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CFTC Regulation 4.7 for Registered CTAs and CPOs

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“Lite-Touch” Regulatory Approach for Certain CFTC Registrants

In general, CFTC registered CPOs and CTAs must adhere to certain disclosure and reporting requirements as specified in the Commodity Exchange Act (“CEA”) and regulations thereunder.  However, some CFTC registered firms can operate under a “lite-touch” regulatory regime if the firm only provides investment management services to qualified eligible persons.  The lite-touch regulatory regime is available under CFTC Rule 4.7 to both CPOs and CTAs who file the exemption with the NFA.

This post will provide an overview of the firms which are eligible for the exemption and an overview of the relief granted.  We post the entire text of the exemption at the end of this post.

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Eligibility for Exemption

In general, the exemption is available for firms which meet the following requirements:

  1. Registered with the CFTC as a CPO or CTA
  2. Investors/Clients are only qualified eligible persons (QEPs)
  3. 4.7 Exemption filed with the NFA
  4. Offering/Disclosure Documents contain CFTC disclaimer

The central reason why some firms will want to utilize the exemption is to keep from going through the disclosure document review process with the NFA which can take anywhere from 3 weeks to 3 months depending on a number of factors.  Please note that firms must already be registered with the CFTC which means that Principals and APs will generally need to have the Series 3 exam license.  If a CPO wants to remain unregistered, the firm may be able to use the 4.13(a)(4) exemption instead of the 4.7 exemption.

Filing the Exemption

To file the notice for exemption, the firm will need to access the NFA’s online registration system and complete the required exemption filing.  In order to claim the exemption, the CPO or CTA will be required to certify that:

  • neither the CPO/CTA nor its Principals are subject to statutory disqualifications under sections 8a(2) or 8a(3) of the CEA;
  • the CPO/CTA will comply with the applicable requirements of Rule 4.7 (see below for full text of rule);
  • and for CPOs, that the exempt pool will be offered and operated in compliance with the requirements of Rule 4.7.

Generally, the exemption becomes effective upon filing, assuming there are no errors with the filing.  It is important to note that the exemption ceases to be effective once a CPO’s/CTA’s circumstances change rendering it ineligible for the exemption.  The CPO/CTA must promptly notify the NFA of such change.

Requirements From Which CPO/CTA is Exempt

Under the 4.7 exemption, CPOs are granted the following:

  • Disclosure Relief
    • exempt from delivering to potential investors disclosure documents pursuant to Rule 4.21 or file/submit amendments of disclosure documents with the NFA pursuant to Rule 4.26
    • exempt from the specific disclosure document requirements pursuant to Rule 4.24 (e.g. risk disclosure statements, potential conflicts of interest, risk factors, etc.)
    • exempt from the performance disclosure requirements pursuant to Rule 4.25

*If the CPO chooses to provide investors with an offering memorandum, it must not be misleading and must contain the risk disclosure statement pursuant to Rule 4.7(b)(1).

  • Reporting Relief
    • exempt from the full reporting requirements to Rule 4.22(a)( and (b) but the CPO must provide investors with a quarterly statement within 30 days of the end of the quarter which includes: (i) NAV of the exempt pool, (ii) change in NAV, and (iii) NAV per outstanding interest
  • Annual Report Relief
    • exempt from the annual reporting requirements of Rule 4.22(c) and (d) but the CPO must file and distribute, within 90 days of the end of the year, an annual report for the exempt pool that contain: (i) a statement of financial condition, (ii) statement of income, (iii) footnote disclosures and other material information
  • Recordkeeping relief
    • exempt from the full recordkeeping requirements of Rule 4.23 but the CPO must maintain the reports discussed above and all books and records related to the exempt pool in accordance with Rule 1.31

Under the 4.7 exemption, CTAs are granted the following:

  • Disclosure Relief
    • the CTA is similarly exempt from disclosure documents requirements pursuant to Rule 4.31, 4.34, 4.35, and 4.36
  • Recordkeeping Relief
    • exempt from the full recordkeeping requirements of Rule 4.33 but the CTA must maintain all books and records related to the exempt accounts in accordance with Rule 1.31

Important Items to Note

  • 4.7 Exempt CPOs will still need to file quarterly NFA Rule 2-46 reports for the funds which they manage.
  • CPOs must remember that while they may file a Rule 4.7 exemption for a particular pool and thus be exempt from the above requirements, the CPO is not exempt as related to the other non-exempt pools that it may operate.

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The full text of Rule 4.7 is reprinted below:

§ 4.7   Exemption from certain part 4 requirements for commodity pool operators with respect to offerings to qualified eligible persons and for commodity trading advisors with respect to advising qualified eligible persons.

This section is organized as follows: Paragraph (a) contains definitions for the purposes of §4.7; paragraph (b) contains the relief available to commodity pool operators under §4.7; paragraph (c) contains the relief available to commodity trading advisors under §4.7; paragraph (d) concerns the Notice of Claim for Exemption under §4.7; and paragraph (e) addresses the effect of an insignificant deviation from a term, condition or requirement of §4.7.

(a) Definitions…..[intentionally omitted

(b) Relief available to commodity pool operators. Upon filing the notice required by paragraph (d) of this section, and subject to compliance with the conditions specified in paragraph (d) of this section, any registered commodity pool operator who offers or sells participations in a pool solely to qualified eligible persons in an offering which qualifies for exemption from the registration requirements of the Securities Act pursuant to section 4(2) of that Act or pursuant to Regulation S, 17 CFR 230.901 et seq., and any bank registered as a commodity pool operator in connection with a pool that is a collective trust fund whose securities are exempt from registration under the Securities Act pursuant to section 3(a)(2) of that Act and are offered or sold, without marketing to the public, solely to qualified eligible persons, may claim any or all of the following relief with respect to such pool:

(1) Disclosure relief.

(i) Exemption from the specific requirements of §§4.21, 4.24, 4.25 and 4.26 with respect to each exempt pool; Provided, That if an offering memorandum is distributed in connection with soliciting prospective participants in the exempt pool, such offering memorandum must include all disclosures necessary to make the information contained therein, in the context in which it is furnished, not misleading; and that the following statement is prominently disclosed on the cover page of the offering memorandum, or, if none is provided, immediately above the signature line on the subscription agreement or other document that the prospective participant must execute to become a participant in the pool:

“PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR THIS POOL.”

(ii) Exemption from disclosing the past performance of exempt pools in the Disclosure Document of non-exempt pools except to the extent that such past performance is material to the non-exempt pool being offered; Provided, That a pool operator that has claimed exemption hereunder and elects not to disclose any such performance in the Disclosure Document of non-exempt pools shall state in a footnote to the performance disclosure therein that the operator is operating or has operated exempt pools whose performance is not disclosed in this Disclosure Document.

(2) Periodic reporting relief . Exemption from the specific requirements of §§4.22(a) and (b); Provided, That a statement signed and affirmed in accordance with §4.22(h) is prepared and distributed to pool participants no less frequently than quarterly within 30 calendar days after the end of the reporting period. This statement must be presented and computed in accordance with generally accepted accounting principles and indicate:

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

(ii) The change in net asset value from the end of the previous reporting period; and

(iii) The net asset value per outstanding unit of participation in the exempt pool as of the end of the reporting period.

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

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

(iv) Where the pool is comprised of more than one ownership class or series, the net asset value of the series or class on which the account statement is reporting, and the net asset value per unit or value of the participant’s share, also must be included in the statement required by this paragraph (b)(2); except that, for a pool that is a series fund structured with a limitation on liability among the different series, the account statement required by this paragraph (b)(2) is not required to include the consolidated net asset value of all series of the pool.

(v) A commodity pool operator of a pool that meets the conditions specified in §4.22(d)(2)(i) of this part to present and compute the commodity pool’s financial statements contained in the Annual Report in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board and has filed notice pursuant to §4.22(d)(2)(ii) of this part also may use such International Financial Reporting Standards in the computation and presentation of the account statement.

(3) Annual report relief.

(i) Exemption from the specific requirements of §4.22(c) and (d) of this part; Provided, That within 90 calendar days after the end of the exempt pool’s fiscal year

or the permanent cessation of trading, whichever is earlier, the commodity pool operator electronically files with the National Futures Association and distributes to each participant in lieu of the financial information and statements specified by those sections, an annual report for the exempt pool, affirmed in accordance with §4.22(h) which contains, at a minimum:

(A) A Statement of Financial Condition as of the close of the exempt pool’s fiscal year (elected in accordance with §4.22(g));

(B) A Statement of Operations for that year;

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

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

(ii) Except as provided in §4.22(d)(2) of this part, such annual report must be presented and computed in accordance with generally accepted accounting principles consistently applied and, if certified by an independent public accountant, so certified in accordance with §1.16 of this chapter as applicable.

(iii) Legend.

(A) If a claim for exemption has been made pursuant to this section, the commodity pool operator must make a statement to that effect on the cover page of each annual report.

(B) If the annual report is not certified in accordance with §1.16, the pool operator must make a statement to that effect on the cover page of each annual report and state that a certified audit will be provided upon the request of the holders of a majority of the units of participation in the pool who are unaffiliated with the commodity pool operator.

(4) Recordkeeping relief. Exemption from the specific requirements of §4.23; Provided, That the commodity pool operator must maintain the reports referred to in paragraphs (b)(2) and (b)(3) of this section and all books and records prepared in connection with his activities as the pool operator of the exempt pool (including, without limitation, records relating to the qualifications of qualified eligible persons and substantiating any performance representations) at his main business address and must make such books and records available to any representative of the Commission, the National Futures Association and the United States Department of Justice in accordance with the provisions of §1.31.

(c) Relief available to commodity trading advisors. Upon filing the notice required by paragraph (d) of this section, and subject to compliance with the conditions specified in paragraph (d) of this section, any registered commodity trading advisor who anticipates directing or guiding the commodity interest accounts of qualified eligible persons may claim any or all of the following relief with respect to the accounts of qualified eligible persons who have given due consent to their account being an exempt account under §4.7:

(1) Disclosure relief.

(i) Exemption from the specific requirements of §§4.31, 4.34, 4.35 and 4.36; Provided, That if the commodity trading advisor delivers a brochure or other disclosure statement to such qualified eligible persons, such brochure or statement shall include all additional disclosures necessary to make the information contained therein, in the context in which it is furnished, not misleading; and that the following statement is prominently displayed on the cover page of the brochure or statement or, if none is provided, immediately above the signature line of the agreement that the client must execute before it opens an account with the commodity trading advisor:

“PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT DOCUMENT.”

(ii) Exemption from disclosing the past performance of exempt accounts in the Disclosure Document for non-exempt accounts except to the extent that such past performance is material to the non-exempt account being offered; Provided, That a commodity trading advisor that has claimed exemption hereunder and elects not to disclose any such performance in the Disclosure Document for non-exempt accounts shall state in a footnote to the performance disclosure therein that the advisor is advising or has advised exempt accounts for qualified eligible persons whose performance is not disclosed in this Disclosure Document.

(2) Recordkeeping relief. Exemption from the specific requirements of §4.33; Provided, That the commodity trading advisor must maintain, at its main business office, all books and records prepared in connection with his activities as the commodity trading advisor of qualified eligible persons (including, without limitation, records relating to the qualifications of such qualified eligible persons and substantiating any performance representations) and must make such books and records available to any representative of the Commission, the National Futures Association and the United States Department of Justice in accordance with the provisions of §1.31.

(d) Notice of claim for exemption.

(1) A notice of a claim for exemption under this section must:

(i) Provide the name, main business address, main business telephone number and the National Futures Association commodity pool operator or commodity trading advisor identification number of the person claiming the exemption;

(ii)

(A) Where the claimant is a commodity pool operator, provide the name(s) of the pool(s) for which the request is made; Provided, That a single notice representing that the pool operator anticipates operating single-investor pools may be filed to claim exemption for single-investor pools and such notice need not name each such pool;

(B) Where the claimant is a commodity trading advisor, contain a representation that the trading advisor anticipates providing commodity interest trading advice to qualified eligible persons;

(iii) Contain representations that:

(A) Neither the commodity pool operator or commodity trading advisor nor any of its principals is subject to any statutory disqualification under section 8a(2) or 8a(3) of the Act unless such disqualification arises from a matter which was previously disclosed in connection with a previous application for registration if such registration was granted or which was disclosed more than thirty days prior to the filing of the notice under this paragraph (d);

(B) The commodity pool operator or commodity trading advisor will comply with the applicable requirements of §4.7; and

(C) Where the claimant is a commodity pool operator, that the exempt pool will be offered and operated in compliance with the applicable requirements of §4.7;

(iv) Specify the relief claimed under §4.7;

(v) Where the claimant is a commodity pool operator, state the closing date of the offering or that the offering will be continuous;

(vi) Be filed by a representative duly authorized to bind the commodity pool operator or commodity trading advisor;

(vii) Be filed electronically with the National Futures Association through its electronic exemption filing system; and

(viii)

(A)

( 1 ) Where the claimant is a commodity pool operator, except as provided in paragraph (d)(1)(ii)(A) of this section with respect to single-investor pools and in paragraph (d)(1)(viii)(A)( 2 ) of this section, be received by the National Futures Association:

( i ) Before the date the pool first enters into a commodity interest transaction, if the relief claimed is limited to that provided under paragraphs (b)(2), (3) and (4) of this section; or

( ii ) Prior to any offer or sale of any participation in the exempt pool if the claimed relief includes that provided under paragraph (b)(1) of this section.

( 2 ) Where participations in a pool have been offered or sold in full compliance with part 4, the notice of a claim for exemption may be filed with the National Futures Association at any time; Provided, That the claim for exemption is otherwise consistent with the duties of the commodity pool operator and the rights of pool participants and that the commodity pool operator notifies the pool participants of his intention, absent objection by the holders of a majority of the units of participation in the pool who are unaffiliated with the commodity pool operator within twenty-one days after the date of the notification, to file a notice of claim for exemption under §4.7 and such holders have not objected within such period. A commodity pool operator filing a notice under this paragraph (d)(1)(viii)(A)( 2 ) shall either provide disclosure and reporting in accordance with the requirements of part 4 to those participants objecting to the filing of such notice or allow such participants to redeem their units of participation in the pool within three months of the filing of such notice.

(B) Where the claimant is a commodity trading advisor, be received by the Commission before the date the trading advisor first enters into an agreement to direct or guide the commodity interest account of a qualified eligible person pursuant to §4.7.

(2) The notice will be effective upon receipt by the National Futures Association with respect to each pool for which it was made where the claimant is a commodity pool operator and otherwise generally where the claimant is a commodity trading advisor; Provided, That any notice which does not include all the required information shall not be effective, and that if at the time the National Futures Association receives the notice an enforcement proceeding brought by the Commission under the Act or the regulations is pending against the pool operator or trading advisor or any of its principals, the exemption will not be effective until twenty-one calendar days after receipt of the notice by the National Futures Association and that in such case an exemption may be denied by the Commission or the National Futures Association or made subject to such conditions as the Commission or the National Futures Association may impose.

(3) Any exemption claimed hereunder shall cease to be effective upon any change which would cause the commodity pool operator of an exempt pool to be ineligible for the relief claimed with respect to such pool or which would cause a commodity trading advisor to be ineligible for the relief claimed. The pool operator or trading advisor must promptly file a notice advising the National Futures Association of such change.

(4)

(i) Any exemption from the requirements of §4.21, 4.22, 4.23, 4.24, 4.25 or 4.26 claimed hereunder with respect to a pool shall not affect the obligation of the commodity pool operator to comply with all other applicable provisions of part 4, the Act and the Commission’s rules and regulations, with respect to the pool and any other pool the pool operator operates or intends to operate.

(ii) Any exemption from the requirements of §4.31, 4.33, 4.34, 4.35 or 4.36 claimed hereunder shall not affect the obligation of the commodity trading advisor to comply with all other applicable provisions of part 4, the Act and the Commission’s rules and regulations, with respect to any qualified eligible person and any other client to which the commodity trading advisor provides or intends to provide commodity interest trading advice.

(e) Insignificant deviations from a term, condition or requirement of §4.7.

(1) A failure to comply with a term or condition of §4.7 will not result in the loss of the exemption with respect to a particular pool or client if the commodity pool operator or the commodity trading advisor relying on the exemption shows that:

(i) The failure to comply did not pertain to a term, condition or requirement directly intended to protect that particular qualified eligible person;

(ii) The failure to comply was insignificant with respect to the exempt pool as a whole or to the particular exempt account; and

(iii) A good faith and reasonable attempt was made to comply with all applicable terms, conditions and requirements of §4.7.

(2) A transaction made in reliance on §4.7 must comply with all applicable terms, conditions and requirements of §4.7. Where an exemption is established only through reliance upon paragraph (e)(1) of this section, the failure to comply shall nonetheless be actionable by the Commission.

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Cole-Frieman & Mallon LLP provides comprehensive legal, registration and compliance services for CFTC registered firms.  Bart Mallon can be reached directly at 415-868-5345.

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

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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:

  1. not be subject to a disqualification (which includes various criminal, civil, and regulatory disciplinary events),
  2. solely advise 3(c)(7) fund(s),
  3. file with the state the report that is required by the SEC (the condensed Form ADV, discussed in the Exempt Reporting Advisers article), and
  4. 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.

New BVI Hedge Fund Regulations Start 01/01/2011

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Transition Period for BVI Mutual Funds Act of 1996 Ends on December 31, 2010

Sponsors with funds located in the BVI should be aware that at the beginning of next year there will be a new regulatory regime.  Starting on January 1, 2011, all funds must comply with the requirements of the Securities and Investment Business Act, 2010 (“SIBA”) instead of the current Mutual Funds Act, 1996 (“MFA”).

The new laws are much stricter than the previous laws and continue the push by the BVI Financial Services Commission (FSC) to maintain greater oversight of funds located in the BVI.  Managers with BVI funds should pay careful attention to the new laws and make revisions to their documents or operations accordingly.

Below is an overview of the major new requirements under the SIBA:

  • Disclaimer on Offering Documents – in the event a fund offers interests or shares on or after December 31, 2010, the fund offering documents must be amended to include the prescribed investment warning under the new law.  The subscription agreements must also include an acknowledgement from any new investor that it has received, understood and accepted the investment warning.
    • Note: these documents must be filed with the Financial Services Commission (“Commission”) within 14 days of their issue.
  • 2 Directors viagra canada – all private funds must at all times have at least 2 directors (at least 1 of which is an individual).
    • Note: a change of the board (and auditor) must be filed with the Commission within 14 days.
  • Manager, Administrator, and Custodian – all private funds must have a manager, an administrator, and a custodian which is independent from the manager and administrator.
    • Note:  funds may apply to the Commission from an exemption from the requirement to have a custodian or a manager.
  • Notices
    • Appointing a new custodian, administrator, prime broker, or manager must be reported to the Commission at least 7 days prior to the appointment.
    • Audited accounts must be filed within 6 months of the financial year end.
    • 14 days notice to the Commission is also required for change in place of business and amendments of constitutional or offering documents.
    • Annual returns must be filed by June 30 of each year.

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Other related articles include:

Bart Mallon, Esq. is a hedge fund attorney and works with a variety of domestic and offshore hedge fund manager.  He can be reached directly at 415-868-5345.

Rule 204-4 – Reporting by Exempt Reporting Advisers

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Proposed Rule 204-4 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 204-4 provides that certain “exempt reporting advisers” are required to file Form ADV with the SEC.  The instructions to Form ADV will specify which information on Form ADV is to be completed by such “exempt reporting advisers.”

The term “exempt reporting advisers” means an adviser exempt from SEC registration because:

  • the adviser only advises solely one or more “venture capital funds” (Advisers Act Section 203(l)); or
  • the adviser acts only as an adviser to private funds and has AUM in the US of less than $150MM (Advisers Act Section 203(m)).

The full proposed revised rule is reprinted below.

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§ 275.204-4 Reporting by exempt reporting advisers.

(a) Exempt Reporting Advisers. If you are an investment adviser relying on the exemption from registering with the Commission under section 203(l) or (m) of the Act (15 U.S.C. 80b-3(l) or 80b-3(m)), you must complete and file reports on Form ADV (17 CFR 279.1) by following the instructions in the Form, which specify the information that an exempt reporting adviser must provide.

(b) Electronic Filing. You must file Form ADV electronically with the Investment Adviser Registration Depository (IARD) unless you have received a hardship exemption under paragraph (e) of this section.

Note to paragraph (b): Information on how to file with the IARD is available on the Commission’s website at http://www.sec.gov/iard.

(c) When filed. Each Form ADV is considered filed with the Commission upon acceptance by the IARD.

(d) Filing fees. You must pay FINRA (the operator of the IARD) a filing fee. The Commission has approved the amount of the filing fee. No portion of the filing fee is refundable. Your completed Form ADV will not be accepted by FINRA, and thus will not be considered filed with the Commission, until you have paid the filing fee.

(e) Temporary hardship exemption.

(1) Eligibility for exemption. If you have unanticipated technical difficulties that prevent submission of a filing to the IARD system, you may request a temporary hardship exemption from the requirements of this chapter to file electronically.

(2) Application procedures. To request a temporary hardship exemption, you must:

(i) File Form ADV-H (17 CFR 279.3) in paper format no later than one business day after the filing that is the subject of the ADV-H was due; and

(ii) Submit the filing that is the subject of the Form ADV-H in electronic format with the IARD no later than seven business days after the filing was due.

(3) Effective date – upon filing. The temporary hardship exemption will be granted when you file a completed Form ADV-H.

(f) Final Report. You must file a final report in accordance with instructions in Form ADV when:

(1) You cease operation as an investment adviser;

(2) You no longer meet the definition of exempt reporting adviser under paragraph (a); or

(3) You apply for registration with the Commission.

Note to paragraph (f): You do not have to pay a filing fee to file a final report on Form ADV through the IARD.

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

States Securities Divisions Amending Securities Regulations Post Dodd-Frank

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Washington State Proposes Amendment to Definitions

The Dodd-Frank bill has certainly created new responsibilities for the SEC and CFTC.  Also affected are the state securities divisions which have laws and regulations referencing, or based on, various federal securities laws.  Because federal laws have changed under Dodd-Frank, the state securities laws (generally known as “Blue Sky” laws) will eventually need to be amended as well.  Over the coming months we will see various state securities divisions propose changes to regulations designed to correspond to the new laws under Dodd-Frank.  One state, Washington (which is known to have a good securities division), has recently proposed rules to “amend the definition of “accredited investor” contained in its rules to conform to federal law through expedited rule making.”

Additionally, we may see state legislatures rewriting large parts of their securities laws to correspond with the changes at the federal level.  Such effort may be coordinated by NASAA or through another iteration of the Uniform Securities Act.

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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.

Hedge Fund Events August 2010

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The following are various hedge fund events happening this month.  Please email us if you would like us to add your event to this list.

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Aug 2-3

August 3

August 3

August 5

August 5

August 9-13

August 11

August 11

August 12

August 12

August 22

August 24

August 24-26

August 25-27

August 25-27

August 31 – September 1

August 31 – September 3

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

Hedge Fund Events May 2010

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The following are various hedge fund events happening this month.  Please email us if you would like us to add your event to this list.

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May 2-4

May 3-4

May 3-5

May 4

May 4

May 4

  • Sponsor: Quickstep Consulting in association with the Summit Finuas Network
  • Event: UCITS for Hedge Funds
  • Location: Dublin

May 4

May 5

May 5

May 5

May 6-7

May 6-7

May 10-11

May 10-12

May 10-12

May 10-13

  • Sponsor: Institute for International Research
  • Event: RiskMinds USA 2010
  • Location: Boston

May 11

May 11

May 11

May 11

May 11-12

May 11-12

May 11-12

May 11-12

May 12

May 12-14

May 12-14

May 13-14

May 13-14

May 14

May 15

May 17-18

May 17-18

May 17-18

May 17-18

May 17-18

May 17-19

May 18

May 18-20

May 19

May 20

May 20

May 20

May 20

May 20

May 20

May 20

May 20

May 21

May 24-26

May 24

May 25

May 25

May 25-26

May 25-26

May 25-27

May 25-27

May 25-28

  • Sponsor: Incisive Media
  • Event: Risk Europe
  • Location: Frankfurt

May 26

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

Cole-Frieman & Mallon LLP Quarterly Newsletter | 1st 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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April 1, 2010
www.colefrieman.com

Cole-Frieman &  Mallon LLP Quarterly Newsletter

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.  We have also provided a list of some of the major compliance issues that managers should be aware of during this time period.

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New Quarterly Reporting Rule for CPOs – new NFA Rule 2-46, which became effective on March 31, 2010, requires registered commodity pool operators (including registered CPOs managing 4.7 or 4.12 pools) to provide a quarterly report to the NFA through the NFA’s EasyFile system.  Managers will report information on key relationships, a statement of the change in the fund’s NAV, monthly ROR, and a schedule for major investments.  The report will need to be filed within 45 days of March 31 and the process will be familiar to those groups who have filed their annual returns with the NFA previously.

For a complete overview of the new rule, click here.

Proposed Forex Regulations – for forex managers, the announcement of the CFTC’s proposed forex regulations was the major topic of conversation over the last quarter.  The proposed regulations include a number of new requirements for forex managers: (i) registration requirements for forex CTAs, CPOs, and IBs; (ii) net capital requirements for forex dealers; (iii) reduction in leverage from 100:1 to 10:1; and, (iv) a guarantee requirement for all forex IBs.

Overview of the proposed regulations can be found here.

Mallon P.C. comments on the proposed regulations can be found here.

Compliance Reminders

Form D Update – managers should be aware that for continuous offerings (most hedge funds), Form D needs to be updated on an annual basis.  Managers who have not updated Form D within the last year should check whether the fund’s Form D needs to be updated. For more information please click here.

Blue Sky Filings – managers need to make sure they are up to date with all blue sky filings.  Mallon P.C. has a team devoted to blue sky filings and compliance and is happy to answer any questions you may have. For more information on blue sky filings, please click here.

Investment Advisers – investment advisers should have completed their annual update of Form ADV through the IARD system by March 31, 2010 for 2009.  Managers who have not done this yet will need to do so immediately. Additionally, some states will require managers to submit other information such as updated financials. The requirements for California registered investment advisers can be found here.

CFTC Registrants – managers who are registered with the CFTC and members of the NFA have a number of yearly compliance requirements.  Generally these managers will have already done the following: (i) submitted annual reports (if required to be filed with the NFA); (ii) sent out a physical copy of their privacy policy to all investors/clients; (iii) completed the yearly NFA Self-Exam Checklist; and, (iv) updated their compliance policies and procedures accordingly.  Some CFTC registrants will have a requirement to review the procedures with respect to bunched orders on a quarterly basis.

Cleantech & Carbon – a recent 100 Women in Hedge Funds event focused on the cleantech industry and how hedge funds and VC funds are looking at investments in this space.  We wrote a summary of the event and were encouraged by the turnout and industry participation.  We look forward to greater interest in this sector by hedge funds.  Additionally, we are closely watching Congress as cap and trade legislation and energy bills become a topic of consideration.  We will continue to monitor any cap and trade legislation and will report on how this may impact the investment management industry.

2nd Quarter Events – New York CTA Expo April 21 – Mallon P.C. sponsors the CTA Expo which was established in 2008 to help professional capital raisers and allocators identify futures trading talent and to promote investing in managed futures. It is a one day conference consisting of speakers and panels combined with a schedule of thirty minute presentations by individual CTAs.  The New York event will take place on April 21, 2010 at the CME Group Building.  For more information, please see the CTA Expo website.

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For assistance with any compliance, registration, or planning issues on any of the above topics, please contact Bart Mallon of Cole-Frieman & Mallon LLP (www.colefrieman.com) at 415-868-5345 or [email protected].

Cole-Frieman & Mallon LLP is a 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.

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

Hedge Fund Events April 2010

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The following are various hedge fund events happening this month.  Please email us if you would like us to add your event to this list.

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April 7-8

April 8

April 8-9

April 9

April 13

April 13

April 14

  • Sponsor: Bay Area Hedge Fund Roundtable
  • Event: Bay Area Hedge Fund Roundtable
  • Location: San Francisco, CA

April 14

April 14

April 14-15

April 15

April 18-20

April 19

April 19

April 19-20

April 19-23

April 20

April 20

April 20

April 21

April 21

April 21

April 21

April 21

April 21

April 21-22

April 26

April 26-27

April 26-29

April 26-29

April 27

April 27

April 27-28

April 28

April 28

April 28

April 28

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