Hedge Fund Events October 2012

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

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October 1

October 1-2

October 1-2

October 1-2

October 1-3

October 2

October 2

October 2

October 3

October 3

October 3

October 3

October 3-5

October 4

October 4

October 4

October 9

October 9

October 10

October 10-11

October 11

October 10-12

October 11-12

October 16

October 16

Location: Boston, MA

October 16

October 17

October 17

October 17-19

October 18

October 18

October 18-19

October 18-19

October 22

  • Sponsor: Liquidnet, Credit Suisse, Omgeo, Interactive Data, FXall, NYSE Euronext
  • Event: Linedata Exchange 2012
  • Location: New York, NY

October 23

October 23

October 24

  • Sponsor: Hedge Funds Care
  • Event: A Fall Affair
  • Location: Chicago, IL

October 24-25

October 25-26

October 29

October 30

October 30

October 30

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Cole-Frieman Mallon & Hunt LLP provides legal services for hedge fund managers and other groups within the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.

 

JOBS ACT – SEC Proposes New Changes to Rules 506 and 144A

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The JOBS Act, enacted earlier this year, directed the SEC to remove prohibitions on general solicitation and general advertising and revise rules on the resale of securities by large institutional investors. On August 29th, the SEC issued a proposed rule to modify Rules 506 and 144A of the Securities Act, which deal with general solicitation and advertising and resales of securities by large institutional investors, respectively.

Rule 506

Under the proposed rule, companies issuing securities would be permitted to use general solicitation and general advertising to offer securities if the following conditions have been met:

  • The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
  • All purchasers of securities are accredited investors, because either:
    • They come within one of the categories of persons who are accredited investors under existing Rule 501.
    • The issuer reasonable believes that the meet one of the categories at the time of the sale of the securities.

The proposed rule would use a set of factors to determine if an issuer has taken the necessary steps to verify a purchaser is an accredited investor. These factors include:

  • The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
  • The amount and type of information that the issuer has about the purchaser.
  • The nature of the offering, meaning:
    • The manner in which the purchaser was solicited to participate in the offering.
    • The terms of the offering, such as a minimum investment amount.

Form D

The proposed rule would also affect Form D, which issuers must file with the SEC when they sell securities under Regulation D. The revised form would contain a new separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation and general advertising.

Rule 144A and QIBs

The Rule 144A exemption is a safe harbor under Section 5 of the Securities Act of 1933 that essentially allows unlimited resales of certain unregistered securities of US and foreign issuers not listed on a US securities exchange or quoted on a US automated inter-dealer quotation system to “qualifying institutional buyers” (QIBs). A QIB is an entity acting for its own account or the accounts of other qualified institutional buyers that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity. For hedge funds and private funds this means an unregistered fund or entity that owns or invests at least $100 million in securities of unaffiliated issuers and a registered fund manager acting for its own account or the accounts of other QIBs that in the aggregate owns and has discretions over at least $100 million in securities of unaffiliated issuers. Even if a manager is a QIB, each fund itself must have $100 million in securities to qualify as a QIB.

Under the proposed rule, offers of securities could be made to investors who are not QIBs as long as the securities are sold only to persons whom the seller and any person acting on behalf of the seller reasonably believe are QIBs.

Conclusion

The modification of Rule 506 would allow companies to advertise and solicit the sales of securities in ways that they had not been able to do so previously. The effect on Rule 144A would be to permit the offers of securities to investors who are not QIBs but persons whom the seller reasonably believes are QIBs.

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Cole-Frieman Mallon & Hunt LLP, an investment management law firm which provides legal services to the hedge fund industry. Bart Mallon can be reached directly at 415-868-5345.

 

FATCA Implications for Hedge Funds

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Foreign Account Tax Compliance Act Overview

The Foreign Account Tax Compliance Act (“FATCA”) was enacted by Congress as part of the HIRE Act of 2010. FATCA will become effective on January 1, 2013 and some parts of the act will be applicable to investment managers. The primary objective behind FATCA is to combat tax evasion by making it difficult for U.S. persons to hide income and assets overseas. To accomplish this objective, the new regulations will require financial institutions to identify and disclose direct and indirect U.S. investors and withhold U.S. income tax on nonresident aliens and foreign corporations. Foreign financial institutions, and certain onshore entities, will be required to comply with the new disclosure and tax withholding requirements or be subject to a 30% FATCA tax. While proposed regulations and applicable forms have yet to be finalized, investment managers should be prepared for the new FATCA regime and compliance rules.

Application to Investment Funds

Non-U.S. Funds

Foreign financial institutions (each, an “FFI”), which include hedge funds, funds of funds, commodity pools and other offshore investment vehicles, will be required to enter into an agreement with the IRS (“FFI Agreement”) to avoid being subject to the FATCA tax. Each FFI will be required to:

  • obtain, verify and report information on its direct and indirect U.S. investors pursuant to specific due diligence procedures;
  • perform annual reporting;
  • deduct and withhold 30% from any payment made by the fund to U.S. investors refusing disclosure and non U.S. investors without proper FATCA documentation; and
  • comply with requests for additional information.

U.S. Funds

Domestic funds will need to determine the FATCA status of each of their investors and will be subject to new due diligence and reporting obligations for current and new investors. In addition, U.S. funds will be required to deduct and withhold a 30% FATCA tax from investors who do not provide the required documentation.

FATCA Timeline

The current timeline for FATCA compliance is as follows (however dates may change as regulations are finalized):

  • FFI Agreement – FFIs will be able to enter into an FFI Agreement through an IRS online system starting on January 1, 2013 (but no later than June 30, 2013).
  • Reporting Obligations – due diligence and reporting requirements under FATCA will be implemented in a staggered manner, based on an investor’s account balance, beginning on January 1, 2013. IRS plans to release new tax forms in the next few months.
  • Withholding Obligations – the 30% FATCA tax will be implemented in a staggered manner, beginning on January 1, 2014 and will eventually include interest, dividends and other FDAP (fixed, determinable, annual, periodic) income from U.S. sources, gross proceeds from sale of U.S. securities and foreign pass-through payments.

Next Steps

As we mentioned previously, final regulations have not been promulgated. However, when they are, managers will need to do the following:

  1. Review and update fund offering documents and other investor agreements to disclose additional reporting obligations imposed by FATCA and risk of withholding for “recalcitrant investors” (those investors who choose not to disclose their name to the IRS).
  2. Asses fund structure and identify entities that may be affected by new FATCA regime.
  3. Work with third-party service providers to ensure proper registration and compliance once FATCA rules are finalized, including: (a) investor due diligence and documentation; (b) FFI Agreement; and (c) FATCA withholding.

If you have questions about the new FATCA requirements and how they impact your fund, please contact us directly.

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Cole-Frieman & Mallon LLP, an investment management law firm which provides legal services to the hedge fund industry. Bart Mallon can be reached directly at 415-868-5345.

California Private Fund Adviser Exemption Approved

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California Hedge Fund Managers Relieved of IA Registration Requirement

On August 27, 2012 (“Effective Date”), the California Office of Administrative Law approved the long awaited private fund adviser exemption (“Private Fund Exemption”). The immediately effective exemption is only available to advisers who provide advice solely to “qualifying private funds,” which include venture capital funds, Section 3(c)(1), and Section 3(c)(7) funds. The Private Fund Exemption is not available to advisers who also manage separate accounts.

Currently, a California based adviser who manages less than $100,000,000 must either register as an investment adviser with the California Department of Corporations (“Department”), or rely on an exemption from registration. Under the new Private Fund Exemption advisers can file as “exempt reporting advisers” (“ERAs”) and thereby avoid the burdensome registration process.

Requirements Generally

To qualify for the Private Fund Exemption, the adviser must

  1. have not violated any securities laws;
  2. file and periodically update certain items on Part 1 of the Form ADV;
  3. pay California’s investment adviser registration and renewal fees; and
  4. fulfill any additional requirements when advising funds organized under Section 3(c)(1).

Additional Requirements for 3(c)(1) Fund Managers

The additional requirements for advisers advising 3(c)(1) funds include:

1. All investors in the fund must either (i) be accredited investors; (ii) be managers, directors, officers or employees of the adviser; or (ii) have received the fund interest via a transfer not involving a sale.

2. Advisers may only charge performance fees to qualified clients; and

3. Advisers shall provide each investor with annual audited financial statement of the fund within 120 days after the end of each fiscal year; provided, however, advisers who begin operations more than 180 days into a fiscal year may include the audit of the initial fiscal year in the fiscal year immediately succeeding the initial fiscal year.

Other Information

An adviser to 3(c)(1) funds that existed prior to Effective Date may take advantage of the Private Adviser Exemption if, as of the Effective Date, it complies with the requirements enumerated above. Any investors in funds existing prior to the Effective Date who do not meet the standards outlined in Item 1 above, will be allowed to remain in the funds provided that they do not make any additional capital contributions. Furthermore, as of the Effective Date, advisers must cease charging performance fees to any investors who do not meet the “qualified client” definition.

To take advantage of the Private Fund Exemption, an adviser must file a partial Form ADV with the Department via the IARD system no later than 60 days from the Effective Date. Advisers currently registered with the Department may choose to withdraw their registration and make a filing under the Private Fund Exemption.

For information on whether your firm may be able to claim an exemption from registration, please see the California Private Fund Adviser Exemption Chart.

If you would like help to utilize the California exemption, please contact us directly.

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Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm which provides legal services to the hedge fund industry. Bart can be reached directly at 415-868-5345.

Hedge Fund Events September 2012

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

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September 6

September 9-11

September 12-14

September 13

September 13

September 13

September 13

September 19

September 19

September 19

September 20

September 20

September 20

September 20

September 25

September 27

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Cole-Frieman Mallon & Hunt LLP provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.

ERISA 408(b)(2) Disclosure Requirements

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Disclosures Required From Service Providers to Certain Plans

On February 3, 2012, the Department of Labor (“DOL”) issued the long awaited final regulation requiring certain pension plan service providers to disclose information ab

out their compensation and potential conflicts of interest (the “Final Regulation”). The Final Regulation was established under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”). While ERISA generally prohibits the furnishing of goods, services, or facilities between a plan and a party in interest to the plan, Section 408(b)(2) provides relief from such prohibited transactions. It allows service contracts or arrangements if they are reasonable, the services are necessary for the establishment or operation of the plan, and no more than reasonable is paid for the services. The Final Regulation became effective on July 1, 2012.

Covered Service Providers and Covered Plans

The Final Regulation applies to the following covered service providers (“CSPs”) who expect to receive at least $1,000 in compensation for services to a covered plan:

• ERISA fiduciaries providing services directly to a covered plan (including fund managers).

• Federal or state law registered investment advisers.

• Record-keepers or brokers who make designated investment alternatives to the covered plan.

• Providers of one or more of the following services to the covered plan who also receive indirect compensation in connection with such services: accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services.

The Final Regulation applies to ERISA-covered defined benefit and defined contribution plan such as pension plans and 401(k) plans.

Final Regulation Disclosure Requirements

Covered service providers must provide responsible ERISA fiduciaries with the information they need to:

• Evaluate the reasonableness of total direct and indirect compensation received by the CSP, its affiliates, and/or subcontractors;

• Ascertain potential conflicts of interest; and

• Fulfill reporting and disclosure requirements under Title I of ERISA.

The required information must be furnished in writing reasonably in advance of the date any service contract or arrangement is entered into. Such writing must describe the provided services and all compensation to be received. CSPs who disclose indirect compensation must describe the arrangements between the payer and CSP pursuant to which such compensation is paid, identifying the sources of such compensation and the services to which it relates. Furthermore, CSPs must disclose whether they are providing recordkeeping services and the compensation attributable to such services.

Conclusion for Fund Managers

Fund managers with ERISA clients will need to begin drafting and providing these disclosures to such clients. This will be another requirement for start up fund managers to consider when deciding whether to take on ERISA clients. While ultimately the disclosures are not extremely onerous, they do add another to-do to a manager’s list.

Please contact us if you have questions or if you would like help drafting the disclosure required under 408(b)(2).

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Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm which provides legal services to the hedge fund industry. Bart can be reached directly at 415-868-5345.

 

CFTC Adopts New Segregated Funds Rules Post PFG

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In the wake of the failure of MF Global in 2011, regulators and self-regulatory organizations scrambled to assess the damage and to implement regulations to oversee how futures commission merchants (“FCMs”) manage and report segregated funds. Just as some of these rules were being implemented, the Peregrine Financial Group scandal hit, and the renewed calls for reform have likely triggered another wave of regulations.

Recent Activity on Segregated Funds

It has been a busy couple of months for rules affecting segregated funds:

• July 9: The NFA brought an emergency action against Peregrine Financial Group, Inc. (“Peregrine Financial”) and Peregrine Asset Management, Inc. for, among other things, failing to demonstrate that they could meet capital and segregated funds requirements. The NFA was Peregrine Financial’s designated self-regulatory organization.

• July 10: The NFA notified CPO Members holding assets at Peregrine Financial to notify the NFA of their exposure to Peregrine Financial.

• July 13: The CFTC adopted the new segregated funds rules for FCMs proposed by the NFA in late May.

• July 16: The NFA, following harsh criticism, announced an external review of its general audit practices and procedures, as well as its execution of those procedures with respect to the NFA’s review of Peregrine Financial’s segregated funds.

• Late July: The NFA and other regulatory and self-regulatory organizations publicly discussed proposals for new rules affecting segregated funds.

New Regulations Effective September 1, 2012

The CFTC announced on Friday, July 13 that it had adopted the segregated funds rules proposed by the NFA. These rules will become effective on September 1, 2012. Below is a summary; greater details can be found on the NFA’s website here.

• Policies and Procedures. All FCMs must have written policies and procedures regarding the maintenance of the firm’s residual interest in its customer segregated funds. These policies and procedures must target an amount (either by percentage or dollars) that the FCM seeks to maintain as its residual interest in those accounts and ensure that the FCM remains in compliance with the applicable segregation requirements.

• Pre-Approval and NFA Notice. No FCM may withdraw, transfer or otherwise disburse funds from any customer segregated funds account exceeding 25% of the FCM’s residual interest in customer segregated funds unless (a) the firm’s CEO, CFO or other defined principal pre-approves the transaction in writing, and (b) a notice is filed immediately with the NFA.

• Monthly or Semi-Monthly Reporting. All FCMs must provide NFA with certain financial and operational information on a monthly or semi-monthly basis. NFA will subsequently make some of the information publicly available on its website in the future.

Note: all of these new requirements

also apply to foreign futures and options customer secured amount funds accounts.

Proposed Rules and Procedures

Various regulators and self-regulatory organizations have put forth the following rules and procedures for discussion and possible adoption in the future:

• Web-Based Balance Confirmation. A committee of self-regulatory organizations have agreed to put into place a web-based process that FCMs can use to confirm their segregated account balances. [Note: this committee includes the CME Group, NFA, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange.]

• Direct e-Monitoring of Accounts. The CFTC, the NFA, and a number of self-regulatory organizations have expressed support for requiring FCMs to provide regulators with direct read-only access to the FCMs’ segregated accounts, to facilitate monitoring of account balances.

• Clearinghouses. CME Group expressed potential support for having segregated funds held at clearinghouses or other depositories, with the interest being returned to the FCMs.

Conclusion

FCMs should be aware of the new CFTC rules that will go into effect on September 1, 2012. FCMs should also prepare for the imposition of some or all of the rules proposed by various self-regulatory organizations.

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Special Reminder: CPOs Must Notify NFA of Exposure to Peregrine Financial

As mentioned above, the NFA is requiring CPO Members that hold assets at Peregrine Financial to report their exposure. Specifically, the NFA requires the following information within 48 hours of receiving the NFA notice:

• The name of each pool account held at Peregrine Financial and its NFA Pool ID number;

• The current dollar amount of pool assets held at Peregrine Financial for each pool account and the corresponding date;

• The most recent net asset value for each pool with funds at Peregrine Financial and the date of the valuation;

• Any withdrawal restrictions that the firm has implemented or plans to implement with respect to each pool.

In addition, please note that following the failure of MF Global, the NFA required CPOs to disclose the extent of their exposure in the CPO’s disclosure documents. The NFA may require a similar disclosure related to Peregrine Financial.

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Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a focus on managed futures law and regulations which affect CTAs, CPOs, IBs and FCMs. Bart can be reached directly at 415-868-5345.

 

Hedge Fund Events August 2012

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

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August 1-3

August 6

August 9

August 9

August 14

August 16

August 16

August 28

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Cole-Frieman Mallon & Hunt LLP provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.

Recent Enforcement Actions Illustrate the Need for Good Recordkeeping

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SEC v. Gold Standard Mining Corp.

SEC v. Orthofix International N.V.

In the Matter of Altamont Global Partners

Since the end of June, there have been three enforcement actions dealing with inadequate or improper accounting methods that did not follow generally accepted accounting practices (GAAP). Two enforcements were brought by the SEC and one by the NFA. Gold Standard Mining Corp. and Altamont Global Partners involve making false statements regarding the value of assets. Orthofix deals with the failure to adopt and follow appropriate internal procedures to ensure proper accounting. We are providing an overview of these actions and some of our thoughts below.

SEC v. Gold Standard Mining Corp.

  • Gold Mining Corp. made false and misleading statements in filings with the SEC regarding the acquisition, operations, and assets of a Russian subsidiary.
  • Gold Mining Corp. filed fraudulent financial statements from 2009-2011 that did not follow GAAP. Revenues were not reported accurately, and assets were grossly inflated. For example, one asset, a hotel, was valued as $3MM per room.
  • Gold Mining Corp. also failed to disclose a profit sharing agreement with the former owner of the Russian subsidiary.

The complaint can be found here.

SEC v. Orthofix International N.V.

  • Wholly owned Mexican subsidiary of Orthofix, Promeca, paid $317,000 in bribes to Mexican officials in order to obtain sales contracts from the Mexican government.
  • Promeca employees referred to the bribes as “chocolates” and fraudulently recorded the transactions as cash advances or promotional and training expenses.
  • Prior to the discovery of the bribery scheme, Orthofix did not have an effective Foreign Corrupt Practices Act compliance manual or training regime in place. The only anti-bribery materials given to Promeca were in English only.
  • Orthofix did not have an adequate internal auditing system in place and failed to conform with GAAP.

The complaint can be found here.

In the Matter of Altamont Global Partners

  • Funds managed by Altamont made loans to Altamont in violation of NFA Compliance Rule 2-45 which prohibits loans by commodity pools to its CPO/affiliated persons or entities.
  • Loan proceeds were used to pay operating expenses or paid directly to employees of Altamont.
  • Altamont falsified quarterly statements by hiding losses and inflating funds’ net asset value to make it appear as if trading had been successful.

The complaint can be found here.

Takeaways for Managers

Above all else, keep accurate and honest records. Managers should be sure to follow GAAP when creating financial records for their funds, and never falsify accounting documents. As Orthofix demonstrates, it is also crucially important that managers employ appropriate internal mechanisms to avoid fraudulent or harmful practices from developing. Rule 204-2 under the Advisers Act requires registered advisers to maintain true, complete, and current books and records relating to its investment advisory business. Generally, there are three categories of records to be maintained: (i) business records of the advisor, (ii) records of the adviser that relate to the adviser’s clients and the adviser’s advisory activities, and (iii) records relating to the adviser’s compliance program.

Conclusion

While Gold Mining Corp. and Orthofix involve the relationships between businesses and their subsidiaries, they offer good examples of the need to establish and maintain policies designed to prevent inaccurate recordkeeping. Altamont Global Partners represents a warning for fund managers to avoid falsifying their funds’ financial documents to hide losses or inflate net asset value.

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Cole-Frieman & Mallon LLP provides a full suite of legal and compliance services to investment managers. The firm can be reached through our contact page and Bart Mallon can be reached directly at 415-868-5345.

NFA Notice to CPOs with Assets at PFG

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Managers Required to Provide Information to NFA Immediately

As has been widely reported, futures FCM PFG has filed for bankruptcy and the CFTC has filed an action against the firm.

Below is a reprinted notice to NFA Members who are commodity pool operators. CPOs must inform the NFA about any accounts held at PFG including information on amount of assets held at PFG and most recent pool NAV. CPOs will need to provide this information to the NFA immediately and there is contact information in the notice below if a CPO has specific questions for the NFA.

If you are a CPO, CTA or IB with assets held at PFG, please contact our firm if you have questions with respect to next steps.

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Notice to Members I-12-13

July 10, 2012

CPO RESPONSE REQUIRED

FOR COMMODITY POOL OPERATORS – A RESPONSE IS REQUIRED FROM CPO MEMBERS WITH ACCOUNTS AT PEREGRINE FINANCIAL GROUP INC.

On July 9, 2012, National Futures Association (NFA) took an emergency enforcement action against Peregrine Financial Group, Inc. (PFG) and Peregrine Asset Management, Inc. (PAM). NFA deemed this action necessary to protect customers because PFG is unable to demonstrate that it can meet its capital requirements and segregated funds requirements, and because NFA has reason to believe that PFG does not have sufficient assets to meet its obligations to its customers. The CFTC has also filed a complaint in the United States District Court for the Northern District of Illinois against PFG and its owner, Russell R. Wasendorf, Sr. alleging that PFG and Wasendorf committed fraud by misappropriating customer funds, violated customer fund segregation laws, and made false statements in financial statements filed with the Commission.

In light of these events, NFA is requiring all CPO Members with pool accounts held at PFG to provide NFA with a notice of the following information:

The name of each pool account held at PFG and its NFA Pool ID number;

  • The current dollar amount of pool assets held at PFG for each pool account and the corresponding date;
  • The most recent net asset value for each pool with funds at PFG and the date of the valuation;
  • Any withdrawal restrictions that the firm has implemented or plans to implement with respect to each pool.
  • CPO members must provide this information to NFA by sending an email to [email protected] within 48 hours of receiving this notice.

Any questions regarding this request should be directed to:

Tracey Hunt, Senior Manager, at (312) 781-1284 or at [email protected]

Mary McHenry, Senior Manager, at (312) 781-1420 or at [email protected]

You are receiving this message because you are either a Member of National Futures Association (NFA) or you subscribed to the email subscription list on NFA’s Website. To cancel or change your subscription at any time, visit the Email Subscriptions page on our Website at http://www.nfa.futures.org/news/subscribe.asp.

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Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a focus on managed futures law and regulations. Bart can be reached directly at 415-868-5345.