Revised Form ADV Part 1 Now Available on IARD

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New Questions Added to Form ADV Part 1

The SEC has released a new Form ADV Part 1a which includes a number of additions as described in greater depth below.  Please also see the the paper version of the new Form ADV Part 1 which is currently effective.

Since enactment of the Dodd-Frank Act, the SEC has adopted a series of rules that have a significant impact on investment advisers and the IA registration process. Last year, amendments to the Form ADV Part 2 required registered investment advisers to provide new and prospective clients with a brochure and brochure supplements prepared using a “plain English” narrative approach. The new Form Part 2 became effective January 1, 2011 for new registrants and March 31, 2011 for registrants updating their Form ADV. Many states followed suit requiring the use of the new Form Part 2.

Overview of Major Changes to Form ADV Part 1

The new Form ADV Part 1 is now available on the IARD website. The changes reflect the new asset thresholds and the SEC’s effort to gather detailed information about investment advisers and their operations. For example, Section 7 now requires the following information about private funds (defined as “an issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for section 3(c)(1) or section 3(c)(7) of that Act”):

  • a private fund identification number (which is assigned to the fund)
  • whether the fund is part of a master-feeder structure (and if so, information about the master and/or feeder funds)
  • whether the fund is a “fund of funds”
  • details about the beneficial owners of the fund
  • information about whether the fund relies on an exemption from registration under Regulation D of the Securities Act of 1933
  • details about the fund’s service providers

Next Steps

For firms who have not started the registration process, completion of the new Form ADV Part 1 will take longer because of the additional information that must be collected.  For firms who have begun the process but have not yet been registered with the SEC or state, it is likely that the new information will be required to be submitted prior to registration being approved by the SEC or state securities commission.  For advisers who are already registered with the SEC or state, the new questions will need to be completed as part of the Annual Updating Amendment (for more information, please see our post for the requirement in 2011 – we will have a similar post for 2012 after the new year).  The due date for the Form ADV Annual Updating Amendment approaching is March 30, 2012.

Should you have any questions on the completion, submission, and/or reporting deadlines for Form ADV, please feel free to contact us or call Bart Mallon directly at 415-868-5345.

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Cole-Frieman & Mallon LLP provides investment adviser registration and compliance services to private fund managers.  The firm has a robust investment management practice catering to hedge fund managers, mutual fund managers and institutional investors.

SEC Action Against Hedge Fund Manager for Marketing Misrepresentations

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SEC v. Andrey C. Hicks and Locust Offshore Management, LLC

Marketing, of course, is an issue close to the heart of every hedge fund manager. You spend so much time and effort making your pitchbook and other materials exactly right in terms of strategy, investment process and all the details that help you make the most of your investor meetings. It needs to look great; it needs to tell your story, and as the SEC recently reminded us, it needs to be the truth, the whole truth, and nothing but the truth.

Overview of Case

On October 26, 2011, the SEC filed an action in the US District Court for the District of Massachusetts against Andrey C. Hicks (“Hicks”) and Locust Offshore Management, LLC (“LOM”). Hicks and LOM purported to manage a British Virgin Islands-based investment vehicle named Locust Offshore Fund, Ltd. (the “Fund” and collectively with Hicks and LOM, “Locust”), which employed a strategy based on a quantitative model developed by Hicks. The SEC alleged that the Fund was in fact part of a fraudulent scheme that ultimately funneled incoming subscriptions into Hicks’ personal accounts.

According to the complaint (see SEC v. Hicks & Locust),  the scheme depended on a number of misrepresentations found in LOM’s website, the Fund’s offering memorandum, Hicks’ email correspondence, Hicks’ verbal statements to at least one investor, post-subscription correspondence with investors.

The SEC asserted causes of action under Section 17(a) of the Securities Act (fraudulent interstate transactions), Section 10(b) of the Exchange Act and related rules (prohibiting the use of manipulative and deceptive devices); Section 206(4) of the Advisers Act (prohibiting act, practice or course of business that is fraudulent, deceptive or manipulative), and for equitable relief.

The District Court issued a temporary restraining order and asset freeze against Locust.

Takeaways for Managers

The alleged misrepresentations included the following:

  • Statements that the Fund was formed and registered as a professional fund in the British Virgin Islands, when in fact no such entity had existed or been registered there;
  • Flowing from the above, any statement identifying Hicks as the portfolio manager, director, or other principal of the Fund or LOM, as well as any statement that LOM was the manager of the Fund;
  • Identifying Ernst & Young as the auditor of the Fund, and Credit Suisse as the Fund’s prime broker, when in fact neither company had ever been retained to provide services to the Fund;
  • Statements that the 27 year old Hicks held an undergraduate degree and doctorate degree in applied mathematics from Harvard, when in fact he had only attended three semesters as an undergraduate, and was forced to withdraw due to repeated failure to meet academic standards. Hicks received a D minus in the only math course he took;
  • Statements that Hicks managed a book of futures, options and foreign exchange investments at Barclays, and grew his book nearly two-fold during his brief tenure, when in fact he had never been employed at Barclays; and
  • Assurances to at least one investor that his subscription monies had been received and were “entered into live trading,” and similar statements.

The first investor in the Fund, referred to as Investor A, met Hicks on an airplane and the two fell into conversation. The above statements, found in the offering documents, on the website and in other materials, were reinforced during their conversation. Hicks talked about his education and professional experience, showed Investor A LOM’s website on his Blackberry, and the two parted, exchanging their business cards. The chance meeting and follow-up emails were evidently persuasive; Investor A wired his subscription monies about a month later.

This action highlights several points for managers:

  • Do not lie in your marketing materials; in biographies especially, take care to avoid statements that exaggerate education, qualifications, experience and expertise;
  • Carefully check all facts, even basic data such as service provider information and fund formation details in all areas where they appear (not merely obvious places like your fund offering documents, but any presentations, pitchbooks, websites or other materials);
  • Maintain files of backup materials to document every factual statement made in your offering documents, marketing materials and on your website;
  • The anti-fraud provisions of the securities laws have a long reach and managers should be careful about all communications, not just in their marketing materials. Evaluate letterhead, business cards, email signatures and speak with all employees, but especially those involved in marketing, regarding appropriate parameters for meetings (planned or chance) with potential investors.

Conclusion

Although Hicks is an extreme example, all managers should ensure that their funds’ offering documents marketing materials, stationery, written correspondence, and verbal statements are accurate, including with respect to service provider information, fund formation details, and biographies. To the extent that managers provide such information on their websites, all of these details should be confirmed as accurate on the website itself, and in any linked or uploaded materials.

We recommend that your attorney, in-house counsel or compliance consultant review all marketing materials prior to distributing them, and retaining these materials and backup information in your files.

For more information please see the complaint above of the SEC litigation release.

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Cole-Frieman & Mallon is a boutique hedge fund law firm which provides fund formation, business and compliance services to fund managers.  Bart Mallon can be reached directly at 415-868-5345.

Investment Adviser and IA Representative Registration Renewal 2012

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If your firm is registered as an investment adviser (IA) then you may have received notice from FINRA to renew your firm’s registration for 2012. If you have not received the notice or have not paid the renewal fees, the following provides an overview of the process.

Background

IA firms and IA representatives (RA) should be aware that registrations expire annually on December 31. In order for an IA firm to maintain their active registrations and/or notice filing statuses and for RAs to maintain active registration statuses, the IA firms must pay applicable renewal fees annually. The IARD Renewal Program facilitates the annual renewal process. A Preliminary Renewal Statement which is made available on the IARD system, will include an amount that must be paid to FINRA by December 12, 2011. Remember to allow sufficient time for payments made by check and sent through the postal service. Online payments made via E-Pay should be made by December 8, 2011 in order for the funds to be posted by December 12, 2011.

Submitting Payment

This year, the preliminary renewal statement will be made available on November 14, 2011. IA firms can access this statement via IARD by following these steps:

  1. Log onto IARD at (https://accountmgmt.finra.org/auth/ews_logon.jsp?CTAuthMode=BASIC&login_form_location_basic).
  2. Enter your firm’s ID and password.
  3. Review and accept the terms and conditions.
  4. Under the “Accounting” tab at the top of the page, select “Renewal Account.”
  5. One the left column, select “Renewal Statement.”

The bottom of the page provides an itemized list of all applicable fees.

Payment by Check

If you choose to submit payment by check, print the statement and mail it, along with the check to the following address:

U.S. Mail:

FINRA
P.O. Box 7777-W8705
Philadelphia, PA 19175-8705

(Note: this P.O. Box address will not accept courier or overnight deliveries.)

Express Delivery:

FINRA
Attn: 8705
500 Ross Street 154-0455
Pittsburgh, PA 15262

(301)869-6699

The check should be made payable to: FINRA. Be sure to write your CRD Number and the word “Renewal” on the face of the check. Be sure to also include the first page of the Renewal Statement.

Payment via CRD/IARD E-Pay

Payment can also be submitted online via CRD/IARD E-Pay. To do so, follow these instructions:

Go to the E-Pay website.

  1. Enter your login and password.
  2. On the left column under “Payments,” click “Pay my accounts.”
  3. Select the account and click “Continue.”
  4. Enter the total Payment Amount and check “Renewal” under Account Type. Then enter the payment method and click “continue.”
  5. Review the information and click “Make Payment.”
  6. Log out and the money should post within about 2 days.

Automatic Daily Account-to-Renewal Account Transfer

If your firms has sufficient funds in the Daily Account to cover the total renewal amount, FINRA will automatically process the renewal payment by the payment deadline.

Other Payment Methods

Wire payments sent by 2 p.m. (ET), should post the next business day. Wire payments sent after 2 p.m., ET, may take up to 2 business days to post. Instructions for initiating a wire can be found here.

Confirming Payment

After payment is submitted, you will be able to retrieve your firm’s online Final Renewal Statement on IARD on or after January 3, 2012. These statements will reflect the final registration status of the IA firm and RAs. To do so, follow the instructions above to log onto IARD. Under the “Renewal Statement” link in the “Accounting” section, you can retrieve the Final Renewal Statement, which will state “Paid in Full” or “Amount Due.” If an amount is due, the balance must be paid by February 3, 2012.

It is important to make sure payment is made by the deadline, otherwise the registration may be terminated. The firm will then have to contact each regulator to request re-registration instructions.

More information about the Renewal Program can be found on the IARD website. FINRA has also posted a bulletin on the 2012 IARD Renewal Program, available here.

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Cole-Frieman & Mallon LLP is a boutique hedge fund law firm and provides investment adviser registration and renewal services. Bart Mallon can be reached directly at 415-868-5345.

Reminder to CPOs re: Quarterly Rule 2-46 Filing

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Quarterly CPO Filing Due by November 14

For those commodity pool operators who are registered with the NFA, there is a quarterly reporting requirement under Rule 2-46.  This filing must be submitted to the NFA by November 14 through the NFA’s EasyFile system.  Today the NFA sent the following reminder email to those managers who have not yet completed this filing.  If you have questions on the filing, please feel free to contact us.

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November 7, 2011

Reminder to CPOs regarding upcoming due date for quarterly pool report

This is a reminder that the September 30th quarterly pool report required by NFA Compliance Rule 2-46 is due to NFA on November 14, 2011. You are receiving this message because NFA’s records indicate that you have not yet completed the filing requirement for one or more of your pools. Please note that each Member CPO is required to file a quarterly report for each active pool that it operates as long as the pool has a reporting requirement under CFTC Regulation 4.22.

The report itself covers the three-month calendar quarter ending September 30, 2011 and it must be filed electronically through NFA’s EasyFile System. You can view a list of your pools and the applicable report due dates by logging onto EasyFile using this link: https://www.nfa.futures.org/appentry/Redirect.aspx?app=EASYFILEPOOL. PLEASE NOTE THAT IF YOU HAVE A QUALIFYING POOL THAT DID NOT OPERATE BEFORE OR DURING THE QUARTER ENDING SEPTEMBER 30, 2011, YOU MUST STILL ACCESS THE EASYFILE SYSTEM AND DELETE THE POOL’S QUARTERLY STATEMENT CALL USING THE DELETE ICON ON THE MAIN POOL INDEX LISTING.

Please ensure that the September quarterly reports are filed by the due date. Failure to file this report, and/or previous quarterly reports timely, is an apparent violation of NFA Rules, that could subject your firm to disciplinary action. Questions concerning the reporting requirements should be directed to NFA’s Information Center at 312-781-1410 or 800-621-3570.***

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Cole-Frieman & Mallon LLP is a boutique law firm focused on the investment management industry.  The firm provides legal advice to CPOs and CTAs.  Bart Mallon can be reached directly at 415-868-5345.

Is there SIPC Insurance for Futures Accounts?

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SIPC Does Not Cover Futures Accounts at MF Global

The MF Global bankruptcy is creating a number of problems for managers with accounts at the firm. One question we have received from some managers is whether their client accounts are insured either through the Securities Investor Protection Corporation (“SIPC”) or through some sort of similar company.  Unfortunately there is no SIPC coverage for futures accounts and it is currently unclear how and when clients will find out whether they wil be made whole.  It is curious that there is no insurance for futures accounts given the Refco collapse in 2005, but with this bankruptcy, we are probably more likely to see calls for the creation some sort of SIPC-like insurance.

SIPC & What Losses are Insured

The following is a description of the SIPC from FINRA:

SIPC is a non-profit organization created in 1970 under the Securities Investor Protection Act (SIPA) that provides limited coverage to investors on their brokerage accounts if their brokerage firm becomes insolvent. All brokerage firms that do business with the investing public are required to be members of SIPC. SIPC protection is limited. It covers the replacement of missing stocks and other securities up to $500,000, including $250,000 in cash claims. However, it does so only when a firm shuts down due to financial circumstances in which customer assets are missing—because of theft, conversion, or unauthorized trading—or are otherwise at risk because of the firm’s failure.

SIPC does not cover the following:

  • Ordinary market loss;
  • Investments in commodity futures, fixed annuities, currency, hedge funds or investment contracts (such as limited partnerships) that are not registered with the SEC; and
  • Accounts of partners, directors, officers or anyone with a significant beneficial ownership in the failed firm.

SIPC Moves Quickly & Makes Statement

The following was posted on the SIPC website on Monday:

WASHINGTON, D.C. – October 31, 2011 – The Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, announced today that it is initiating the liquidation of MF Global Inc., under the Securities Investor Protection Act (SIPA).

SIPC today filed an application with the United States District Court for the Southern District of New York for a declaration that the customers of MF Global Inc. are in need of the protections available under the SIPA.

The United States District Court for the Southern District of New York granted the application and appointed James W. Giddens as trustee for the liquidation, and further appointed the law firm of Hughes Hubbard & Reed as counsel to Mr. Giddens.

Orlan Johnson, board chairman of the Securities Investor Protection Corporation (SIPC), said: “When the customers of a failed SIPC member brokerage firm have left their securities in the custody of that firm, SIPC acts as quickly as possible to protect those customers. In this case, SIPC initiated the liquidation proceeding within hours of being notified by the SEC that a SIPC case was necessary to protect the investing public.”

While the SIPC is not insuring the accounts, they are involved with helping investors.  The following press release discusses the SIPC’s involvement in helping investors to transfer accounts:

U.S. Bankruptcy Judge Martin Glenn approved a request to allow the transfer of certain segregated customer commodity positions from MF Global Inc. to one or more futures commission merchants (FCMs). The request was made by the trustee appointed by the Securities Investor Protection Corporation and oversee- ing the liquidation of MF Global Inc.

This action will allow for the transfer of approximately 50,000 client accounts, the substantial majority of which were cleared through the Chicago Mercantile Ex- change (CME). These transfers will unfreeze commodity positions with a notional value of $100 billion and represent a substantial position of all existing commod- ity accounts at MF Global Inc.

The notice above can be found on MF Global’s regulatory notices webpage.

Next Moves & Conclusion

Commodity pool operators who advise funds with accounts at MF Global should have already alerted investors in such funds.  For more information on this please see our post on the NFA Guidance re: MF Global.

Other persons who are interested in receiving more information about the liquidation and account transfer process should find the following websites helpful:

We will continue to provide updates on MF Global which we think will be helpful to our readers.  If you have specific questions, please feel free to send us questions and we will do our best to provide appropriate information through the blog.  As we mentioned above, we think that there is likely to some sort of regulatory fall-out from this and we believe that law makers will call for insurance for customer accounts.

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Cole-Frieman & Mallon provides legal advice to FCMs, IBs, CTAs and CPOs.  Bart Mallon can be reached directly at 415-868-5345.

NFA Provides Guidance re: MF Global

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CPOs Must Provide Information to Fund Investors

Below is guidance just provided by the NFA regarding MF Global.  Commodity Pool Operators must provide investors with a disclosure regarding the fund’s assets held at MF Global.  Additionally, if the CPO is soliciting new investors for the fund, the CPO will need to amend their disclosure document and have the disclosure document reviewed by the NFA prior to first use.

Please contact us if you need help with respect to any of the items discussed in the NFA memo below.

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November 1, 2011

Proposed Guidance for CPOs with Pool Funds Held at MF Global, Inc.

NFA recognizes the need for our CPO Members to keep their pool participants informed as to what has occurred with MF Global, Inc. (MF Global) and how it may affect future operations. In this regard, NFA, in consultation with the CFTC, is providing guidance on disclosures that CPO Members with pool funds held at MF Global must make to their participants. At a minimum, CPO Members must provide their pool participants with a disclosure statement that includes the disclosures summarized below. Members are also encouraged to provide any additional disclosures that are necessary given their specific business operations.

If you are a Member operating a pool that has pool funds held at MF Global, you must make the following disclosures:

  • On October 31, 2011, MF Global reported to the SEC and CFTC possible deficiencies in customer segregated accounts held at the firm. As a result, the SEC and CFTC determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets, and SIPC initiated the liquidation of MF Global under the Securities Investor Protection Act.
  • As of (insert date) approximately $XXX of (Name of Pool)’s assets were on deposit in an account(s) at MF Global. These assets represent XX% of the (Name of Pool)’s net asset value of $XXX.
  • The General Partner does/does not believe that these actions will have a material impact upon the operations of (Name of Pool) and its ability to:
    • Satisfy redemptions requests;
    • Adequately value redemption requests and the manner in which they will be handled;
    • Accept new subscriptions in (Name of Pool) and properly value the net asset value for new subscribers; and
    • Provide for accurate valuation in the (Name of Pool)’s account statements provided to participants.
  • Participants are cautioned that there can be no assurances:
    • That (Name of Pool) will have immediate access to any or all of its assets in accounts held at MF Global; and
    • As to the amount or value of those assets in the context of the bankruptcy.
  • Participants should also be aware that future actions involving MF Global may impact (Name of Pool)’s ability to value the portion of its assets held at MF Global and/or delay the payment of a participant’s pro-rata share of such assets upon redemption.

The above disclosures must be provided to current pool participants through a separate written communication. In addition, Members who have a current disclosure document and plan to solicit new participants must ensure that they have updated their disclosure document to include these disclosures. In this regard, please remember that all amended disclosure documents must be submitted to NFA for review prior to use.

Further, with respect to the valuation of pool assets and redemptions, each Member is urged to consult with its CPA to ensure these items are reported in accordance with generally accepted accounting principles or international financial reporting standards, as applicable.

If you have any questions, please do not hesitate to contact the following individuals:

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

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

Todd Maines at (312)781-1560 or at [email protected]

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Cole-Frieman & Mallon LLP is an investment management law firm which provides CPO registration and compliance services.  Bart Mallon can be reached directly at 415-868-5345.

Announcing Alternative Mutual Funds Practice

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Friends:

Cole-Frieman & Mallon LLP is pleased to announce the addition of an alternative mutual funds practice led by new partner Aisha Hunt.  Below is our press release announcing Aisha’s affiliation as well as the new practice area.  We all look forward to continuing to provide top-tier legal services to the investment management industry.

– Karl Cole-Frieman & Bart Mallon

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COLE-FRIEMAN & MALLON LLP LAUNCHES ALTERNATIVE MUTUAL FUND PRACTICE

Aisha Hunt, former in-house counsel at Wells Fargo and Dodge & Cox joins as Partner to run the practice

SAN FRANCISCO, CA – November 1, 2011 – Cole-Frieman & Mallon LLP, a leading boutique investment management law firm, is proud to announce the addition of Aisha Hunt as a Partner to head the firm’s growing Alternative Mutual Fund Practice in San Francisco. Ms. Hunt has represented some of the most prominent investment managers and mutual fund families in the United States, including the Wells Fargo Advantage Funds and the Dodge & Cox Funds.

By bringing on Ms. Hunt, the firm now offers clients a broader suite of investment management legal services, including a ’40 Act practice focused on alternative mutual funds. She has extensive legal experience counseling emerging and established investment managers to separate accounts, hedge funds, UCITS funds and mutual funds. Ms. Hunt holds a B.S. in Business Administration from U.C. Berkeley’s Haas School of Business and a J.D. from Stanford Law School.

“We are very excited that Aisha has joined the firm to launch our new Alternative Mutual Fund Practice,” said Karl Cole-Frieman. “Our clients will greatly benefit from her wide-ranging mutual fund knowledge, as well as her experience advising hedge fund managers.”

“Few law firms with hedge fund practices have the necessary ’40 Act expertise to advise on the unique regulatory and structural requirements of alternative mutual funds,” said Darren Day, Managing Director at Concept Capital Markets, LLC, a prime brokerage firm which services alternative mutual funds. “With the addition of a ’40 Act practice, Cole-Frieman & Mallon LLP is well positioned to help investment managers meet the growing demand for alternative mutual funds.”

Cole-Frieman & Mallon Partner, Bart Mallon, added “Launching an alternative mutual fund is complex and requires highly specialized legal counsel to help navigate the regulatory landscape. Our Alternative Mutual Fund Practice is specifically tailored to help investment managers meet the growing demand and opportunities for these new products.”

“One of the best things about Aisha is that she understands investment managers must contain costs yet receive a premier value-added service. It is impressive that she can help managers analyze the cost-benefit ratio to raising assets on an alternative mutual fund platform,” said Nancy Kazdan, Managing Partner at Market Share International.

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, mutual fund and UCITS 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.

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Cole-Frieman & Mallon provides legal services to the investment management community and has an alternative mutual funds practice.

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

Kartl Cole-Frieman can be reached at 415-762-2841.

Aisha Hunt can be reached at 415-762-2854.

Hedge Fund Events November 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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November 2-3

November 3

November 3-4

November 3-4

November 7

November 7

November 7-8

November 7-9

November 8

November 8

November 8-9

November 8-9

November 9

November 10

  • Sponsor: RCA
  • Event: Fall Asset Management Thought Leadership Symposium
  • Location: New York, NY

November 10

  • Sponsor: Hedge Fund Intel.
  • Event: AR Award 2011
  • Location: New York NY

November 13-15

November 14-16

November 15

November 15-16

November 17

November 21

November 30 – December 2

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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.

Form PF Filings to be Submitted via FINRA

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SEC Mandates FINRA to Receive Form PF Filings

SEC has chosen FINRA to accept Form PF filings on its behalf when and if Form PF is adopted.  As background, on January 26, 2011 the SEC issued a proposed Rule 204(b)-1 under the Investment Advisers Act of 1940 which would require SEC registered investment advisers to file a new Form PF with the SEC on either a quarterly or annual basis.  Although the rest of the proposed rule is still under consideration, the SEC has determined that if Form PF is adopted, investment advisers would file Form PF electronically through FINRA.  FINRA currently is the operator of IARD, the system through which investment advisers electronically file their Form ADV and make necessary notice filings to states.  If the rule is passed, FINRA will develop and maintain the filing system for Form PF as well.

The SEC initially anticipated that the proposed rule implementing Form PF would have an initial compliance date of December 15, 2011 – this appears less likely as we get closer to that date and plan to provide updates as appropriate.

Form PF Filing Process and Filing Fees

Because the filing system for Form PF will likely be an extension of the current IARD filing system, we expect the process will be substantially similar to the current process of filing Form ADV.  Investment advisers filing Form PF will likely have to go through the entitlement process and then fund their accounts with the fees necessary to submit the filing through the system.  Managers will have to make quarterly annual filing based on their assets under management. Regardless of assets under management, the filing fees shall be as the same for each filing:

  • $150 for each Form PF annual update
  • $150 for each Form PF quarterly update

Conclusion

FINRA is the logical choice to accept and manage the filing of Form PF because, as the current operator of the IARD system, they are uniquely situated to develop and deploy the Form PF filing system in a timely manner.  The SEC believes that having FINRA expand its existing platform to accommodate this additional filing would be result in greater efficiency for both the advisers and the SEC.  However, managers should be wary of the continued consolidation of filing platforms as FINRA continues to move towards becoming the SRO for hedge fund managers and other investment advisers.

The text of FINRA’s letter regarding Form PF can be found here: FINRA Form PF Letter

The text of SEC’s notice of intent to have Form PF filed through FINRA can be found here: SEC Form PF Announcement – IA-3297

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Cole-Frieman & Mallon LLP provides comprehensive registration and compliance services to hedge fund managers, including help with filing Form PF.  Bart Mallon can be contacted directly at 415-868-5345.

Requesting a Waiver from NFA Enhanced Supervisory Requirements

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Member Firms Subject to ESRs May Seek Waiver

As we have discussed previously, an NFA Member firm may be required to adopt enhanced supervisory requirements (“ESR”) based on:

  • the employment history of its APs and Principals,
  • the affiliations of its Principals,
  • if the firm charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract, or
  • it becomes subject to NFA or CFTC enforcement or disciplinary proceedings.

If a Member firm meets any of the criteria requiring it to adopt ESRs, it may request a waiver from these requirements. This post discusses how a firm may request such a waiver and what the NFA will consider in granting or denying the waiver.

Requesting a Waiver

To request a waiver from enhanced supervisory requirements, a Member firm may file a petition with the NFA’s three-person Telemarketing Procedures Waiver Committee (the “TPWC”) for a partial or full waiver from the requirement to adopt ESRs.  The firm must file the petition with the TPWC within 30 days of receiving notice from the NFA that the firm is required to adopt ESRs.  This deadline is important because failure to timely file the request will prohibit the firm from filing the waiver again until at least 2 years after the firm adopts the ESRs.  If the TPWC denies the waiver, the firm is also prohibited from filing the waiver again until at least 2 years after the firm adopts the ESRs.

Factors the NFA Will Consider

The TPWC may consider the following factors when evaluating a waiver request:

  • total number and the backgrounds of APs sponsored by the Member;
  • number of branch offices and guaranteed introducing brokers (“GIBs”) operated by the Member;
  • experience and background of the Member’s supervisory personnel;
  • number of the Member’s APs who had received training from firms which have been closed for fraud, the length of time those APs worked for those firms and the amount of time which has elapsed since those APs worked for the disciplined firms;
  • results of any previous NFA examinations;
  • cost effectiveness of the taping requirement in light of the firm’s net worth, operating income and related telemarketing expenses;
  • whether the Member assesses commissions, fees and other charges that are based on all of the relevant circumstances, including the expense of executing orders and the value of services the Member renders based on its experience and knowledge; and
  • whether the Member adequately discloses the amount of commissions, fees and other charges before transactions occur in light of a retail customer’s trading experience and the impact that the commissions, fees and other charges may have on the likelihood of profit.

Conditions on Waiver

Even if the TPWC grants a full or partial waiver, it will still impose certain requirements on the firm. The firm must:

  • notify the NFA of any actions charging it with violation of CFTC, SEC, or other self-regulatory organization’s (“SRO”) regulations or rules;
  • notify the NFA of any customer complaints involving sales practices or promotional material;
  • not change ownership;
  • not have any material deficiencies noted during any SRO examination;
  • not hire additional APs from Disciplined Firms;
  • execute a written acknowledgement that the firm understands the conditions of the waiver;
  • and may include any other conditions deemed by the TPWC to be appropriate in consideration of a total or partial waiver from the enhanced supervisory requirements.

If the firm violates these conditions, the TPWC may revoke or amend the wavier that was previously granted.

Conclusion

The ESRs impose more strict requirements on Member firms.  It is important for a firm to evaluate the employment history of its APs and Principals to determine whether the firm meets the criteria set forth in NFA Interpretive Notice 9021 and must therefore adopt the ESRs or seek a waiver from such requirements. If a firm receives a notice from the NFA that it must adopt ESRs and it wishes to request a waiver, it should act quickly. Failure to file a petition within 30 days will bar the firm from filing a request for at least 2 years after it adopts the ESRs.

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Cole-Frieman & Mallon LLP provides comprehensive legal services to CFTC registered managers.  The firm also provides NFA registration and compliance support.  Bart Mallon can be reached directly at 415-868-5345.