprints are likely to verify identity as well as the authenticity of identification cards presented, such as law enforcement offices and NFA’s Chicago office. Other locations that may provide fingerprinting services and that would be appropriate include military bases, government agencies and self-regulatory organizations.

If you have any questions regarding the information contained in this Advisory, please contact NFA’s Information Center at (800) 621-3570.

CPO Annual Report Guidance

Annual Reminder for CPOs and CTAs

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Commodity Firms Need to Complete Annual Regulatory Information

The NFA recently released a regulatory reminder to firms which are registered as commodity pool operators and/or commodity trading advisors. The reminder reminds CPOs and CTAs that there are certain annual regulatory items which a firm must complete in order to remain in good standing with the NFA. I have reprinted these two releases below. As a summary, the reports emphasize:

Firms must complete an annual update and questionnaire. Firms must pay of yearly dues to the NFA (which can be done online). Firms should also make sure that all employees are appropriately registered as Associated Persons, as necessary.
Firms should review the NFA Self Exam checklist to ensure compliance.
Firms should send Privacy Policy to all investors/ clients.
Firms should review and test the Disaster Recovery Plan. If necessary, adjustments should be made.
Firms should review Ethics Training Procedures. If necessary, appropriate ethics training should be provided.
Firms should file any new exemption notices with the NFA, if necessary.
Firms should review their Disclosure Document. As a reminder, the Disclosure Document must be no more than 9 months old and reviewed by the NFA. If the CPO or CTA firm also trades in the off-exchange forex markets, the Disclosure Document must incorporate the new forex rules which were adopted on November 30, 2008 (see NFA Compliance Rule 2-41 on post regarding NFA to Begin Regulating Forex).
(For CTAs) If the firm places bunched orders, the firm must conduct (and document) quarterly analysis of the of order allocation method. The order allocation method must be fair and equitable.
(For CPOs) Firms must distribute the pool’s Annual Report to investors; Annual Report must also be submitted to the NFA.

Many of the above items can be done online. Many of the above items should be overseen by a hedge fund/ securities attorney or an experienced NFA compliance consultant. Please contact us if you would like more information on our annual NFA compliance packages which can be modified based on your needs. We can also provide compliance support on an hourly basis. Continue reading →

Revising Hedge Fund Offering Documents

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It is very important that hedge fund managers always provide potential investors with hedge fund offering documents which are current and up to date.* Because of certain changes to the various hedge fund laws within the past few months (and because of the increased likelihood of future rules/regulations changes) a hedge fund private placement memorandum which was current 3 months ago will likely need to be revised.

*As always, hedge fund offering documents should only be drafted by a knowledgeable hedge fund attorney.

Specifically, there are two changes which will need to be implemented immediately – the change of the new issue rule (applicable to most funds) and the abolition of Section 409 (applicable to a small number of hedge funds). This article will detail the changes that will need to be made and will discuss how your hedge fund attorney will go about this. Continue reading →

Hedge Fund Disclaimer

Starting a Hedge Fund – Primer for Start Up Hedge Fund Managers

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How to Start a Hedge Fund

Many future hedge fund managers have misconceptions about how to start a hedge fund – either they think it is a very basic process that takes no time or resources, or they think that it will take too much time and will be cost prohibitive. For most start up hedge funds, the manager can be up and running within a month depending on whether the manager will need to be registered with the state securities commission (please see our article on start up hedge fund timelines). This article will detail the steps the manager will need to take to start the hedge fund. Continue reading →

Registration Renewal For Brokers (IARD Notice)

Authority of Various Securities Laws and Releases/ Interpretations

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The reference below comes directly from the SEC website and provides the reader with a good overview of the different laws and rules which govern the hedge fund industry, and the order in which those rules are applied (that is, the securities statutes trump SEC interpretive releases). This reference is important for hedge fund managers to understand because there are many different types of authority which are cited in this blog and in the hedge fund offering documents and hedge fund compliance manuals. If you have questions on what sources are the most important for your particular situation, you should discuss this with your hedge fund attorney. As always feel free to contact us if you have legal questions regarding your hedge fund. Continue reading →

Hedge Fund Law Blog

Hedge fund laws, starting a hedge fund, news and events…

Category Archives: Legal Resources

Over 100 Hedge Fund Managers Apply For PPIP

Series 30 Exam Information

NFA Fingerprint Cards

CPO Annual Report Guidance

Annual Reminder for CPOs and CTAs

Revising Hedge Fund Offering Documents

Hedge Fund Disclaimer

Starting a Hedge Fund – Primer for Start Up Hedge Fund Managers

Registration Renewal For Brokers (IARD Notice)

Authority of Various Securities Laws and Releases/ Interpretations