CFTC May Consider Vote on CPO Registration for Mutual Fund Managers

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Three days ago, reports came out that the CFTC could be putting to a private vote the requirement that managed futures mutual funds be subject to marketing and registration rules when they use derivatives tied to commodities, which include commodity futures, options and swaps.  According to individuals who spoke on anonymity, the proposed regulation has been circulated for a vote by the CFTC’s five commissioners.  The commissioners could end up voting on the proposed regulation or deciding to hold a public vote.  If the proposal passes as adopted, managers to managed futures mutual funds would be required to register as commodity pool operators (CPOs) with the CFTC.

Background on CFTC Rule 4.5

As previously discussed in an earlier article on CFTC Rule 4.5, the issue of requiring mutual funds to register with the CFTC has been on the Commission’s radar for a long time.  In part because of pressure from the NFA, the CFTC proposed changes to Rule 4.5 in February of 2011 which would require CPO registration for most managers to managed futures mutual funds. While the current rule exempts managers from the registration requirements, prior to 2003 mutual fund managers were required to register as CPOs unless they:

  1. restricted their commodities and futures marketing activity,
  2. limited commodity futures or options activity to bona fide hedging transactions, and
  3. limited the aggregate futures margins and/or options premiums for non-hedging positions to 5% of the liquidating value of the entity’s portfolio (after taking into account unrealized profits and losses).

When the CFTC amended Rule 4.5 in 2003, it eliminated the trading and marketing restrictions and as a result managed futures mutual funds currently market participation in their funds as managed futures funds and have more than 5% direct exposure to managed futures for speculative purposes.  The February proposal seeks to reinstate the pre-2003 language in Rule 4.5.

Wholly-Owned Subsidiaries

It is important to note that the 5% limit in the proposed Rule 4.5 would apply to the entity filing for the Rule 4.5 exemption, not subsidiaries. Managed futures mutual funds are currently structured so that the managed futures investments are made through wholly-owned subsidiaries.  Wholly-owned subsidiaries would not qualify for the 4.5 exemption unless each subsidiary independently met all the requirements set forth in the proposed amendment. Therefore, mutual funds (i) with an investment objective to provide exposure to physical commodities as an asset class and (ii) that do so by investing in commodity futures, options, and swaps via wholly-owned subsidiaries, must make sure that those subsidiaries qualify for Rule 4.5 as well.

Conclusion

If the CFTC approves the proposed regulation, it would subject many mutual funds to CFTC registration and oversight by the NFA.

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Cole-Frieman & Mallon LLP provides advice to managers in the managed futures industry.  The firm also has a robust alternative mutual fund practice led by Aisha Hunt.  Bart Mallon can be reached directly at 415-868-5345.  Aisha Hunt can be reached directly at 415-762-2854.

 

San Francisco Hedge Funds Care Poker Event

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January 25th 

This is the second biggest event of the year for the hedge fund industry in San Francisco.  Ticket information is below and we all look forward to seeing you there.

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California Hedge Funds to Support Child Abuse Prevention at 2nd Annual West Coast Committee of Hope Poker Tournament

Charity Poker Event Will Be Held Wednesday, January 25th at The City Club of San Francisco

NEW YORK – January 12, 2012 – Hedge Funds Care, a financial services industry-supported charity dedicated to preventing and treating child abuse, today announced that it would be holding the 2nd Annual West Coast Committee of Hope Poker tournament. Proceeds from the event will go to support child abuse prevention and treatment programs in the San Francisco Bay area. The event, sponsored by Battea Class Action Services and Ernst and Young, will be held on January 25th at 4:30pm PST at The City Club of San Francisco (155 Sansome Street, San Francisco, CA). Hedge fund industry participants who attend will enjoy an open bar, hors d’oeuvres and networking.

“This event has really grown in size and reputation over the last year and we expect to easily surpass last year’s fundraising achievements,” said Alicia Gavello, Fund Accountant at Partner Fund Management and the chair for this year’s benefit. “Programs that help treat child abuse are still badly underfunded and this is the California hedge fund industry’s chance to stand up and make a difference,” she added.

Since their inception, the West Coast Committee of Hope and Committee of Hearts have raised a combined $6.1 million and distributed 150 grants to Californian child abuse and prevention programs. A limited number of tickets and sponsorships are still available. For more information, please click here:
http://www.hedgefundscare.org/event.asp?eventID=61

About Hedge Funds Care

Hedge Funds Care is an international charity supported largely by the alternative investment industry. Its sole mission is to support efforts to prevent and treat child abuse. Hedge Funds Care raises money, primarily through events, and awards grants in 12 major cities in the United States, Canada, the Cayman Islands, and the United Kingdom. Approximately 30 events are held annually. Hedge Funds Care’s grantees service children of all ages and span the entire spectrum from preventive and educational services for at-risk families to forensic interviews and treatment of children who have already experienced abuse. It generally funds small, community-based organizations, where small grants can have a profound impact. Since inception, Hedge Funds Care has awarded more than 660 grants totaling almost $24 million. Hedge Funds Care is largely a volunteer-driven organization, with professionals from the hedge fund industry serving on the Board and on local committees that plan events and evaluate grant proposals. The organization has a small staff based in New York City.

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Hedge Funds Care – West Coast Events

Dan Butchko

Hedge Funds Care

212-991-9600 ext. 336

[email protected]

70 West 36th Street, Suite 1404    – New York, NY 10018 – tel. 212.991.9600 fax. 646.214.1079 – HedgeFundsCare.org

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Cole-Frieman & Mallon LLP provides hedge fund start-up and other legal services to hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.

California Proposes Private Fund Adviser Exemption

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Hedge Fund Managers Exempt from Registration in California

As a general proposition, managers who are located in California must register as an investment adviser if they are providing investment advice for compensation.  There are exemptions from the registration requirement which we have detailed previously.  Because of the changes in the statutes and regulations at the Federal level, the states are changing their laws with respect to adviser registration.  Some states, such as California (see post), have adopted interim orders for certain advisers to address gaps in the Federal and state laws until state laws or appropriate regulations can be adopted.  California is proposing to adopt laws which would exempt many hedge fund managers from registration with the California Securities Regulation Division.

The proposed regulations if adopted would likely go into effect sometime in the first half of 2012.  The California Department of Corporations has requested comments on the proposal which may be submitted by February 20, 2012.  We have summarized the proposed exemption below and for more information, please see the following releases:

California Private Adviser Exemption Overview

If the proposed rule is approved, a manager would be exempt from registration as an investment adviser with the state of California if the manager meets the following requirements:

  • manager provides advice only to one or more “qualifying private funds” (includes Section 3(c)(1) funds and Section 3(c)(7) funds)
  • manager may not have not violated securities laws;
  • manager must file periodic reports with the Department of Corporations (an abbreviated version of the Form ADV);
  • manager must pay the existing investment adviser registration and renewal fees ($125); and
  • manager must comply with additional safeguards when advising funds organized under Section 3(c)(1) (other than venture capital companies). This includes:
    • only accredited investors may invest in the private fund;
    • the firm shall provided certain written disclosures about the services it provides, its duties, and other material information;
    • the firm shall obtain an annual audit of each fund and deliver them to each investor; and
    • performance fees can only be charged to qualified clients.

Firms may register with the SEC once they reach $100M in AUM. Therefore, the firm may rely on the California private adviser exemption and then, absent an exemption from SEC registration, register with the SEC at that point. Section 203(m) of the Adviser’s Act of 1940 (as amended by Dodd-Frank) provides such an exemption from such registration if the firm only manages private funds and has less than $150M AUM (the firm would be an exempt reporting adviser and would have to file the abbreviated Form ADV with the SEC).

Funds with Non-Accredited Investors

The proposed rule does have a grandfathering provision that will make the California private adviser exemption available to a firm that currently manages any Section 3(c)(1) fund that has non-accredited investors if the following requirements are met:

  • the fund existed prior to the effective date of the California private adviser exemption;
  • as of the effective date of the Private Adviser Exemption, the fund no longer accepts accredited investors;
  • the firm provides certain written disclosures about the services it provides, its duties, and other material information; and
  • as of the effective date of the Private Adviser Exemption, the firm delivers audited financials to the investors.

Currently, the proposed rule does not have an anticipated effective date. If approved, managers of funds with non-accredited investors may still qualify for the Private Adviser Exemption.

Conclusion

The California private adviser exemption will change the entire registration regime in California. Firms that solely manage qualifying funds and meet the requirements discussed above will not have to register with the DOC and those that are currently registered may withdraw their registration. So, hedge fund managers in California with under $100M in AUM generally will not be registered with any regulatory agency. Do keep in mind that if a manager manages even a single separate account, in addition to the qualifying funds, it will not be eligible for the private adviser exemption.

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Cole-Frieman & Mallon LLP provides investment adviser registration and compliance services to hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.

Attracting ERISA Assets Event

Below is information on a 100 Women in Hedge Funds event in San Francisco later this month.

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Underfunded and Over-solicited: How to Stand Apart to Attract ERISA Plan Assets

January 31, 2012 at 6 PM

San Francisco CA

Due to recent underperformance, many corporate and government pension fund managers actively seek to increase investment returns in order to pay underfunded benefits promised to retirees. According to the 2011 US Department of Labor, GAO Report, pension plan investment in hedge funds is on the rise. In 2010, 60% of large plans had made investments in hedge funds, compared to 11% in 2001. Moreover, these managers had allocated more than 5% of plan assets to hedge funds, on average.With 40% of large plans (>$5 billion) and 22% of midsize plans ($250 million to $500 million) already invested in hedge funds and private equity, the opportunities to attract even more pension plan assets could not be any better.Our panel will share insights and discuss:

* How to market your fund to find long-term partnerships and significant capital

* How to address pension plan managements’ concerns regarding the risks of hedge fund investments

* The legal, due diligence and operational challenges of managing pension plan assets

Participants

  • David Mattheson, Moderator, Drinker Biddle & Reath LLP
  • Stephen Wilkes, Drinker Biddle & Reath LLP
  • Deborah E. Gallegos, Strategic Investment Solutions
  • Ray Iler, Deloitte

Event Details

  • Date: January 31, 2012
  • Time: 5 PM Registration.  We will begin promptly at 6 PM; please arrive early. Since it is disruptive to everyone when latecomers enter the session, those arriving after an education session has begun will only be admitted at the discretion of 100WHF and the host. Please note the start time on this invite and plan to arrive early.
  • Networking and cocktails prior to session.
  • Hosts: Deloitte and Drinker Biddle
  • Location: 555 Mission Street, San Francisco, CA 94105
  • RSVP: RSVP Now

If you have any questions about this event, please contact [email protected]

This event is NOT FOR ATTRIBUTION.

Admission is free, but there is a $25 charge if you register and do not attend, even if you cancel in advance. No-show proceeds will be donated to the 2012 beneficiary of 100WHF’s US philanthropic initiatives.

If you have no-show fees in arrears, the system cannot register you for an event. You can view and pay for any outstanding no-show fees online from your Member Profile

Space is limited. No walk-ins will be permitted.

Biographies

David Mattheson, Partner, Drinker Biddle & Reath LLP

David M. Matteson is a partner and member of the nationally ranked Investment Management Practice Group.

For more than 28 years, David has concentrated his practice in the area of private investment management, with an emphasis on derivatives. He has represented hedge funds, commodity pool operators (CPOs), commodity trading advisors (CTAs), investment advisers and offshore and onshore funds.

David has advised clients as to the various structures and strategies with respect to the formation of funds and their management companies, SEC and CFTC regulatory issues, offering memoranda, marketing materials and appropriate investment agreements and terms of specific investment funds. Prior to joining the firm, David was general counsel of a hedge fund manager. He was recently named one of the Best Lawyers in America® for his Hedge Fund/Investment Management practice.

Stephen Wilkes, Associate, Drinker Biddle & Reath LLP

Steve Wilkes is an attorney in the firm’s ERISA Financial Services Team. He has gained broad experience representing clients on matters involving employee benefits, taxation and securities law, from both a regulatory and transactional perspective, for over 30 years. Steve’s practice today focuses mostly on investment management issues faced by the law firm’s clients, where ERISA and related securities, corporate, or banking laws intersect with regard to the creation and delivery of financial products and services.

Clients include investment advisers, broker dealers, banks, registered funds and private funds.

Deborah E. Gallegos, Director of Manager Research, Strategic Investment Solutions

Deborah E. Gallegos, Director of Manager Research for Strategic Investment Solutions (SIS), has more than 20 years of experience in public fund administration, investment management, and plan sponsor consulting. She is responsible for the overall direction and supervision of SIS’s manager research effort, and oversees the conduct of manager search and selection projects in the public markets asset classes including hedge funds. Deborah served as New York City’s Chief Investment Officer, where she supervised the development of the overall investment policies, standards and guidelines for the City’s five pension systems totaling $90 billion in assets.

Previously, Deborah served as Deputy State Investment Officer for the New Mexico State Investment Council. She was a Vice President at JP Morgan Fleming Asset Management, where she worked for six years for its Global Emerging Markets Fund, and also worked for Morgan Stanley & Co. in its equity research group.

Deborah serves as the Treasurer for the Stern Grove Festival Foundation and sits on the investment committee for the City College of San Francisco.

Ray Iler, Partner, Deloitte

Ray J. Iler is Deloitte’s West Coast hedge fund leader responsible for hedge fund industry matters involving audit, tax, financial advisory and consulting. In addition to serving hedge fund clients, Mr. Iler provides professional services to private equity clients. Prior to joining Deloitte, Mr. Iler served as Chief Financial Officer and Corporate Secretary for Quadrise Canada Corporation, an oil and gas technology company. From 2001 to 2006, he founded the tax practice and served as Audit Partner for Deloitte’s Grand Cayman practice, where he advised clients on investment fund structuring, due diligence procedures, service provider selection and incentive fee structuring. From 2000 to 2001, Mr. Iler was the Manager for Bank of Bermuda Cayman Limited’s corporate banking team responsible for investment management, custody and brokerage services for investment funds and high net worth individuals. From 1998 to 2000, he was the Capital Markets Group Head for UBS (Cayman Island) Ltd., where he managed back office operations for UBS sponsored investment funds and client investment funds, as well as served as director for those funds. He began his career as an auditor with Deloitte in Canada in 1991 and moved to Deloitte’s Cayman practice in 1994.

Mr. Iler received a Bachelor of Commerce with distinction in finance and accounting from University of Alberta. He is a CFA charterholder and past President of the CFA Society of the Cayman Islands, a former Director, Treasurer and founding member of the Alternative Investment Management Association’s Cayman Chapter, a Canadian Chartered Accountant and a Certified Public Accountant.

About Deloitte

Challenging times call for new ideas and the evolving environment will require a more sophisticated and robust infrastructure to operate profitably. Whether it is product structuring, scenario planning for the new regulatory era, enhancing risk management processes, or adopting new technology and operating models to meet investor demands, Deloitte’s deep bench of professionals is well-positioned to assist the hedge fund industry. The breadth of our practice and our commitment to the industry means that you can count on Deloitte to deliver results that make a difference.

About Drinker Biddle

Drinker Biddle & Reath LLP, with 650 lawyers in 11 offices nationwide, provides clients with unparalleled service in matters ranging from billion-dollar deals to complex class actions, across a broad spectrum of industries. Our priorities are knowing our clients’ business and providing the value they need so that we can be an integral part of their success. Clients choose us for our sophisticated yet efficient approach to handling their most important business transactions, litigation and government affairs efforts. For more information on how we have been innovating for clients for more than 160 years, please visit www.drinkerbiddle.com.

About 100 Women in Hedge Funds (www.100womeninhedgefunds.org)

100 Women in Hedge Funds is a global, practitioner-driven non-profit organization serving over 10,000 alternative investment management investors and professionals through educational, professional leverage and philanthropic initiatives. Formed in 2001, 100 Women in Hedge Funds has hosted more than 300 events globally, connected more than 250 senior women through Peer Advisory Groups and raised over $25 million for philanthropic causes in the areas of women’s and family health, education and mentoring.

Give Back

100 Women in Hedge Funds provides a ‘Give Back’ program that enables members to match their resources (time, access, financial) to projects that will help us expand our successful initiatives. Visit 100WHF Give Back today and tell us how you can help.

100WHF Connect!

Get Connected today! Visit Connect! for details and to sign up.

100WHF Access Fee

Have you paid your access fee? If not please go to 100WHF Member Payment. We appreciate your continued support!

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Cole-Frieman & Mallon 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.


Hedge Fund Events January 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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January 10 – 11

January 10 – 12

January 17

January 17

January 17

January 17

January 18 – 20

January 18 – 20

January 19

January 20

January 23 – 24

January 23 – 25

January 24

January 25 – 26

January 25

January 26

January 29 – 31

January 29

January 31

January 31

January 31

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Cole-Frieman & Mallon 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.

Year-End Planning for Hedge Fund Managers

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www.colefrieman.com

Clients, Friends, Associates:

Although we are late in publishing this year-end planning memo, we believe it may still be helpful for managers on this last day of 2011 and into the new year.  In addition to all of the administrative details involved in closing out the year, the regulatory landscape has shifted dramatically over the past year. As a result, year-end processes and 2012 planning are particularly important, especially for General Counsels, Chief Compliance Officers (CCOs) and key operational and financial personnel. We have updated our own year-end checklist to help managers stay on top of these priorities.

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Regulatory Compliance:

New Issue Status. On an annual basis, a manager needs to confirm or reconfirm the eligibility of investors that participate in initial public offerings or new issues. Most managers reconfirm this via negative consent, i.e., investors are informed of their status as on file with the manager and asked to inform the manager of any changes. No response operates as consent to the current status.

In addition, this is a good time to review your offering documents to confirm that they include FINRA’s anti-spinning rule (Rule 5131), as well as the SEC’s current thresholds for accredited investor and qualified client status, which became effective this year.

ERISA Status. Given the significant problems that can occur from not properly tracking ERISA investors, we recommend that managers also confirm or reconfirm on an annual basis the ERISA status of its investors. This is particularly important for managers that track the underlying percentage or ERISA funds for each investor. This reconfirmation can also be obtained through a negative consent.  [For more information, please see our post on ERISA issues for hedge funds.]

Annual Privacy Policy Notice. On an annual basis, a registered investment adviser must also provide its investors with a copy of its privacy policy, even if there are no changes to the policy.

Annual Compliance Review. On an annual basis, the CCO of a registered investment adviser must conduct an annual review of a manager’s compliance policies and procedures. This annual compliance review should be in writing and presented to senior management. We recommend that you discuss the annual review with your outside counsel, who can provide guidance about the review as well as a template for the review. Managers should be careful that sensitive conversations regarding the annual review are protected by attorney-client privilege. CCOs may also want to consider additions to the compliance program, including implementation of policies relating to use of social media, a hot topic for both managers and regulators in 2011.

Managers who are not registered may still wish to review their procedures and/or implement a compliance program as a best practice.

Trade Errors. Managers should make sure that all trade errors are addressed by the end of the year, pursuant to the manager’s polices regarding trade errors. Documentation of trade errors should be finalized, and if the manager is required to reimburse the funds, it should do so by year-end.

Soft Dollars. Managers that participate in soft dollar programs should make sure that they have addressed any commission balances by the end of the year.

Custody Rule Annual Audit. SEC-registered advisers must (i) maintain client funds and securities with a qualified custodian in a separate account for each client under that client’s name, or in an account that contains only client funds and securities with the adviser listed as agent or trustee for the clients; (ii) have a reasonable basis, formed after “due inquiry,” for believing that the qualified custodian holding client funds or securities sends an account statement to each advisory client at least quarterly; (iii) notify clients upon opening any new custodial account on behalf of the client (or changes to any such account) and include a legend in such notice urging the clients to compare custodial account statements with any statements received from the adviser (if the adviser elects to send any such statements directly); and (iv) undergo an annual surprise examination conducted by an independent public accountant.

Advisers to pooled investment vehicles may avoid both the quarterly statements and surprise examination requirements by having audited financial statements prepared in accordance with GAAP by an independent public accountant registered with the Public Company Accounting Oversight Board. Statements must be sent to the fund or, in certain cases, investors the fund within 120 days after the fund’s fiscal year end. Managers should review their custody procedures to ensure compliance with the rule. Requirements for state-registrants may differ, and we encourage you to contact us if you have any questions or concerns about your custody arrangements.

Please see our post on the SEC Custody Rule for more information.

Schedule 13G/D and Section 16 Filings. A manager whose managed funds are beneficial owners of 5% or more of a registered voting equity security must report these positions on Schedule 13G. Schedule 13G filings are updated annually within 45 days of the end of the year. For managers who are also filing Schedule 13D and/or Section 16 filings, this is an opportune time to review your filings to confirm compliance and anticipate needs for Q1.

Form 13F. A manager must also file a Form 13F if it exercises investment discretion with respect to $100 million or more in certain securities within 45 days after the end of the year in which the manager reaches the $100 million filing threshold. The SEC lists the securities subject to 13F reporting on its website.

Form 13H. Managers who meet the SEC’s new large trader thresholds (in general, managers whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month) were required to file an initial Form 13H with the SEC on December 1, 2011. Large traders will need to file amended 13Hs on an annual basis. In addition, changes to the information on 13H will require interim amendments following the calendar quarter in which the change occurred.

Blue Sky Filings. On an annual basis, a manager should review its blue sky filings for each state to make sure it has met any renewal requirements. States are increasingly imposing late fees or rejecting late filings altogether. Accordingly, it is critical to stay on top of filing deadlines, for both new investors and any renewals.

SEC Form D. Form D filings for most funds need to be amended on an annual basis, on or before the anniversary of the initial SEC Form D filing. Copies of Form D can be obtained by potential investors via the SEC’s website.

IARD Annual Fees. Preliminary annual renewal fees for state registered and SEC registered investment advisors were due by December 12, 2011. In the event a manager has not submitted these fees, the manager should submit these fees immediately through the IARD system. The manager will likely be subject to additional late filing fees and these must be paid through the IARD by February 3, 2012.

Pay-to-Play Rules. In 2010, the SEC’s adopted Rule 206(4)-5, which disqualified investment advisers, their key personnel and placement agents acting on their behalf from seeking to be engaged by a governmental client if they have made political contributions. State and local governments are following suit, including California, which requires such persons to register with the state as lobbyists, and mandates lobbyist registration in California’s cities and counties as well. This is an important issue for any manager seeking investments by government pension plans.

Registered Commodity Pool Operators and Commodity Trading Advisers. Registered CPOs and CTAs must prepare and file Annual Questionnaires and Annual Registration Updates with the NFA. Registered CPOs must also prepare and file an annual report for each commodity pool. Unless its funds qualify for an exemption, registered CPOs and CTAs must update their disclosure documents periodically, as they may not use any document dated more than 9 months prior to the date of its intended use. Disclosure documents that are materially inaccurate or incomplete must be promptly corrected and the correction must be promptly distributed to pool participants.

Fund Accounting and Financial Matters:

Wash Sales. Managers should carefully manage wash sales for year end. Failure to do so could result in embarrassing book/tax differences for investors. Certain dealers can provide managers with swap strategies to manage wash sales, including Basket Total Return Swaps and Split Strike Forward Conversions. These strategies should be considered carefully to make sure they are consistent with the investment objectives of the fund.

Financial Accounting Standards Board Interpretation No. 48 (“FIN48”). Under FIN48, which became effective in 2009, managers must implement procedures to assess material tax positions, and potentially accrue liabilities. Managers should begin preparing to implement FIN48 as soon as possible, and should discuss with their auditors whether FIN48 will apply to them. Funds with exposure to certain countries, including Spain and Australia, should make sure they are aware of the implications of FIN48.

Redemption Management. Managers with significant redemptions at the end of the year should carefully manage the unwinding of positions so as to minimize transaction costs in the current year (that could impact performance), and prevent transaction costs from impacting remaining investors in the next year. When closing funds or managed accounts, managers shall pay careful attention to the liquidation procedures in the managed account agreement and the fund constituent documents. Offshore funds may involve unusual or lengthy dissolution procedures. Please contact us to help you evaluate and manage any fund dissolutions you are considering.

NAV Triggers and Waivers. If redemptions, performance or a combination of these are expected cause a termination event (NAV declines are typical inclusions in these provisions) in a fund’s ISDA or other counterparty agreement, managers should seek waivers of those events before the end of the year. We recommend starting this process early as credit officers at many banks may become unavailable during the holiday season.

Fund Expenses. Managers should make sure that all fund expenses for a particular year are paid for in that year, and do not roll over into the next year. In particular, managers should contact their outside legal counsel to obtain accurate and up to date information about legal expenses. Outside counsel and other vendors should be given a deadline so that checks do not need to be processed on New Year’s Eve.

Management Company Issues:

Management Company Expenses. Similarly, managers who distribute profits on an annual basis should attempt to pay management company expenses in the year they are incurred. If ownership or profit percentages are adjusted at the end of the year, a failure to manage expenses could significantly impact the economics of the partnership or the management company.

Employee Reviews. An effective annual review process is important to reduce employment related litigation and protect the management company in the event of such litigation. Moreover, it is an opportunity to provide context for bonuses, compensation adjustments, employee goals and other employee-facing matters at the firm. It is not too late to put an annual review process in place for 2011.

Compensation Planning. In the hedge fund industry, and the financial services industry in general, the end of the year is the appropriate time to make adjustments to the compensation program. Since much of a manager’s revenue is tied to annual income from incentive fees, any changes to the management company structure, affiliated partnerships, or any shadow equity program should begin on the first of the year.

Insurance. If a manager carries D&O Insurance or other liability insurance, the policy should be reviewed on an annual basis to make sure that the manager has provided notice to the carrier of all claims and all potential claims.

Future Regulatory Change:

Form ADV. Current registrants must file an annual amendment to Form ADV within 90 days of the end of its fiscal year. For SEC registrants, an updated Part 1A will be due on March 30, 2012, regardless of your FYE, to indicate your AUM for purposes of eligibility to remain registered with the SEC.

Annual amendments for SEC registrants will include Parts 1A and 2A (the firm brochure). For most state registrants, this will include all parts of the ADV as well as U4s for its investment adviser representatives. For managers who have not yet filed using the revised ADV Part 2 (for example, those who filed at the end of 2010, but were not approved until after January 1, 2011), you should anticipate additional time translating your old Part II and Schedule F information into the narrative format of Part 2A and B.

Additionally, on an annual basis, registered investment advisers must provide a copy of the updated Form ADV 2A brochure and Part 2B brochure supplement to clients (or a summary of changes, with an offer to provide the complete brochure).

For managers who are required to register with the SEC, the deadline to be registered is March 30, 2012. We recommend filing the ADV by at least February 14, 2012 to ensure meeting this deadline.

Managers who will no longer meet the AUM threshold to maintain registration with the SEC will have until June 28, 2012 to transition to state registration.

Form PF. Managers to private funds who are either registered with the SEC, or required to be registered with the SEC, will begin filing Form PF in 2012. Most private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. Those with $5 billion or more in private fund assets must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012.

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For assistance with any compliance, registration, or planning issues with respect to any of the above topics, please contact Karl Cole-Frieman at 415-352-2300, Bart Mallon at 415-868-5345 or Aisha Hunt at 415-762-2854.

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.

Cole-Frieman & Mallon LLP
150 Spear Street, Suite 825
San Francisco, CA 94105
t. 415-352-2300
f. 646-619-4800
www.colefrieman.com

This Cole-Frieman & Mallon LLP Announcement is published as a source of information only for clients and friends of the firm, and should not be construed as legal advice or opinion on any specific facts or circumstances. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Cole-Frieman & Mallon LLP is a California limited liability partnership.

Hedge Fund Events December 2011

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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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December 1

December 1

December 4-6

December 5

December 5

December 5-7

December 6

December 7

December 7

December 7

December 7

December 7-8

December 7-9

December 7-9

December 7-9

December 8

December 8

December 12

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Cole-Frieman & Mallon 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.

Seven Ways to Offer Hedge Fund Strategies Through ’40 Act Registered Funds

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The Growing Demand for Registered Funds

The opportunities for hedge fund managers to grow assets under management continue to expand as pension fund, endowment, foundation, insurance and individual investors increase their allocation to alternative investments. To meet investor demand for absolute returns and diversification, as well as greater liquidity and transparency, an increasing number of hedge fund managers are offering hedge fund strategies through funds registered under the Investment Company Act of 1940 (’40 Act).

What Are the Benefits of Managing a Registered Fund?

Unregistered funds are only permitted to have up to 100 or 499 investors and require most fund investors to be accredited or qualified investors (as mandated by Section 3(c)(1) and Section 3(c)(7) of the ’40 Act). Funds registered under the ’40 Act can accept an unlimited number of accredited investors or qualified investors, which allows funds to lower account minimums and appeal to more investors. Additionally, funds registered as opened-end investment companies under the ’40 Act (or mutual funds) can be marketed and sold to an unlimited number of institutional and individual investors regardless of their income or net worth.

Why Do Investors Prefer Registered Funds?

In addition to providing portfolio transparency and greater liquidity (i.e., a mutual fund’s NAV is required to be calculated and marked to market daily), a ’40 Act registered fund provides greater regulatory safeguards. The ’40 Act requires oversight and accountability by independent fund board members; protects the physical integrity of fund assets; guards against conflicts of interest, including problematic affiliated transactions; protects against potentially unsound capital structures by imposing certain investment restrictions; and ensures that investors receive accurate and appropriate information about the fund and its manager(s). Generally, investors can also conduct due diligence and make investments in registered funds more efficiently and cost-effectively than unregistered funds. Most registered funds can be bought and sold directly from the fund and through intermediaries such as brokers or fund supermarkets (i.e., Schwab and Fidelity).

How are Hedge Fund Strategies Offered Through Registered Funds?

The evolution of fund structures has significantly broadened distribution channels for hedge fund strategies. Below are seven of the most common ways to offer hedge fund strategies through registered funds:

1. Register a new stand-alone fund (or a series trust to launch multiple funds).

2. Register a new series (or fund) of a third-party sponsored series trust.

3. Convert an existing private fund into a registered fund (or a series a of a third-party sponsored series trust).

4. Register a fund of funds (underlying funds can be private, registered or both).

5. Advise a private underlying fund of a registered fund of funds.

6. Advise a registered underlying fund of a registered fund of funds.

7. Provide sub-advisory services to a registered multi-manager fund.

Conclusion

Investors are increasingly seeking absolute returns to diversify their portfolios, as well as more protective fund structures. Investor demand for these attributes combined with fund managers’ desire to grow their AUM has driven the emergence of different ways to offer hedge fund strategies through registered funds. Although the process and cost significantly varies, hedge fund managers can easily assess the options outlined above with the assistance of a seasoned ’40 Act attorney and other fund service providers.

For more information regarding ’40 Act registered funds, please see the SEC’s Investment Company Registration and Regulation Package or contact Aisha Hunt, a Partner and the head of the ’40 Act/ Alternative Mutual Fund Practice at Cole-Frieman & Mallon LLP.  Aisha can be reached directly at 415-762-2854.

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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 established investment management firms.

Karl Cole-Frieman Speaking at Fund Compliance Event

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On December 1st and 2nd Private Equity International (PEI) will be hosting a Fund Compliance Forum in San Francisco.   The forum will be focused on providing private equity firms with information on various Dodd-Frank compliance requirements, including the investment adviser registration requirement.  Karl Cole-Frieman, a partner with Cole-Frieman & Mallon LLP, will a panelist and will be discussing the compliance issues associated with marketing materials.  The overview of the session by Karl can be found here.

Information on the event is posted below and can be found on the PEI website by clicking here.

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PEI Private Fund Compliance Forum: San Francisco

An enormous collective sigh of relief was felt around the private equity world when the SEC announced that the deadline to register was moved to March 30, 2012. This extension has given private equity firms more time to designate a chief compliance officer, implement a compliance program, and file all necessary forms with the SEC.

The PEI Private Fund Compliance Forum: San Francisco provides private equity and venture capital firms an opportunity to gain a more complete understanding of what newly registered private funds should expect post-registration and how to implement and manage an effective compliance program.

This one and a half day event, divided into panel discussions and in-depth workshop sessions, is tailored to firms that are in the process of registering with the SEC, those firms that are seeking more information about the scope of what is entailed in registration as well as those who are already operating as RIAs that are looking to enhance their compliance functions.

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Panel: Effective and appropriate marketing materials

10:40 – 11:45

• Interpreting rules governing marketing and advertising

• Making sure that presentations are reviewed by compliance

• Making sure your web sites are in compliance

• Guidelines regarding talking to the press

Moderator:

Janis Kerns, Editor, ACA Insight

Panel Members:

Karl A. Cole-Frieman, Partner, Cole-Frieman & Mallon LLP

Jennifer Keese-Powell, Marketing Manager, Hall Capital Partners LLC

Lois Towers, Compliance Officer, Pantheon Ventures (US)

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Cole-Frieman & Mallon LLP provides a variety of services including: hedge fund formation, advisor registration and counterparty documentation, CFTC and NFA matters, seed deals, internal investigations, operational compliance, regulatory risk management, hedge fund due diligence, marketing and investor relations, employment and compensation matters, and routine business matters. For more information please visit us at: http://www.colefrieman.com/.

NIBA Petitions For Release of Segregated Funds to MF Global Customers

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The National Introducing Brokers Association (NIBA) has started a petition asking the judge in the MF Global bankruptcy proceeding to release customer segregated funds.  Below we have provided the full text of the petition which members of the community can sign by going here.  It is unclear how this would work in conjunction with the CME’s promise to guarantee up to $300M of the missing $650M or so (for more information on this, please see the CME release).

Below the reprint of the petition, we have also posted a recent statement by the FIA on MF Global.

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Release remaining cash balances of former MF Global customers

Greetings NIBA members and supporters,

We urge you to sign the following petition in order for the bankruptcy court to have a chance to hear from you – the broker, the trading advisor, the IB – directly. Some of you have the resources to pursue your interests individually, that’s great. But, the court needs to hear from all of you. Our voice is much stronger if we are unified; acting collectively, we can make a difference. This is one of the reasons you belong to and support the NIBA. We are standing up for the rights of all our members. Please sign regardless of whether you cleared with MFG.

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Honorable Martin Glenn
U.S. Bankruptcy Court, Courtroom 501
One Bowling Green
New York City, NY 10004

The National Introducing Brokers Association (NIBA) submits this Petition urging you to exercise your authority and immediately, to the extent it does not hinder the bankruptcy process, permit the release of the remaining cash balances of liquidating and transferred customers of MF Global, and of customers who were included in the bulk transfer process. To the extent there are sufficient “segregated” funds available, they are the assets of the customers. Further, those funds are absolutely vital for the marketplace to function fully. The result of withholding these funds is affecting the ability of customers to maintain and trade their positions, and will impact liquidity and trading volume – absolutely necessary for an efficient market.

The NIBA is a 20-year old non-profit association of registered Introducing Brokers, Commodity Trading Advisors and Associated Persons who transact business for customers in the retail sector of the futures industry, as well as in managed futures. Our membership includes professionals associated with MF Global, as well as IBs, CTAs and APs at the receiving futures commission merchants. Our customers include individuals and entities as diverse as farmers, pension funds and users of energy and metals.

Customers and futures professional alike are suffering under the current scheme. We urge you to heed Petition and release these funds. We want to get back to work.

Respectfully, The National Introducing Brokers Association

(www.theniba.com)

—————-

Sincerely,

[Your name]

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FIA Issues Statement Regarding MF Global

WASHINGTON, D.C. ―Nov. 9, 2011― The Futures Industry Association issued the following statement in response to the events involving the bankruptcy of MF Global.

The Futures Industry Association (FIA) is deeply troubled by the failure of MF Global (MFG) and the financial distress that the apparent shortfall in customer segregated funds has caused our members’ customers and the markets generally. Segregation of customer funds is the cornerstone that assures the financial integrity of our markets and any violation of these segregation requirements cannot be tolerated.

Since the appointment of a Trustee for MFG on October 31, FIA member firms have been working closely with all affected stakeholders, including the CME Group, ICE Clear US, ICE Clear Europe and other relevant derivatives clearing organizations, to effect the prompt and orderly transfer of customer positions to other futures commission merchants (FCMs).

FIA supports a full review of the circumstances that led to the failure of MFG and, in particular, the apparent shortfall in customer segregated funds. FIA recognizes that this apparent shortfall will delay the date by which customers will receive all of the funds that were on deposit with MFG. Futures customers cannot afford to have the funds they had deposited to support their positions held up while the claims process runs its course. FIA strongly encourages the Trustee, with the assistance of the Commodity Futures Trading Commission and the clearing organizations, to complete an interim accounting and facilitate the prompt return of all customer funds.

The FIA is the primary industry association for centrally cleared futures and swaps. Its membership includes the world’s largest derivatives clearing firms as well as derivatives exchanges from more than 20 countries. For more information, please contact Joanne Morrison ([email protected]) at 202.466.5460 or visit our website at www.futuresindustry.org.

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Cole-Frieman & Mallon LLP provides legal services to the managed futures community.  Please contact us if you have questions or call Bart Mallon directly at 415-868-5345.