Category Archives: new hedge fund regulations

SEC Study on Uniform Fiduciary Duty for BDs

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Recommendation for Uniform Fiduciary Duty

Under Section 913 of the Dodd-Frank Act, the SEC was required to condict a study of the effectiveness of the current legal and regulatory structure for broker-dealer firms and investment advisory firms with respect to the provision of personalized investment advice to retail customers and to comment on any gaps in the legal and regulatory structure.  Essentially Congress wants to know whether retail investors really understand the difference between BDs and IAs.  This issue has been one which many in the industry have strong opinions about, particularly from the investor side and the broker-dealer side.

The following is a brief overview of the SEC study which was recently released.

SEC Recommendations

In the study, the SEC spent considerable time providing a background and overview of the regulatory regimes of both investment advisers and broker-dealers.  The study also discussed retail investors and made many references to other studies which have been conducted on this and similar issues.  Ultimately, the SEC staff was trying to determine what standards should be in place with the understanding that retail investors may have limited understanding of the regulatory structure of IAs and BDs.

Overall, the SEC’s recommendations fall into two categories:

  • Uniform Fiduciary Standard – SEC staff recommended that the SEC should apply a uniform fiduciary duty with respect to both IAs and BDs when such firms provide personalized investment advice regarding securities to retail custodmers [note: the fiduciary standard does not apply to brokers when they are activng in the capcity of a broker with respect to a transaction.]
    • With respect to the uniform standard, the staff noted that the SEC should provide guidance in some form with respect to implementing this standard.  Such guidance should cover, at least, the following items: standards of conduct, duty of loyalth, principal trading, duty of care, personalized investment advice about securities, and investor education.
  • Harmonization of Regulations – in general the SEC staff believes that harmonization, when it adds meaningful investor protection, would be advantageous.  Specifically, the staff discussed the following issues which potentially should have substantially similar rules/regulations for both IAs and BDs:
    • Advertising and other communications
    • Use of finders and solicitors
    • Solicitation
    • Licensing and registration of firms
    • Licensing and continuing education for representatives of BD and IA firms
    • Books and records

[Because of the complexity of the issue, the above is only a gross overview.]

Our thoughts

It seems clear that if two firms are engaged in the exact same activity with respect to retail investors (providing personalized investment advice regarding securities), then such firms should be subject cialis super active to the same standards of care with respect to those activities.  However, it is also clear that implementing this change in regulatory framework will not be easy.Should be a bias toward harmonization when possible and practicle

What we found particularly interesting about the study  was the discussion about state registered investment advisers and the various rules they must adhere to – it seems funny that at the federal level we are trying to harmonize regulations, whereas the report makes clear that each states rules have completely different rules (see report starting at page 85).

Probably the most interesting thing is that the Staff recommended “that the Commission should consider requiring investment adviser representative to be subject to federal continuing education and licensing requirements.”  This means that the SEC  (or potentially a SRO) would be required to create and administer an exam (similar probably to the Series 65 exam for state registered investment adviser representatives) and continuing education (similar to the CE requirements for brokers).

The full report can be found here: Study on Investment Advisers and Broker Dealers.

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Bart Mallon provides legal advice to both investment advisers and broker-dealers through Cole-Frieman & Mallon LLP, an investment management law firm.  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:

  1. Impose user fees on SEC-registered investment advisers
  2. Authorize one or more SROs to examine SEC-registered investment advisers
  3. 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.

Rule 203(m)-1 – Private Fund Adviser Exemption

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SEC Proposed Rule 203(m)-1 under Investment Advisers Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. New Advisers Act Section 203(m)-1 provides an exemption from registration with the SEC to those groups who only advise one or more qualifying private funds and manages less than $150 million in private fund assets.   The proposed new rule 203(m)-1 essentially exempts smaller fund managers from SEC registration.

Managers should note, however, that they may still be required to either:

  1. Register as an investment adviser pursuant to state law
  2. Become a reporting adviser subject to proposed Rule 204-4

The proposed rule also provides that the exemption is available for managers who are based outside of the United States and manage funds which are domiciled in the U.S. provided that the funds have less than $150 million in assets.

The full proposed rule is reprinted below.

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§ 275.203(m)-1 Private fund adviser exemption.

(a)  United States investment advisers.  For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business in the United States is exempt from the requirement to register under section 203 of the Act if the investment adviser:

(1) Acts solely as an investment adviser to one or more qualifying private funds; and

(2) Manages private fund assets of less than $150 million.

(b)  Non-United States investment advisers.  For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business outside of the United States is exempt from the requirement to register under section 203 of the Act if:

(1) The investment adviser has no client that is a United States person except for one or more qualifying private funds; and

(2) All assets managed by the investment adviser from a place of business in cheapest perscription for xenical the United States are solely attributable to private fund assets, the total value of which is less than $150 million.

(c)  Calculations.  For purposes of this section, private fund assets are calculated as the total value of such assets as of the end of each calendar quarter.

(d)  Transition rule.  With respect to the calendar quarter period immediately following the calendar quarter end date that the investment adviser ceases to be exempt from registration under section 203(m) of the Act (15 U.S.C. 80b-3(m)) due to having $150 million or more in private fund assets, the Commission will not assert a violation of the requirement to register under section 203 of the Act (15 U.S.C. 80b-3) by an investment adviser that was previously exempt in reliance on section 203(m) of the Act; provided that such investment adviser has complied with all applicable Commission reporting requirements.

(e)  Definitions.  For purposes of this section,

(1)  Assets under management means the regulatory assets under management as determined under Item 5.F of Form ADV (§ 279.1 of this title).

(2)  Place of business has the same meaning as in § 275.222-1(a) of this title.

(3)  Principal office and place of business of an investment adviser means the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser.

(4)  Private fund assets means the investment adviser’s assets under management attributable to a qualifying private fund.

(5)  Qualifying private fund means any private fund that is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C 80a-8) and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53).

(6)  Related person has the meaning set forth in § 275.204-2(d)(7) of this title.

(7)  United States has the meaning set forth in § 230.902(l) of this title.

(8)  United States person means any person that is a “U.S. person” as defined in § 230.902(k) of this title, except that any discretionary account or similar account that is held for the benefit of a United States person by a dealer or other professional fiduciary is a United States person if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.

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Bart Mallon, Esq. is a hedge fund attorney and works with a variety of managers to hedge funds, private equity funds and venture capital funds.  He can be reached directly at 415-868-5345.

Rule 203(l)-1 – Definition of Venture Capital Fund

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SEC Proposed Rule 203(l)-1 under Investment Advisers Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. New Advisers Act Section 203(l) provides an exemption from registration with the SEC to those groups who only advise “venture capital funds,” without regard to the number of such funds advised by the adviser or the size of such funds.  The following proposed new rule 203(l)-1 essentially creates a definition of “venture capital fund” for the purposes of the new section.  The proposed rule also provides a grandfathering provision for certain presently existing venture capital funds.

For the purposes of Section 203(l)-1, the term “venture capital fund” will generally mean any private fund that:

  1. Represents it is a venture capital funds;
  2. Invests in only equity securities of a portfolio company and 80% of such securities must have been acquired directly from the portfolio company;
  3. Has a management company which provides guidance to the portfolio company regarding management and operations of the portfolio levitra mail no prescription company or the fund must control the portfolio company;
  4. Uses less than 15% leverage which may only be short term; and
  5. Provides fund investors with no withdrawal rights except in extraordinary circumstances.

The full proposed rule is reprinted below.

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§ 275.203(l)-1 Venture capital fund defined.

(a) Venture capital fund defined. For purposes of section 203(l) of the Act (15 U.S.C. 80b-3(l)), a venture capital fund is any private fund that:

(1) Represents to investors and potential investors that it is a venture capital fund;

(2) Owns solely:

(i) Equity securities issued by one or more qualifying portfolio companies, and at least 80 percent of the equity securities of each qualifying portfolio company owned by the fund was acquired directly from the qualifying portfolio company; and

(ii) Cash and cash equivalents, as defined in § 270.2a51-1(b)(7)(i), and U.S. Treasuries with a remaining maturity of 60 days or less;

(3) With respect to each qualifying portfolio company, either directly or indirectly through each investment adviser not registered under the Act in reliance on section 203(l) thereof:

(i) Has an arrangement whereby the fund or the investment adviser offers to provide, and if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of the qualifying portfolio company; or

(ii) Controls the qualifying portfolio company;

(4) Does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days;

(5) Only issues securities the terms of which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata; and

(6) Is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53).

(b) Certain pre-existing venture capital funds. For purposes of section 203(l) of the Act (15 U.S.C. 80b-3(l)) and in addition to any venture capital fund as set forth in paragraph (a), a venture capital fund also includes any private fund that:

(1) Has represented to investors and potential investors at the time of the offering of the private fund’s securities that it is a venture capital fund;

(2) Prior to December 31, 2010, has sold securities to one or more investors that are not related persons, as defined in § 275.204-2(d)(7), of any investment adviser of the private fund; and

(3) Does not sell any securities to (including accepting any committed capital from) any person after July 21, 2011.

(c) Definitions. For purposes of this section,

(1) Committed capital means any commitment pursuant to which a person is obligated to acquire an interest in, or make capital contributions to, the private fund.

(2) Equity securities has the same meaning as in section 3(a)(11) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(11)) and § 240.3a11-1 of this chapter.

(3) Publicly traded means, with respect to a company, being subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), or having a security listed or traded on any exchange or organized market operating in a foreign jurisdiction.

(4) Qualifying portfolio company means any company that:

(i) At the time of any investment by the private fund, is not publicly traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is publicly traded;

(ii) Does not borrow or issue debt obligations, directly or indirectly, in connection with the private fund’s investment in such company;

(iii) Does not redeem, exchange or repurchase any securities of the company, or distribute to pre-existing security holders cash or other company assets, directly or indirectly, in connection with the private fund’s investment in such company; and

(iv) Is not an investment company, a private fund, an issuer that would be an investment company but for the exemption provided by § 270.3a-7, or a commodity pool.

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Bart Mallon, Esq. is a hedge fund attorney and works with a variety of managers to hedge funds, private equity funds and venture capital funds.  He can be reached directly at 415-868-5345.

Rule 202(a)(30)-1 – Foreign Private Adviser Definition

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Proposed Rule 202(a)(30)-1 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 202(a)(30), among other things, defines the terms “client” and “investor” for the purposes of new Section 202(a)(30) of the Advisers Act which requires “foreign private advisers” to register with the SEC.

New section 202(a)(30) of the Advisers Act defines “foreign private adviser” as an investment adviser that

  • has no place of business in the United States,
  • has fewer than 15 clients in the United States and investors in the United States in private funds advised by the adviser, and
  • less than $25 million in aggregate assets under management from such clients and investors.

For the purposes of Section 202(a)(30)-1, a single “client” generally means:

  • a natural person, family members of the same household and accounts for such persons
  • an entity and not the “owners” of an entity (two entities with exactly the same ownership can, together, be counted as a single client)

Other rules with respect to the “client” definition:

  • an “owner” will be deemed to be a client separate from an entity if advisory services are provided to the owner separately from the entity
  • managers to a hedge fund or other private fund do not necessarily need to count the individual investors in the fund as a client
  • a fund entity will be a client of the manager of the fund entity

For the purposes of Section 202(a)(30)-1, the term “investor” will generally mean a “beneficial owner” (if the fund is a 3(c)(1) fund) or a “qualified purchaser” (if the fund is a 3(c)(7) fund).  With respect to any “client” or “investor,” the term “in the United States” generally means any person who is a deemed to be a “U.S. person” as it is defined in Rule 902(k) of Regulation S under the Securities Act of 1933 (which is premised on residence in the United States, regardless of any temporary presence outside the United States).

The full proposed rule is reprinted below.

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§ 275.202(a)(30)-1 Foreign private advisers.

(a) Client. You may deem the following to be a single client for purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)):

(1) A natural person, and:

(i) Any minor child of the natural person;

(ii) Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence;

(iii) All accounts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries; and

(iv) All trusts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries;

(2)

(i) A corporation, general partnership, limited partnership, limited liability company, trust (other than a trust referred to in paragraph (a)(1)(iv) of this section), or other legal organization (any of which are referred to hereinafter as a “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 (any of which are referred to hereinafter as an “owner”); and

(ii) Two or more legal organizations referred to in paragraph (a)(2)(i) of this section that have identical owners.

(b) Special rules regarding clients. For purposes of this section:

(1) You must count an owner as a client if you provide investment advisory services to the owner separate and apart from the investment advisory services you provide to the legal organization, provided, however, that the determination that an owner is a client will not affect the applicability of this section with regard to any other owner;

(2) You are not required to count an owner as a client solely because you, on behalf of the legal organization, offer, promote, or sell interests in the legal organization to the owner, or report periodically to the owners as a group solely with respect to the performance of or plans for the legal organization’s assets or similar matters;

(3) A limited partnership or limited liability company is a client of any general partner, managing member or other person acting as investment adviser to the partnership or limited liability company; and

(4) You are not required to count a private fund as a client if you count any investor, as that term is defined in paragraph (c)(1) of this section, in that private fund as an investor in the United States in that private fund.

Note to paragraphs (a) and (b): These paragraphs are a safe harbor and are not intended to specify the exclusive method for determining who may be deemed a single client for purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)).

(c) Definitions. For purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)),

(1) Investor means any person that would be included in determining the number of beneficial owners of the outstanding securities of a private fund under section 3(c)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1)), or whether the outstanding securities of a private fund are owned exclusively by qualified purchasers under section 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(7)), except that any of the following persons is also an investor:

(A) Any beneficial owner of the private fund that pursuant to § 270.3c-5 of this title would not be included in the above determinations under section 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1), (7)); and

(B) Any beneficial owner of any outstanding short-term paper, as defined in section 2(a)(38) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(38)), issued by the private fund.

Note to paragraph (c)(1): You may treat as a single investor any person that is an investor in two or more private funds you advise.

(2) In the United States means with respect to:

(i) Any client or investor, any person that is a “U.S. person” as defined in § 230.902(k) of this title, except that any discretionary account or similar account that is held for the benefit of a person in the United States by a dealer or other professional fiduciary is in the United States if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.

Note to paragraph (c)(2)(i): A person that is in the United States may be treated as not being in the United States if such person was not in the United States at the time of becoming a client or, in the case of an investor in a private fund, at the time the investor acquires the securities issued by the fund.

(ii) Any place of business, in the United States, Online levitra as that term is defined in § 230.902(l) of this title; and

(iii) The public, in the United States, as that term is defined in § 230.902(l) of this title.

(3) Place of business has the same meaning as in § 275.222-1(a) of this title.

(4) Assets under management means the regulatory assets under management as determined under Item 5.F of Form ADV (§ 279.1 of this title).

(d) Holding out. If you are relying on this section, you shall not be deemed to be holding yourself out generally to the public in the United States as an investment adviser, within the meaning of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)), solely because you participate in a non-public offering in the United States of securities issued by a private fund under the Securities Act of 1933 (15 U.S.C. 77a).

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Bart Mallon, Esq. is a hedge fund attorney and providers legal services to hedge fund managers through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Rule 203A-5 – IA Registration Transition Rules

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Proposed Rule 203A-5 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 203A-5 provides that (i) SEC registered investment advisers must report their AUM to the SEC by August 20, 2011 and (ii) if such advisers are at that time below the threshold for SEC registration, the adviser must withdraw from SEC registration by October 19, 2011 (and generally be registered with the state in which the adviser’s maintains its principle office and place of business).

The full proposed revised rule is reprinted below.

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§ 275.203A-5 Transition rules.

(a) Every investment adviser registered with the Commission on July 21, 2011 shall file an other-than-annual amendment to Form ADV (17 CFR 279.1) no later than August 20, 2011 and shall determine its assets under management based on the current market value of the assets as determined within 30 days prior to the date of filing the Form ADV.

(b) If an investment adviser registered with the Commission on July 21, 2011 would be prohibited from registering with the Commission under section 203A(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)), and is not otherwise exempted by § 275.203A-2 from such prohibition, such investment adviser shall withdraw from registration with the Commission by filing Form ADV-W (17 CFR 279.2) no later than October 19, 2011. During this period while an investment adviser is registered with both the Commission and one or more state securities authorities, the Act and applicable State law will apply to the investment adviser’s advisory activities.

(c) If, prior to the effective date of the withdrawal from registration of an investment adviser on Form ADV-W, the Commission has instituted a proceeding pursuant to section 203(e) of the Act (15 U.S.C. 80b-3(e)) to suspend or revoke registration, or pursuant to section 203(h) of the Act (15 U.S.C. 80b-3(h)) to impose cipro dosage terms or conditions upon withdrawal, the withdrawal from registration shall not become effective except at such time and upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors.

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Bart Mallon, Esq. is a hedge fund lawyer and providers legal services to hedge fund managers through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Rule 203A-1 – Switching to or from SEC IA Registration

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Proposed Rule 203A-1 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 203A-1 will replace existing Rule 203A-1.  The new rule will provide state and SEC registered investment advisers with information on the time requirements for switching between the registration status.  The full proposed revised rule is reprinted below.

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§ 275.203A-1 Switching to or from SEC registration.

(a) State-registered advisers—switching to SEC registration. If you are registered with a state securities authority, you must apply for registration with the Commission within 90 days of filing an annual updating amendment to your Form ADV reporting that you are eligible for SEC registration and are not relying on an exemption from registration genuine viagra online under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)).

(b) SEC-registered advisers—switching to State registration. If you are registered with the Commission and file an annual updating amendment to your Form ADV reporting that you are not eligible for SEC registration and are not relying on an exemption from registration under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)), you must file Form ADV-W (17 CFR 279.2) to withdraw your SEC registration within 180 days of your fiscal year end (unless you then are eligible for SEC registration). During this period while you are registered with both the Commission and one or more state securities authorities, the Act and applicable State law will apply to your advisory activities.

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

SEC Proposes New IA and Hedge Fund Registration Rules

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Seeks Public Comment on Proposed Regulations

On November 19, the SEC released proposed rules with respect to the new hedge fund registration requirement under the Dodd-Frank act.  The major proposals include the following:

  1. Rules with respect to the manner and process of registration of hedge fund and private equity fund managers.
  2. Reporting requirements for registered hedge fund and other private fund managers.  This will include:
    • Basic organizational and operational information about the funds they manage, such as information about the amount of assets held by the fund, the types of investors in the fund, and the adviser’s services to the fund.
    • Identification of five categories of “gatekeepers” that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).
  3. Reporting requirements for non-registered private fund managers (including venture capital funds).  This will include:
    • Basic identifying information for the adviser and the identity of its owners and affiliates.
    • Information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.
    • The disciplinary history of the adviser and its employees that may reflect on their integrity.
    • Exempt reporting advisers would file reports on the Commission’s investment adviser electronic filing system (IARD), and these reports would be publicly available on the Commission’s website.
  4. Defining the term “venture capital fund” and the term “foreign private adviser”.
  5. Providing guidance on SEC to state registration for managers who will no longer be allowed to register with the SEC due to increase in registration asset threshold

We will have the opportunity to fully review these proposals over the next few days and will be providing a report on the proposed regulations and will outline the comments we intend to send to the SEC.  Public comments on the proposal will be due to the Commission in early January 2011.

The SEC summary of the proposed regulations can be found discount viagra soft gels here.  The full texts of the two sets of proposals are below:

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

SEC Proposes "Family Office" Definition

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In Section 409 of Dodd-Frank Act, Congress required the SEC to define “family office” for the purpose of exempting such groups from the registration requirements under the Advisers Act.  Section 409 provides that any definition the SEC adopts should be “consistent with the previous exemptive policy” of the SEC and recognize “the range of organizational, management, and employment structures and arrangements employed by family offices.”

The public will have the ability to comment on the SEC’s proposed rule until November 18, 2010.  After that time the SEC will take public comments into consideration and then promulgate a final rule sometime thereafter.

The SEC notice can be found here and we have also provided a link to the full Proposed Family Office Rule.

The proposed definition is reprinted below in full.

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§ 275.202(a)(11)(G)-1 Family offices.

(a) Exclusion. A family office, as defined in this section, shall not be considered to be an investment adviser for purpose of the Act.

(b) Family office. A family office is a company (including its directors, partners, trustees, and employees acting within the scope of their position or employment) that:

(1) Has no clients other than family clients; provided that if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person shall be deemed to cialis price in canada be a family client for purposes of this section 275.202(a)(11)(G)-1 for four months following the transfer of assets resulting from the involuntary event;

(2) Is wholly owned and controlled (directly or indirectly) by family members; and

(3) Does not hold itself out to the public as an investment adviser.

(c) Grandfathering. A family office as defined in paragraph (a) above shall not exclude any person, who was not registered or required to be registered under the Act on January 1, 2010, solely because such person provides investment advice to, and was engaged before January 1, 2010 in providing investment advice to:

(1) Natural persons who, at the time of their applicable investment, are officers, directors, or employees of the family office who have invested with the family office before January 1, 2010 and are accredited investors, as defined in Regulation D under the Securities Act of 1933;

(2) Any company owned exclusively and controlled by one or more family members; or

(3) Any investment adviser registered under the Act that provides investment advice to the family office and who identifies investment opportunities to the family office, and invests in such transactions on substantially the same terms as the family office invests, but does not invest in other funds advised by the family office, and whose assets as to which the family office directly or indirectly provides investment advice represents, in the aggregate, not more than 5 percent of the value of the total assets as to which the family office provides investment advice; provided that a family office that would not be a family office but for this subsection (c) shall be deemed to be an investment adviser for purposes of paragraphs (1), (2) and (4) of section 206 of the Act.

(d) Definitions. For purposes of this section:

(1) Control means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of being an officer of such company.

(2) Family client means:

(i) Any family member;

(ii) Any key employee;

(iii) Any charitable foundation, charitable organization, or charitable trust, in each case established and funded exclusively by one or more family members or former family members;

(iv) Any trust or estate existing for the sole benefit of one or more family clients;

(v) Any limited liability company, partnership, corporation, or other entity wholly owned and controlled (directly or indirectly) exclusively by, and operated for the sole benefit of, one or more family clients; provided that if any such entity is a pooled investment vehicle, it is excepted from the definition of “investment company” under the Investment Company Act of 1940;

(vi) Any former family member, provided that from and after becoming a former family member the individual shall not receive investment advice from the family office (or invest additional assets with a family office-advised trust, foundation or entity) other than with respect to assets advised (directly or indirectly) by the family office immediately prior to the time that the individual became a former family member, except that a former family member shall be permitted to receive investment advice from the family office with respect to additional investments that the former family member was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to the time the person became a former family member; or

(vii) Any former key employee, provided that upon the end of such individual’s employment by the family office, the former key employee shall not receive investment advice from the family office (or invest additional assets with a family office-advised trust, foundation or entity) other than with respect to assets advised (directly or indirectly) by the family office immediately prior to the end of such individual’s employment, except that a former key employee shall be permitted to receive investment advice from the family office with respect to additional investments that the former key employee was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to the time the person became a former key employee.

(3) Family member means:

(i) the founders, their lineal descendants (including by adoption and stepchildren), and such lineal descendants’ spouses or spousal equivalents;

(ii) the parents of the founders; and

(iii) the siblings of the founders and such siblings’ spouses or spousal equivalents and their lineal descendants (including by adoption and stepchildren) and such lineal descendants’ spouses or spousal equivalents.

(4) Former family member means a spouse, spousal equivalent, or stepchild that was a family member but is no longer a family member due to a divorce or other similar event.

(5) Founders means the natural person and his or her spouse or spousal equivalent for whose benefit the family office was established and any subsequent spouse of such individuals.

(6) Key employee means any natural person (including any person who holds a joint, community property, or other similar shared ownership interest with that person’s spouse or spousal equivalent) who is an executive officer, director, trustee, general partner, or person serving in a similar capacity of the family office or any employee of the family office (other than an employee performing solely clerical, secretarial, or administrative functions with regard to the family office) who, in connection with his or her regular functions or duties, participates in the investment activities of the family office, provided that such employee has been performing such functions and duties for or on behalf of the family office, or substantially similar functions or duties for or on behalf of another company, for at least 12 months.

(7) Spousal equivalent means a cohabitant occupying a relationship generally equivalent to that of a spouse.

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

Cole-Frieman & Mallon LLP Quarterly Newsletter | 2nd Quarter 2010

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Below is our quarterly newsletter.  If you would like to be added to our distribution list, please contact us.

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July 31, 2010
www.colefrieman.com

Clients and Friends,

We take this opportunity to provide you with a brief overview of the major items we have reported on over the last quarter.  While we are a little late with the newsletter, the past couple of weeks have been especially busy with the passage of the Dodd-Frank reform bill.  There will be continuous rulemaking and proposals over the course of the next 12 months and this newsletter will provide an overview of the issues which we will be discussing in the future.  Also, please be sure to skim the ongoing compliance update below to make sure your firm is up to date with compliance.

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Financial Reform Bill – The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by President Obama on July 21, 2010, will meaningfully change the investment management industry in a number of ways. Important changes include:

  • Manager Registration – Managers to hedge funds and private equity funds will generally be required to  register with the SEC by July 21, 2011 if they have $150 million or more in AUM.
  • Accredited Investor Definition – The definition of accredited investor has changed. Now, investors cannot include the value of their primary residence when computing net worth. The qualified client definition may also be changed in the future.
  • BD Fiduciary Standard – The SEC will study and potentially institute a fiduciary standard for broker-dealer representatives.
  • Increased State Regulation of Investment Advisers – Previously, the states only had jurisdiction over managers up to $25 million of AUM. Now the states have jurisdiction over managers with up to $100 million of AUM. We have provided our comments on the increase in state regulatory jurisdiction in light of state budget shortfalls.
  • Regulation of the OTC Derivatives Markets – Previously unregulated contacts (like credit default swaps) will be subject to a clearing requirement. There will be much written on this over the next few months as the CFTC and SEC begin establishing a framework for such clearing.
  • Imposition of Position Limits on Certain Commodities (see below)

In addition to the changes to the securities and commodities laws, there will be a number of rulemaking initiatives by both the SEC and CFTC which will augment the statutory language of the bill.

Busy, Busy SEC – Notwithstanding preparations for the Dodd-Frank bill, the SEC has been especially busy over the last quarter.  The big news was obviously the Goldman settlement, but there were a number of other SEC initiatives as well. These include:

New ADV Part 2 Released – The SEC just released the requirements for the new Form ADV Part 2 which will now be publicly available through the SEC’s Advisor Search program.  New Part 2 will require registered managers to provide a narrative of their investment program and other relevant information. Managers also need to provide investors with supplements detailing certain background information about the representative directing an investor’s account.  Most currently registered managers are required to post a new Part 2 during the first quarter of 2011.

Pay to Play Rule Adopted – The SEC adopted new Rule 206(4)-5 under the Investment Advisers Act prohibiting certain political contributions by investment advisory firms.  Firms are urged to update their compliance policies and procedures to account for the new rule.

Advisor Representative Disclosures – The SEC updated its Advisor Search program so that information on investment adviser representatives will now be publicly available online.  Prior to the update, disciplinary and other background information was only publicly available to the extent it was disclosed on the adviser’s Form ADV.

Futures/ Commodities Issues – Like the SEC, the CFTC has been very busy over the last quarter and will continue to be busy proposing rules under the Dodd-Frank bill. Accordingly, there are a number of interesting items concerning both the CFTC and NFA. These include:

Position Limits – Dodd-Frank mandates the CFTC to impose position limits across different markets including traditional futures markets, agricultural markets, and with respect to certain swap instruments. The CFTC will be releasing orders or proposed rules establishing limits within 180 days for energy commodities and within 270 days for agricultural commodities.  Position limits will affect commodities transactions that have previously qualified for broad statutory exemptions and traders will need to closely monitor trading activity to avoid violating the limits when they are established and implemented.

CFTC Releases Report on NFA – The CFTC audited the NFA in 2009 to gauge how successfully the self regulatory organization implemented certain CFTC regulations.  The CFTC noted a number of areas where the NFA should improve procedures.  We have already seen some of the suggestions implemented and, accordingly, the registration process (in certain instances) is taking a little longer than usual.

CTA & CPO Disclosure Document Bios – For CTAs and CPOs registering with the CFTC, one area where the NFA seems to spend considerable time is the biography portion of the disclosure documents.  Because of common deficiencies with respect to the biographies (or manager backgrounds), the NFA released guidance on how this part of a disclosure document should be completed.

Form 8-R Revised – Form 8-R applications for principal and associated person registration has been revised to include demographic information on the registrant.  The newly added information includes sex, race, eye color, hair color, height and weight.  The purpose of the additions was to help speed up the background check process for principals and associated persons.

NFA Forex Workshop Announced – In expectation of the CFTC finalizing the forex registration rules for forex CTAs, CPOs and IBs, the NFA is conducting a registration and compliance workshop for forex managers.  The workshop will take place on September 25th, 2010 at Caesar’s Palace in Las Vegas. NFA staff will be on hand to discuss the registration process and to take questions from managers.

Other Notes

Hedge Fund Carried Interest – Every few months the taxation of the carried interest becomes a political football.  Early in the quarter it looked like the carried interest tax would be changed as part of an unemployment extension bill.  However, that bill never passed and the proposal to tax the carried interest as ordinary income died.  We expect to probably hear another proposal like this in the next 12 to 18 months.

Hedge Fund Court Case – Earlier this year a court case was decided in favor of a hedge fund manager when that manager suspended redemptions and was subsequently sued by an investor.  We discussed the facts of the case and the manager takeaways.

Ongoing Compliance – At the end of every quarter, managers should take time to address any ongoing compliance matters.  Managers who are registered in any capacity (state, SEC or CFTC) should review their compliance calendar or policies and procedures to ensure that all quarterly compliance matters are completed.  Additionally managers should always be sure to complete all state blue sky filings and commodity pool operators should make sure they complete their Rule 2-46 quarterly filings.

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For assistance with any compliance, registration, or planning issues with respect to any of the above topics, please contact Bart Mallon of Mallon P.C. (www.mallonpc.com) at 415-868-5345 or [email protected].

Cole-Frieman & Mallon LLP is a hedge fund law firm with a national client base and is focused on the investment management industry.  Our clients include hedge fund managers, investment advisers, commodity advisors, and other investment managers.  We also provide general business and start up legal advice and have an emerging practice in real estate and cleantech.

150 Spear Street, Suite 825
San Francisco, CA 94105
Telephone: (415) 352-2300
Fax: (646) 619-4800