Major Futures Industry SROs Call for More FCM Reporting

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The NFA released an announcement that the major SROs for the futures industry – the CME, NFA, ICE, KCBOT, and the Minneapolis Grain Exchange – have created a series of recommendations on ways to increase the security of customer deposits with FCMs. I

t is no surprise that the proposed safeguards all involve more oversight by the SROs.

The recommendations can be summed up as follows:

Require FCMs to file daily segregation reports
Require FCMs to file bimonthly reports detailing how segregated funds are invested and where those assets are custodialized
Require more frequent unannounced audits/inspections of the FCM
Require a principal of the FCM to approve a disbursement from the segregated accounts which is in excess of 25% of those accounts

As we discussed in a piece earlier about the changing managed futures regulations, there will be various proposals over the next several months detailing how the futures industry can be better regulated. Many of these proposals mean that FCMs will need to increase compliance and oversight. We believe that a number of the proposals below (and a number which have been suggested by other groups) are reasonable and would increase managed futures customer protection. The question, as with any increase in regulation, is whether the costs of implementing and maintaing these compliance programs outweigh any benefits to customers. We will certainly hear more on these issues in the near term…

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Futures industry SRO committee announces initial recommendations to strengthen current safeguards for customer segregated funds

March 12, Chicago – A special committee composed of representatives from the futures industry’s self-regulatory organizations (SRO) has proposed a series of initial recommendations for changes to SRO rules and regulatory practices designed to strengthen current safeguards for customer segregated and secured funds held at the firm level in light of the MF Global bankruptcy.

The four recommendations include:

• Requiring all Futures Commission Merchants (FCM) to file daily segregation and secured reports. This will provide SROs with an additional means of monitoring firm compliance with segregation and secured requirements and a risk management tool to track trends or fluctuations in the amount of customer funds firms are holding and the amount of excess segregated and secured funds maintained by the firms.

• Requiring all FCMs to file Segregation Investment Detail Reports, reflecting how customer segregated and secured funds are invested and where those funds are held. These reports would be filed bimonthly and will enhance monitoring of how FCMs are investing customer segregated and secured funds.

• Performing more frequent periodic spot checks to monitor FCM compliance with segregation and secured requirements. FCMs are audited each year by both their DSRO and their outside accountant.

• Requiring a principal of the FCM to approve any disbursement of customer segregated and secured funds not made for the benefit of customers and that exceed 25% of the firm’s excess segregated or secured funds. The firm would also be required to provide immediate notice to its SROs.

Dan Roth, president of NFA, stated that “The committee believes that these recommendations will provide regulators with better tools to monitor firms for compliance with segregation and secured requirements and strengthen the industry’s customer protection regime. These are our initial recommendations. We will continue to work with the CFTC and the industry as we consider additional improvements.”

The special committee, formed in January 2012 in response to the MF Global bankruptcy, includes representatives from CME Group, NFA, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange.

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Cole-Frieman & Mallon LLP provides legal services to the managed futures industry. Bart Mallon can be reached directly at 415-868-5345.

California Extends Hedge Fund IA Exemption Implementation

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Extension of Comment Period Delays Implementation of Private Adviser Exemption

As we have advised previously, states are responding to the Federal overhaul of investment adviser registration requirements by evaluating and in some

case changing their own laws governing investment advisers. This response, spearheaded by the National Association of Securities Administrators, or NASAA, includes exemptions for advisers to certain private funds.

In December, California’s Department of Corporations (the “Department”) released its own proposed exemption, which we discuss in detail here. In sum, the proposed rule, if

adopted, will exempt many hedge fund managers from registration with the state of California. The firm must provide advice solely to one or more “qualifying private funds,” which includes Section 3(c)(1), Section 3(c)(7) funds and certain other funds that fall under an Investment Company Act of 1940 exception. In addition, the adviser must:

have not violated securities laws;
file periodic reports (an abbreviated version of the Form ADV);
pay the existing investment adviser registration and renewal fees ($125); and
comply with additional safeguards when advising funds organized under Section 3(c)(1) (other than venture capital companies).

The initial deadline for comments on the proposal was February 20, 2012. However, the Department has extended that deadline to March 25, 2012.

While the rule is being considered, California has extended its existing private adviser exemption until April 19, 2012. If the new rule is not adopted by that time and the current exemption is not extended, those fund managers with over $25 million in assets under management must register in California. If however, the new rule is adopted, such managers will be exempt from registration. As long as their assets under management fall below $100 million, they will only have to file certain reports (similar to the reports filed by Exempt Reporting Advisers) with California. Once their assets under management exceed $100 million, they will have to register with the SEC unless an exemption applies (e.g. the Private Adviser Exemption).

The proposed exemption will significantly change the registration regime in California. Firms that solely manage qualifying funds and meet the additional requirements will not have to register and those that are currently registered may withdraw their registration. California fund managers with less than $100M in AUM generally will not be registered with any regulatory agency.

Conclusion

The original comment period ending February 20 gave California fund managers plenty of time to evaluate their current business, future plans and potential eligibility for the exemption prior to the deadline for the ADV Annual Updating Amendment (deadline March 31). With the comment period extended to March 25, and final adoption of the exemption likely pushed to early April, managers will now need to plan on filing their annual updating amendment as usual; managers whose registrations are pending should proceed with that process until the final rule is released.

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Cole-Frieman & Mallon LLP provides hedge fund and adviser registration services to managers throughout the United

States. Bart Mallon can be reached directly at 415-868-5345.

MarketsWiki Interview on Managed Futures Mutual Funds and CFTC Rule 4.5

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Bart Mallon discusses Managed Futures Mutual Funds

As we discussed earlier, the CFTC has rescinded the Section 4.13(a)(4) exemption from commodity pool operator (“CPO”) registration. The CFTC also proposed changes to CFTC Rule 4.5 which would essentially require those managers to managed futures mutual funds to register with the CFTC as CPOs. Below is our discussion with MarketsWiki about Rule 4.5 and other issues affecting the managed futures industry.

Please contact us if you have any questions on Rule 4.5.

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Cole-Frieman & Mallon LLP provides managed futures legal services. Bart Mallon can be reached directly at 415-868-5345.

CTA Expo Program in New York 2012

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The CTA Expo is probably the best series of events for CTAs in the United States (and now in London) and the New York event is coming up soon. The managed futures industry will be in New York on April 18th for the NIBA Conference event and on April 19th for the CTA Expo. Both events will be at the NYMEX building. As we have for the last few years, Cole-Frieman & Mallon will be a sponsor of the NIBA event and will be attending the expo on the next day. We look forward to seeing everybody there.

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April 18, 2012

4:30 – 6:00 Joint NIBA/CTAEXPO Cocktail Party, Sponsored by Telvent DTN

April 19, 2012

8:30 – 9:30 Continental Breakfast

New York City Unicorporated Business Tax Update

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Recent Audits May Impact Fund Structures and Management Company Expenses

There may be a number of reasons for a manager to create separate legal entities to serve as the management company and a fund’s general partner. In particular, New York-based managers have typically done this due to New York City’s tax treatment of fees earned by fund managers. However, a recent move by the New York City Department of Finance (the “Department”) may hearken a change to this approach, and the manner in which fund managers analyze and document their expenses.

Background on New York UBT

New York City’s Unincorporated Business Tax (“UBT”) currently is, and has been historically, imposed only on management fees earned in the city, but not on incentive allocations. This tax treatment was formally approved by a statutory amendment to the UBT law over 15 years ago. For this reason, fund managers have formed one entity to be the management company that will receive the asset-based management fees, and another entity to serve as a fund’s general partner and receive the profits-based incentive allocations.

Management fees are generally used to cover both the management of the fund, and the administrative operations of the management company. Expenses related to these functions are deductible against gross income when calculating the management company’s UBT liability. The tax rate is 4% of the net UBT income.

The incentive allocations to the general partner are excluded from UBT on the basis of a statutory exemption for entities that are “primarily engaged” in self-trading for its owners and does not otherwise operate a business in New York city, as defined in the UBT law (this is because all of the administrative/operational functions are performed by the management company).

Developments in the New York City Department of Finance

Recent audits by the Department may portend a shift in this tax treatment and hence, implications for fund managers in how they structure and run their businesses. Specifically, the Department asserted that some portion of a management company’s operating expenses is ultimately attributable to tax exempt income. Because of this, the Department determined that at least some of these expenses should not be used to reduce the management company’s UBT liability. In effect, this approach will attribute some of the expenses to the tax-exempt incentive allocation that the general partner earns, rather than allowing 100% of such expenses to offset the management fee. Put more bluntly, the Department will disallow some of a management company’s expenses in calculating the net UBT income.

Interestingly, while the redistribution of tax among entities under common control is explicitly permitted under Federal tax law, the UBT law is silent on this question, though some commentators suggest that authority for this is implied because the UBT calculation starts with Federal taxable income.

As a result of this new approach, the management company’s net UBT income would increase to the extent that expenses are disallowed, and the management company would owe more tax. In years where performance is significantly up (meaning a higher incentive allocation), the tax increase would likely be more pronounced; in contrast, when performance is down and there is no allocation, the management company may still be permitted to deduct expenses as it has done previously.

Conclusion

It is important to note that the Department’s approach in the audits has not been formally adopted, nor implemented in the UBT law itself. However, given the unpredictability inherent in the Department’s expense-shifting approach in the audits, we recommend that New York-based fund managers evaluate their expenses and carefully document how they relate to the operations of the management company to maximize the ability to deduct them for purposes of calculating their net UBT income.

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Cole-Frieman & Mallon provides hedge fund formation and other legal services to managers in New York and throughout the country. Bart Mallon can be contacted directly at 415-868-5345.

CFTC Rescinds 4.13(a)(4) CPO Registration Exemption

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Increases Other Compliance Obligations for CPOs and CTAs

The CFTC recently adopted final rules amending regulations applicable to both CPOs and CTAs. The CFTC also proposed rules with respect to Regulation 4.5 that would require managers to managed futures mutual funds to register as CPOs. Some of the other changes included:

CPOs subject to “lite-touch” regulation under the 4.7 exemption must now provide annual audited returns to investors in their funds
Changes the 4.5 exemption from CPO registration for managers to managed futures mutual funds
Requires CTAs and CPOs who file exemptions under 4.5, 4.13 and 4.14 to reconfirm the exemption on a yearly basis
Adds new Regulation 4.27 requiring CTAs and CPOs to file Form PF, Form CPO-PQR and From CTA-PR
Requires CTAs and CPOs to provide investors with new disclosures regarding swap transactions, if applicable

Additionally, the CFTC has proposed regulations with respect to harmonizing CFTC regulations and SEC regulations with respect to managed futures mutual funds. We will be providing additional information on these proposals in the coming days and weeks.

The full CFTC notice can be found here.

The final CFTC regulations can be found here: CPO & CTA Compliance Final Rules

Fact sheet: CTA & CPO Compliance Fact Sheet

Proposed Regulations for Managed Futures Mutual Funds: Proposed CPO Registration Requirement for Mutual Fund Managers

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Cole-Frieman & Mallon LLP provides legal services to the managed futures industry. Bart Mallon can be reached directly at 415-868-5345.

NFA Requests Information from CPOs on MF Global Impact

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Response Due to NFA by February 14, 2012

CPOs providing advice to commodity pools which used MF Global (MFG) as a FCM have faced a number of issues after the bankruptcy. As the NFA announced shortly after the bankruptcy, CPOs were responsible for alerting investors in the commodity pool about the bankruptcy and related issues. Some CPOs also had to implement certain liquidty type provisions including potentially creating reserves and/or side-pocketing the MFG assets. Now, the NFA is requesting further information from CPOs with respect to their dealings with MFG. Most notably, the NFA reminds CPOs that they are required to update their fund disclosure documents before soliciting new investors if they had assets at MFG.

The NFA notice is reprinted in full below. For information on disclosure document reporting for CTAs who had assets at MFG, please see our previous post CTA Guidance re: MFG.

For more of our thoughts on the MFG bankruptcy, please see our post on Managed Futures Regulation Post-MFG.

If you are a CPO that needs help updating your disclosure documents or help with the annual CPO questionnaire, please contact us to discuss.

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February 3, 2012

CPOs with Pool Assets Held with MF Global, Inc.

FOR COMMODITY POOL OPERATORS – A RESPONSE IS REQUIRED FROM ALL MEMBERS IN THIS CATEGORY

The bankruptcy proceeding initiated on October 31, 2011 involving MF Global, Inc. (“MFG”), have affected a number of CPOs, as well as the pools they operate. Any CPO with pool(s) affected by this event should have given notice to the current participants of each affected pool regarding the valuation of the assets held at MF Global, Inc. and any withdrawal restrictions that were implemented. Further, any CPOs that have or intend to solicit new participants in a pool affected by the MFG bankruptcy proceeding must update the affected pool’s disclosure document to disclose any material information regarding this event.

In light of these circumstances, NFA is requiring every CPO Member to inform NFA whether

it had any pools (not including 4.13 exempt pools) affected by the MFG bankruptcy proceeding by answering the first question on NFA’s Firm and DR Information Questionnaire: http://www.nfa.futures.org/NFA-electronic-filings/annual-questionnaire.HTML. Those CPOs operating any pool(s) that were affected by the MFG bankruptcy proceeding are required to answer the Special Request Questions for each affected pool, which appear at the top of the CPO Questionnaire.

CPOs must complete the applicable sections of the questionnaire by February 14, 2012. Please note that if the CPO’s annual questionnaire has come due, the CPO must complete the entire questionnaire, including the information requested above, for each pool. If you have any questions, please do not hesitate to contact any of the following individuals:

Susan Koprowski, Compliance Manager, at (312) 781-1288 or at [email protected]

Kaitlan Chi, Compliance Manager, at (312) 781-1219 or at [email protected]

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

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Cole-Frieman & Mallon LLP provides fund formation advice to CPOs and provides managed futures compliance and regulatory support to both CPOs and CTAs. Bart Mallon can be reached directly at 415-868-5345.

Managed Futures Regulation Post-MF Global Bankruptcy

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Below is an article I wrote about how the managed futures industry is likely to react after the MF Global bankruptcy. I originally began drafting the article at the end of 2011 and finished it in the first week of January 2012. As we have already seen, the industry is in fact moving towards addressing some of these issues and ultimately I believe that regulatory and other changes will increase the vitality of the managed futures industry.

The article was originally published as part of the Marcum Private Investment Forum newsletter and can be found here. Please feel free to contact us if you have any questions or comments on the article.

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MF Global Bankruptcy to Shape Managed Futures Regulation in 2012

By Bart Mallon, Esq. Partner, Cole-Frieman & Mallon LLP

It was a combination of the Lehman bankruptcy and the Madoff fraud that led an angry and embarrassed Congress to publicly castigate the SEC for not properly doing its job. What came to bear was the passage of the Dodd-Frank Act which ushered in new laws for the SEC and the CFTC to implement in short order and with limited budgets. The CFTC is in the middle of a similar event which saw the 8th largest bankruptcy in U.S. history as MF Global (MFG) declared bankruptcy on October 31, 2011. The biggest revelation, however, might have been that $1.2 billion of customer money was missing. The fact that there was the potential for a “shortfall” in a managed futures account was shocking – the industry that had prided itself so much on the sacrosanct customer account was now trying to make sense of how something like this happened.

While the various investigators, including the FBI, are trying to figure out where the money is and what transactions are valid, Congress and others are debating the future of regulation for the industry. The Commodity Futures Trading Commission (CFTC), the governmental agency which oversees the managed futures industry, is dealing with not only the MFG bankruptcy but a whole host of other issues. The MFG bankruptcy has brought to light issues with the regulation of the managed futures industry – (1) the practice of utilizing self regulatory organizations (SROs) to oversee important entities within the industry, (2) no “insurance” for margin in managed futures customer accounts and (3) lack of proper funding for the CFTC. Ultimately these issues will need to be addressed and will shape how the industry is regulated moving forward.

Self-Regulation – Is the Fox Watching the Henhouse?

Prior to MFG bankruptcy, the managed futures industry prided itself on the fact that “not a single cent” was ever lost in a customer account due to theft from a futures commission merchant (FCM). Perhaps because of this, the industry seemed unconcerned about the hodge-podge of government agency oversight combined with self-regulation over the managed futures participants. The central SRO for MFG was the CME Group, the world’s largest futures exchange which includes the CME, CBOT, NYMEX and COMEX exchanges. The CME Group is a publicly traded company subject to oversight by the CFTC with respect to its own operations and is also subject to oversight of its supervision of MFG.

MFG ran most of its clearing business through the CME. This means that while the CME derived substantial revenue from MFG, it also was in charge of overseeing MFG to make sure the laws and regulations under the Commodities Exchange Act (CEA) were being followed. While it seems like this will be a conflict of interest on its face, this is how the futures industry works. The argument for having the CME Group act as the SRO to MFG is that as the central exchange, it was in the best position to regulate MFG. The futures industry is an altogether different beast from the securities industry and the CME Group, because of its understanding of the relationships between the firms, was in the best position to oversee MF Global and make sure the firm was complying with all of the requirements of the Commodities Exchange Act. The CME Group is now being investigated – what did it know about MFG’s shortfall and when?

It is easy to paint MFG as simply the bad actor by hiding transactions from the CME Group. But we will learn more as the investigation moves on and if we find that the CME Group was deficient in its oversight of MFG, the SRO model (especially in instances where there is potential conflicts of interest) will need to be reexamined. If it is discovered that there were deficiencies with the SRO oversight of MFG, this will likely create liabilities for the CME Group and may change which SROs can oversee which organizations.

No Insurance for Futures Accounts

The second issue which the MFG bankruptcy highlighted is that there is no insurance for managed futures accounts. In the segregated account structure, the margin required for each futures contract is supposed to be kept in the customer’s name. With respect to the MFG bankruptcy, the $1.2 billion in missing customer assets meant that when customer accounts were transferred from MFG to the various other FCMs only a certain percentage of the margin was transferred to the new FCM, initiating additional margin calls at the new FCM. Many investors were not able to meet the additional margin calls at the new FCM and thus their positions were liquidated. Forced liquidations left a number of investors either unhedged or worse. Small farmers that held accounts at MFG for hedging their crops were especially hard hit.

On the securities side there is the Securities Investor Protection Corporation (SIPC) which provides insurance coverage of up to $500,000 of securities and up to $250,000 in cash in the event that a broker-dealer fails. During the Lehman bankruptcy and Madoff fraud investigation, the SIPC was available to assuage the fears of smaller investors by acting as a backstop to potential losses. Indeed, the SIPC was formed for events just like Lehman. There is no similar insurance program for the margin held in segregated accounts at FCMs.

There have been calls for creating an insurance-like mechanism for futures accounts. The benefits are clear – a guarantee of customer accounts will protect the smaller investors like the farmers and other smaller hedgers. However, there are cost issues to consider and the creation of an SIPC-like mechanism for the managed futures industry needs to be initiated at the Congressional level. The managed futures industry will likely push back any such proposal because of the significant costs involved with implementing such a structure. Timing may also be an issue – the CFTC faces a funding shortfall in addition to Dodd-Frank mandates and other proposed rulemaking functions.

CFTC Funding Issues Present Big Problems for Industry

The CFTC lacks proper funding to adequately protect investors and maintain the integrity of the managed futures industry. The Congressional appropriations process is obviously a political game at which both the SEC and CFTC have failed. The two federal agencies charged with maintaining the integrity of the investment universe are woefully underfunded given their mandates. It is this underfunding that is perhaps the biggest issue for the integrity of the managed futures industry which is why the CFTC needs more money from Congress. More money also helps the CFTC to properly implement parts of the Dodd-Frank Act as well as other adopted and/or proposed regulations.

Dodd-Frank & Swaps Clearing

One of the central pieces of the Dodd-Frank Act is the requirement that swaps be traded and cleared on exchanges. The multi-trillion dollar industry has been unregulated – making counterparties liable to one another and subject to counterparty risk. The intermediation of a clearing house not only creates logistical issues (who, how, when, at what price) but also requires complex, detailed regulations. The CFTC, in conjunction with the SEC with respect to certain matters, was tasked with creating these regulations from scratch. This will be the largest undertaking for the CFTC in 2012 and will likely consume more resources than the MFG investigation.

Other Regulatory Proposals

In addition to the swaps regulations, there are a number of other important regulatory proposals which, if implemented, drastically changes how the managed futures industry operates.

Repeal of Regulation 4.5 –

CFTC Regulation 4.5 essentially exempts certain mutual funds that invest in managed futures from the commodity pool operator (CPO) registration provisions. This means that mutual funds that are essentially publicly traded commodity pools are only regulated by the SEC, who has no experience dealing with the ultimate underlying investments.

In January of 2011 the CFTC proposed repealing Regulation 4.5. If this proposal is adopted as written, managers to managed futures mutual funds need to register as CPOs with CFTC (and become members of the NFA, subject to NFA oversight). This requirement increases the cost burden for these mutual funds and subjects them to great regulatory oversight.

Repeal of Regulation 4.13(a)(4) and 4.13(a)(3) –

Regulation 4.13(a)(4) provides an exemption from CPO registration to those managers who provide advice to a fund (commodity pool) which only has investors who are qualified eligible persons (QEPs). In general, QEPs are investors who meet a higher net worth requirement than accredited investors.

The CFTC also proposed the repeal of Regulation 4.13(a)(3) which provides a “de minimis” exemption from CPO registration to those commodity pool (i.e. hedge fund) managers who only trade a small amount of futures in addition to securities. If 4.13(a)(3) was repealed, all fund managers who trade any amount of futures will be required to become registered as a CPO. It seems that right now this proposal will likely fail, leaving hedge fund managers with the possibility of escaping CPO registration.

Proposed with the Regulation 4.5 repeal, the Regulation 4.13(a)(4) and (a)(3) repeal requires a large number of managers who are not currently registered with the CFTC to register and become NFA members. Again, this will increase the number of firms subject to NFA (and ultimately CFTC) oversight.

Position Limits –

Dodd-Frank Act mandated for the CFTC to impose position limits across different markets, including traditional futures markets, option on futures or commodities traded on a regulated exchange, and trading in swaps. These position limits will not apply to bona fide hedging transactions and counterparties to a bona fide hedge may also be eligible for an exemption. In general, position limits set at 25% of estimated physical deliverable supply for spot-month positions and, with respect to non spot-months, at 10% of open interest (based on futures open interest, cleared swap open interest, and uncleared swaps open interest) in the first 25,000 contracts and 2.5% above that level. There will also be additional reporting requirements for traders exceeding a non-spot-month position visibility level in energy and metal contracts. The industry is vehemently fighting this proposal.

Other Proposals –

in addition to these proposals, the CFTC has other standard enforcement and regulatory issues that have become focus areas. These include high frequency trading and co-location.

It seems clear that given the Dodd-Frank Act’s inclination toward more oversight and regulation of the investment management industry, as well as the recent regulatory fumbles involving MFG, some of these proposals are likely to be adopted. Therefore, managers are going to be required to register as CPOs and the NFA will be the watchdog. But, the NFA, like the CFTC, is a resource limited organization and the ability to effectively monitor member firms will depend on the NFA’s ability to scale to meet the regulatory requirements.

Conclusion

Over the next several months and potentially years the MFG bankruptcy will be sorted out, and hopefully investors will be made whole. During the process of rebuilding the industry to handle the managed futures markets in a time of significant growth in trading and technology, the focus should be on doing whatever is necessary to bring confidence back into the managed futures markets. This will include examining the role of the SRO industry moving forward, examining an insurance SIPC-like program for futures customers and providing more resources for the CFTC. Moving forward it will be Congress who will need to show leadership and provide the CFTC with the funding it will need and the appropriate legislative tools to make sure the industry becomes safer. Hopefully, that will be the good which arises from the unfortunate events that led to the MFG bankruptcy.

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Bart Mallon is a Partner at Cole-Frieman & Mallon LLP where his practice focuses on the investment management industry, specifically working with hedge fund managers and groups in the managed futures industry. Mr. Mallon also founded and runs the widely-read Hedge Fund Law Blog.

NFA Provides Guidance to CTAs re: MF Global

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Trading Program Performance Presentation FAQs

Managers registered with the CFTC as either CTAs or CPOs are required to file a disclosure document with the NFA for review by the NFA prior to using the documents to solicit clients/investors. The disclosure documents are required to conform with certain NFA rules. The NFA previously provided guidance to CPOs with respect to disclosures regarding the MF Global bankruptcy. Specifically, the NFA provides guidance with respect to the manner in which CTAs provide trading program performance information in their disclosure documents. The NFA’s guidance provides CTAs with a reasonable way to deal with describing performance if assets were held at MF Global and then transferred after the bankruptcy.

CTAs should remember that disclosure documents must be update (and reviewed by the NFA) every nine months. If you are a CTA that needs help updating your disclosure documents, please contact us.

The full NFA release is reprinted in full below.

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Notice to Members I-12-04
January 27, 2012

Frequently Asked Questions – Trading Program Performance Calculations and Presentation by CTAs with Client Assets held at MF Global, Inc.

As a result of the October 31, 2011 bankruptcy proceeding involving MF Global, Inc. (MFG), NFA has received a number of questions from CTAs regarding how to calculate and present performance information for Trading Programs with client managed accounts that were affected by the MFG bankruptcy proceeding. NFA is issuing this notice to address those frequently asked questions.

1. All of my managed client accounts were held at MFG. The open positions in those accounts were subsequently transferred to another FCM. After the transfer, I continued to trade the accounts according to the trading program. How do I reflect the performance results?

Results should be based upon the assets under the CTA’s control. Any customer assets that were not included in the transfer may not be included in assets under management for purposes of calculating the trading program’s rate of return. The trading program’s capsule performance must include appropriate footnote disclosure (See question 5 below).

2. All of my managed client accounts were held at MFG. The open positions in those accounts were subsequently transferred to another FCM. After the transfer, all positions in those accounts were liquidated, and I did not resume trading these accounts in accordance with the trading program. How do I reflect the performance results after the transfer?

For November 2011, the performance capsule for that trading program should reflect NT to indicate that the program did not trade during the month. The trading program’s performance capsule must include appropriate footnote disclosure (See question 5 below).

3. My managed client accounts that were held at MFG and the open positions in those accounts were subsequently transferred to another FCM. After the transfer, I was able to continue trading those accounts. I have notional funding agreements with those accounts. Should I continue to include the amount of notional funds under the agreement in assets under management for purposes of calculating rate of return?

If you are trading the managed client accounts pursuant to an active notional funding agreement, you should continue to calculate rates of return using nominal account size as the denominator.

4. I have some managed client accounts held at MFG (with open positions that were subsequently transferred) and other managed client accounts held at other FCMs that are trading the same program. Since I did not have full control over the assets held at MFG, the rates of return for those accounts are materially different than the rates of return for accounts held at an FCM other than MFG. How do I reflect the performance results of the program?

For the month of November 2011, you should exclude the accounts that were held at MFG from the performance capsule. You do not have to prepare a separate capsule for these accounts. However, the trading program’s performance capsule must include appropriate footnote disclosure (See question 5 below), including the range of the rates of return for those accounts.

5. What information should I include in the footnote disclosure?

At a minimum, the footnote disclosure should:

Explain that as a result of the MFG bankruptcy proceeding, certain client managed accounts were not fully under the control of the CTA and therefore were excluded in whole or in part from the monthly performance calculation;
Indicate the number of client accounts excluded;
Indicate the amount of assets that were excluded;
Indicate the percentage that the excluded assets represent of total assets under management for that program as of October 31, 2011.

6. Do I need to amend my disclosure document to reflect this information?

CTAs that plan to solicit new clients must ensure that all material information in their disclosure documents has been updated including, but not limited to, changes to assets under management, past performance results, and the firm’s carrying broker relationships. As a reminder, all amended disclosure documents must be submitted to NFA for review prior to use.

Any questions regarding these disclosure issues should be directed to:

Susan Koprowski, Manager, at (312) 781-1288 or at [email protected]
Kaitlan Chi, Manager, at (312) 781-1219 or [email protected]
Mary McHenry, Senior Manager, at (312) 781-1420 or at [email protected]

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Cole-Frieman & Mallon LLP works with CTA and CPOs and provides managed futures legal and compliance services. Bart Mallon can be reached directly at 415-868-5345.

Investment Adviser Registration Presentation for Fund Managers

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Below is a press release on the investment adviser registration presentation we developed to help fund managers with the SEC registration requirements.

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Investment Adviser Registration Presentation for Fund Managers Released by Cole-Frieman & Mallon LLP

March 30, 2012 Deadline for SEC Registration Approaches

SAN FRANCISCO, CA – January 25, 2012 — Cole-Frieman & Mallon LLP, a leading boutique investment management law firm, is proud to announce the release of a presentation designed to help fund managers understand their registration obligations with the U.S. Securities and Exchange Commission. Many hedge fund managers who are not currently registered with the SEC will be required to be registered by March 30, 2012. Because of the application process, managers will need to submit their registration applications to the SEC by February 14, 2012. The presentation is posted on the Hedge Fund Law Blog at www.hedgefundlawblog.com/iaregistration2012.

The presentation, which includes a voice-over discussion, provides both hedge fund and private equity fund managers with a high level overview of the registration process and important compliance issues. “Most private fund managers have a general idea that they need to register with the SEC but many have delayed beginning the process,” said Bart Mallon, a partner with Cole-Frieman & Mallon LLP. “We developed this presentation to remind managers of the requirements but to also provide them with accurate information about what it means to go through the registration process and become registered with the SEC.”

In addition to information on the investment adviser registration process, the presentation also details compliance obligations of registered managers. “Fund managers tend to underestimate the importance of a proper SEC compliance program,” said Niel Armstrong, president of Gordian Compliance Solutions, a compliance consulting firm that offers fund managers outsourced SEC compliance solutions. “Implementing a robust compliance program that is tailored to a fund manager’s specific organizational structure is important from a regulatory perspective,

and many managers also find a business benefit when they employ compliance best-practices.”

Cole-Frieman & Mallon partner Aisha Hunt added “Fund managers generally have business specific needs that should be addressed during the SEC registration process. The presentation and supplementary information on the Hedge Fund Law Blog will provide those managers with the resources they need to understand the relevant business and compliance issues and begin the registration process.”

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About Cole-Frieman & Mallon LLP

Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP has an international practice that services both start-up investment managers, as well as multi-billion dollar firms. The firm provides a full suite of legal services to the investment management community, including: hedge fund, private equity fund, venture capital fund, and mutual fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog (http://www.hedgefundlawblog.com), which focuses on legal issues that impact the hedge fund community. For more information please visit us at: www.colefrieman.com.