FINRA Rule 5131 Effective September 26, 2011

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FINRA “Anti-Spinning” Rule 5131

The anti-spinning provisions of FINRA Rule 5131, which addresses certain conflicts of interest in allocation of New Issues, will go into effect September 26, 2011. Although Rule 5131 only applies to FINRA members (broker-dealers), hedge funds that invest in initial public offerings will be required to provide certain representations to their broker-dealer before they will be allowed to participate in New Issues. The definition of “New Issues” for purposes of Rule 5131 is the same as for FINRA Rule 5130, and includes most initial public offerings of equity securities.

Please note: Rule 5131 does not replace Rule 5130 and it creates additional requirements with respect to New Issues.

Spinning Prohibition

The purpose of the anti-spinning provision of FINRA Rule 5131 is to prohibit the practice of broker-dealers from allocating New Issues to executive officers and directors of current or potential clients in exchange for investment banking business (the practice commonly known as “spinning”).

Rule 5131 generally prohibits a broker-dealer from allocating New Issues to any account (including an account maintained by a hedge fund) in which beneficial interests are held by the following persons, if the broker-dealer currently has or has the expectation of a relationship with that company:

  • an executive officer or director of a public company or a covered non-public company, or
  • a person materially supported by such executive officer or director.

25% De Minimus Exemption

In addition to specific exemptions for certain types of accounts, the prohibition does not apply to an account where the interests of executive officers or directors of a public company or a covered non-public company, or persons materially supported by them, are less than 25% of such account. This means that if two investors in a hedge fund are both directors of the same public company but their combined interest in the fund is 20% of the fund, the broker-dealer will not be prohibited from allocating New Issues to that hedge fund.

Broker-Dealer Compliance with Rule 5131

Before allocating New Issues to any account, a broker-dealer will need to confirm the following:

  • whether the underlying investors in the account are executive officers or directors of a public company or a covered non-public company, or persons materially supported by them;
  • if yes, what company that investor is associated with, and
  • whether the interests of any one company are more than 25% of the account.

Correspondingly, investment managers will need to obtain this information from the underlying investors in their fund.

Implications for Investment Managers

If you currently manage a fund that invests in New Issues, you will likely be asked to complete a Rule 5131 certification by your broker-dealer. You will need to contact your existing investors and obtain written representations regarding their status, which may be done in the form of a questionnaire. You will also need to revise your hedge fund subscription documents to include similar representations for each new investor. Investor representations will need to be updated annually, which may be done through the use of a negative consent letter.

Even if more than 25% of the fund is owned by executive officers or directors (or persons materially supported by them) of one company, the fund may still participate in New Issues by implementing “carve-out” procedures to reduce the beneficial interests of those persons below 25%. Managers wishing to make use of such carve-outs should make sure the operating documents of their fund allow such procedures.

Please contact us if you need assistance in preparing questionnaires, revising offering documents or if you have questions regarding your ability to participate in New Issues under Rule 5131.

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Cole-Frieman & Mallon LLP is a firm with a practice focused on investment management law.  Bart Mallon is a hedge fund attorney and can be reached directly at 415-868-5345.

FINRA Rule 5131 – New Issue Allocations and Distributions

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Full Text of FINRA Rule 5131

The following is the full version of FINRA Rule 5131 effective as of September 26, 2011.  This rule, in conjunction with FINRA Rule 5130, governs the manner in which investors may participate in New Issues.  Specifically, Rule 5131 prevents “spinning” which is the practice of allocating new issues to executive officers and directors of current or potential clients in exchange for investment banking business.

The following rule can also be found on the FINRA website here.

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5131. New Issue Allocations and Distributions

(a) Quid Pro Quo Allocations

No member or person associated with a member may offer or threaten to withhold shares it allocates of a new issue as consideration or inducement for the receipt of compensation that is excessive in relation to the services provided by the member.

(b) Spinning

(1) No member or person associated with a member may allocate shares of a new issue to any account in which an executive officer or director of a public company or a covered non-public company, or a person materially supported by such executive officer or director, has a beneficial interest:

(A) if the company is currently an investment banking services client of the member or the member has received compensation from the company for investment banking services in the past 12 months;

(B) if the person responsible for making the allocation decision knows or has reason to know that the member intends to provide, or expects to be retained by the company for, investment banking services within the next 3 months; or

(C) on the express or implied condition that such executive officer or director, on behalf of the company, will retain the member for the performance of future investment banking services.

(2) The prohibitions in this paragraph shall not apply to allocations of shares of a new issue to any account described in Rule 5130(c)(1) through (3) and (5) through (10), or to any other account in which the beneficial interests of executive officers and directors of the company and persons materially supported by such executive officers and directors in the aggregate do not exceed 25% of such account.

(c) Policies Concerning Flipping

(1) No member or person associated with a member may directly or indirectly recoup, or attempt to recoup, any portion of a commission or credit paid or awarded to an associated person for selling shares of a new issue that are subsequently flipped by a customer, unless the managing underwriter has assessed a penalty bid on the entire syndicate.

(2) In addition to any obligation to maintain records relating to penalty bids under SEA Rule 17a-2(c)(1), a member shall promptly record and maintain information regarding any penalties or disincentives assessed on its associated persons in connection with a penalty bid.

(d) New Issue Pricing and Trading Practices

In a new issue:

(1) Reports of Indications of Interest and Final Allocations. The book-running lead manager must provide to the issuer’s pricing committee (or, if the issuer has no pricing committee, its board of directors):

(A) a regular report of indications of interest, including the names of interested institutional investors and the number of shares indicated by each, as reflected in the book-running lead manager’s book of potential institutional orders, and a report of aggregate demand from retail investors;

(B) after the settlement date of the new issue, a report of the final allocation of shares to institutional investors as reflected in the books and records of the book-running lead manager including the names of purchasers and the number of shares purchased by each, and aggregate sales to retail investors;

(2) Lock-Up Agreements. Any lock-up agreement or other restriction on the transfer of the issuer’s shares by officers and directors of the issuer entered into in connection with a new issue shall provide that:

(A) Any lock-up agreement or other restriction on the transfer of the issuer’s shares by officers and directors of the issuer shall provide that such restrictions will apply to their issuer-directed shares; and

(B) At least two business days before the release or waiver of any lock-up or other restriction on the transfer of the issuer’s shares, the book-running lead manager will notify the issuer of the impending release or waiver and announce the impending release or waiver through a major news service, except where the release or waiver is effected solely to permit a transfer of securities that is not for consideration and where the transferee has agreed in writing to be bound by the same lock-up agreement terms in place for the transferor;

(3) Agreement Among Underwriters. The agreement between the book-running lead manager and other syndicate members must require, to the extent not inconsistent with SEC Regulation M, that any shares trading at a premium to the public offering price that are returned by a purchaser to a syndicate member after secondary market trading commences:

(A) be used to offset the existing syndicate short position, or

(B) if no syndicate short position exists, the member must either:

(i) offer returned shares at the public offering price to unfilled customers’ orders pursuant to a random allocation methodology, or

(ii) sell returned shares on the secondary market and donate profits from the sale to an unaffiliated charitable organization with the condition that the donation be treated as an anonymous donation to avoid any reputational benefit to the member.

(4) Market Orders. No member may accept a market order for the purchase of shares of a new issue in the secondary market prior to the commencement of trading of such shares in the secondary market.

(e) Definitions

For purposes of this Rule, the following terms shall have the meanings stated below.

(1) A “public company” is any company that is registered under Section 12 of the Exchange Act or files periodic reports pursuant to Section 15(d) thereof.

(2) “Beneficial interest” shall have the same meaning as in FINRA Rule 5130(i)(1).

(3) “Covered non-public company” means any non-public company satisfying the following criteria: (i) income of at least $1 million in the last fiscal year or in two of the last three fiscal years and shareholders’ equity of at least $15 million; (ii) shareholders’ equity of at least $30 million and a two-year operating history; or (iii) total assets and total revenue of at least $75 million in the latest fiscal year or in two of the last three fiscal years.

(4) “Flipped” means the initial sale of new issue shares purchased in an offering within 30 days following the offering date of such offering.

(5) “Investment banking services” include, without limitation, acting as an underwriter, participating in a selling group in an offering for the issuer or otherwise acting in furtherance of a public offering of the issuer; acting as a financial adviser in a merger, acquisition or other corporate reorganization; providing venture capital, equity lines of credit, private investment, public equity transactions (PIPEs) or similar investments or otherwise acting in furtherance of a private offering of the issuer; or serving as placement agent for the issuer.

(6) “Material support” means directly or indirectly providing more than 25% of a person’s income in the prior calendar year. Persons living in the same household are deemed to be providing each other with material support.

(7) “New issue” shall have the same meaning as in Rule 5130(i)(9).

(8) “Penalty bid” means an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member in connection with an offering when the securities originally sold by the syndicate member are purchased in syndicate covering transactions.

(9) “Unaffiliated charitable organization” is a tax-exempt entity organized under Section 501(c)(3) of the Internal Revenue Code that is not affiliated with the member and for which no executive officer or director of the member, or person materially supported by such executive officer or director, is an individual listed or required to be listed on Part VII of Internal Revenue Service Form 990 (i.e., officers, directors, trustees, key employees, highest compensated employees and certain independent contractors).

• • • Supplementary Material: ————–

.01 Issuer Directed Allocations. The prohibitions of paragraph (b) above shall not apply to allocations of securities that are directed in writing by the issuer, its affiliates, or selling shareholders, so long as the member has no involvement or influence, directly or indirectly, in the allocation decisions of the issuer, its affiliates, or selling shareholders with respect to such issuer-directed securities.

.02 Annual Representation. For the purposes of paragraph (b), a member may rely on a written representation obtained within the prior 12 months from the beneficial owner(s) of the account, or a person authorized to represent the beneficial owner(s) of the account, as to whether such beneficial owner(s) is an executive officer or director or person materially supported by an executive officer or director and if so, the company(ies) on whose behalf such executive officer or director serves. A member may not rely upon any representation that it believes, or has reason to believe, is inaccurate. A member shall maintain a copy of all records and information relating to whether an account is eligible to receive an allocation of the new issue under paragraph (b) in its files for at least three years following the member’s allocation to that account.

.03 Lock-up Announcements. For the purposes of this Rule, the requirement that the book-running lead manager announce the impending release or waiver of a lock-up or other restriction on the transfer of the issuer’s shares shall be deemed satisfied where such announcement is made by the book-running lead manager, another member or the issuer, so long as such announcement otherwise complies with the requirements of paragraph (d)(2) of this Rule.

Amended by SR-FINRA-2011-017 eff. Sept. 26, 2011.

Adopted by SR-NASD-2003-140 eff. May 27, 2011.

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Cole-Frieman & Mallon LLP is a hedge fund law firm.  Bart Mallon can be reached directly at 415-868-5345.

CFTC Form 40 – Statement of Reporting Trader

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Managers Must File CFTC Form 40 for Reportable Futures Positions

Managers who maintain large positions in certain futures instruments will need to be aware of the speculative position limits with respect to the instruments.  In the event a position reaches a certain level, the CFTC will request more information about the position from the manager.  For managers which are registered with the NFA as either a commodity pool operator (CPO) or commodity trading adviser (CTA), the CFTC may send a request for the manager to complete and file a Form 40 – Statement of Reporting Trader.  This request is also referred to as a “Special Call” and CFTC regulations require every trader that holds or controls a reportable futures and option position to file Form 40 when they receive the CFTC request. CFTC Form 40 allows the CFTC to compile information to assess whether a trader’s activities could potentially impact the market and whether traders are complying with speculative position limits.

This post provides a brief description of Form 40, the reasons a CPO/CTA may receive a Special Call, as well as how to appropriately respond to the request.

Definitional Aspects of Form 40

Form 40 needs to be completed by the trader of the reportable position.  A trader is “a person who, for his own account or for an account which he controls, makes transactions in commodity futures or options, or has such transactions made.” For most commodity pools, the trader would be the manager of the fund—the CPO.

In the event there is a reportable postion, the CFTC will issue a Special Call based on information provided by futures commission merchants, clearing members and foreign brokers (collectively, “reporting firms”). If, at the daily market close, a reporting firm has a customer with a position at or above the reportable position level in any single futures or option expiration month (a “special account”), the reporting firm must send a report to the CFTC with that customer’s entire position in all futures and options expiration months in that commodity. A “special account” is any commodity futures or option account in which there is a reportable position.

A reportable position that may trigger the Special Call is defined as:

“any open contract position that at the close of the market on any business day equals or exceeds the quantity specified in CFTC Regulation 15.03 in either:

  • Any one future of any commodity on any one reporting market, excluding future contracts against which notices of delivery have been stopped by a trader or issued by the clearing organization of a reporting market; or
  • Long or short put or call options that exercise into the same future of any commodity, or long or short put or call options for options on physicals that have identical expirations and exercise into the same physical, on any one reporting market.”

Reporting Levels for Form 40

Reporting levels vary and can range from 25 contracts for smaller markets to 125,000 contracts for the largest market – for a full description of the reporting requirements, please see the full text of CFTC Regulation 15.03. Reporting thresholds cover the following categories:

  • Agricultural;
  • Broad-based security indexes;
  • Financial;
  • Hedge Street products;
  • Natural resources;
  • Security futures products;
  • TRAKRS; and
  • All other commodities.

Once a reporting threshold is crossed, the fund’s FCM will submit a form to the CFTC which may then prompt a Special Call to the CPO/CTA.

Receiving the Special Call and How to Respond 

When a CPO receives the Special Call, it must complete the Form 40 by the date specified in the letter. Form 40 is comprised of three parts.

Part A requests the following information:

  • Name and address of the CPO;
  • Principal business and occupation of the CPO;
  • Type of entity;
  • Whether the CPO is registered under the Commodity Exchange Act;
  • Whether the CPO controls the futures or option trading for any other person;
  • Whether any other person controls the CPO;
  • Names and locations of all firms at which futures or option trading accounts are carried;
  • Whether any other persons guarantee the futures or option trading accounts of the CPO or have a financial interest of 10% or more in the CPO or the futures or option accounts of the CPO;
  • Whether the CPO guarantee or has a financial interest of 10% or more in futures or option accounts not in the CPO’s name or has a financial interest of 10% or more in another futures or option trader; and
  • Whether the CPO represents a foreign government.

Part B must be completed if the CPO is an individual, joint tenant, or partnership.

Part C must be completed if the CPO is corporation, association, trust, or “other” type of trader. These sections request information that allows the CFTC to aggregate related accounts controlled or held by the CPO. They also request information about whether the CPO is engaged in activities hedged by the use of futures or option markets.

Schedule A requests information about the types of futures/options in which the CPO hedges or covers risk exposure, the CPO’s merchandising or marketing activities, all futures/option markets used, and all cash commodities hedged or risk exposure covered.

Conclusion

If you receive a Special Call from the CFTC, it is important that you respond by the date listed on the letter. The information provided should be for the person or entity that makes transactions in commodity futures or options. For funds, the CPO should complete Form 40 as the trader. A link to the form can be found here (http://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform40.pdf).

For more information, please see the CFTC’s discussion on market surveillance and large trader reporting.

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Cole-Frieman & Mallon LLP provide legal advice to CPOs, CTAs and traders in the managed futures space.  Bart Mallon can be reached directly at 415-868-5345.

CFTC Regulation 15.03 – Reporting Levels

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CFTC Form 40 Reporting Levels 

Managers who trade in the futures and commodities markets should be aware of the amount of contracts they are trading.  For certain products, once a manager reaches a reporting level, the CFTC may request that the manager complete and submit a Form 40 to the CFTC.  CFTC Regulation 15.03, reprinted in full below, provides the number of contracts for each commodity which is deemed to be a reporting level for CFTC Form 40.

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TITLE 17–COMMODITY AND SECURITIES EXCHANGES

CHAPTER I–COMMODITY FUTURES TRADING COMMISSION

PART 15 REPORTS GENERAL PROVISIONS–Table of Contents

Sec. 15.03 Reporting levels.

(a) Definitions. For purposes of this section:

Broad-based security index is a group or index of securities that does not constitute a narrow-based security index.

HedgeStreet products are contracts offered by HedgeStreet, Inc., a designated contract market, that pay up to $10.00 if in the money upon expiration.

Major foreign currency is the currency, and the cross-rates between the currencies, of Japan, the United Kingdom, Canada, Australia, Switzerland, Sweden and the European Monetary Union.

Narrow-based security index has the same meaning as in section 1a(25) of the Commodity Exchange Act.

Security futures product has the same meaning as in section 1a(32) of the Commodity Exchange Act.

(b) The quantities for the purpose of reports filed under parts 17 and 18 of this chapter are as follows:

Commodity (Number of contracts)

Agricultural:

Cocoa (100)

Coffee (50)

Corn (250)

Cotton (100)

Feeder Cattle (50)

Frozen Concentrated Orange Juice (50)

Lean Hogs (100)

Live Cattle (100)

Milk, Class III (50)

Oats (60)

Rough Rice (50)

Soybeans (150)

Soybean Meal (200)

Soybean Oil (200)

Sugar No. 11 (500)

Sugar No. 14 (100)

Wheat (150)

Broad-Based Security Indexes:

Municipal Bond Index (300)

S&P 500 Stock Price Index (1,000)

Other Broad-Based Securities Indexes (200)

Financial:

30-Day Fed Funds (600)

3-Month (13-Week) U.S. Treasury Bills (150)

2-Year U.S. Treasury Notes (1,000)

3-Year U.S. Treasury Notes (750)

5-Year U.S. Treasury Notes (2,000)

10-Year U.S. Treasury Notes (2,000)

30-Year U.S. Treasury Bonds (1,500)

1-Month LIBOR Rates (600)

3-Month Eurodollar Time Deposit Rates (3,000)

3-Month Euroyen (100)

2-Year German Federal Government Debt (500)

5-Year German Federal Government Debt (800)

10-Year German Federal Government Debt (1,000)

Goldman Sachs Commodity Index (100)

Major Foreign Currencies (400)

Other Foreign Currencies (100)

U.S. Dollar Index (50)

Natural Resources:

Copper (100)

Crude Oil, Sweet (350)

Crude Oil, Sweet–No. 2 Heating Oil Crack Spread (250)

Crude Oil, Sweet–Unleaded Gasoline Crack Spread (150)

Gold (200)

Natural Gas (200)

No. 2 Heating Oil (250)

Platinum (50)

Silver Bullion (150)

Unleaded Gasoline (150)

Unleaded Gasoline–No. 2 Heating Oil Spread Swap (150)

Security Futures Products:

Individual Equity Security (1,000)

Narrow-Based Security Index (200)

Hedge Street Products. (125,000) \1\

TRAKRS (50,000) \1\

All Other Commodities (25)

 

\1\ For purposes of part 17, positions in HedgeStreet Products and TRAKRS should be reported by rounding down to the nearest 1,000 contracts and dividing by 1,000.

[69 FR 76397, Dec. 21, 2004, as amended at 71 FR 37817, July 3, 2006]

* The above CFTC Regulation 15.03 can be found on the government website here.

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Cole-Frieman & Mallon LLP provides legal advice and compliance consulting for the managed futures industry.  Bart Mallon can be reached directly at 415-868-5345.

 

GAO Report on SRO for Private Fund Advisers

SRO for Private Fund Adviser could be established, but not without challenges

Over the last few weeks we have heard much talk about the potential formation of a self-regulatory organization (“SRO”) for registered investment advisers (i.e. hedge fund managers). In July the U.S. Government Accountability Office (“GAO”) released a report on the feasibility of forming an SRO to provide oversight to private fund advisers. The report was required by the Dodd-Frank Act and it discusses the feasibility of establishing the SRO as well as the potential advantages and disadvantages of forming such an organization.  This report comes on the heels of an SEC study of IA examinations which analyzed whether an IA SRO would be feasible.  [We concluded:  This study simply states the obvious – the SEC does not have the resources it needs to adequately do its job.  It seems like the major conclusion has already been reached – IA firms are going to need to pay for their oversight because Congress will not pay for it.]  In the GAO report, the issue is examined further and the conclusion states that an SRO could be established and there would be potential advantages and disadvantages for doing so.

Feasibility of Establishing the SRO

The report discussed the feasibility of establishing the SRO. In general there are a number of items which would need to be put into place before an SRO could be formed and operating. The main item is that Congress would need to specifically authorize, through legislation, the creation of the SRO which would then be subject to SEC oversight.  After authorization, a determination would be made as to whether the SRO would be created ab initio or if an existing SRO would take over the responsibilities of overseeing private fund advisers. It is likely that, given the costs of establishing an entirely new entity, an existing SRO (such as FINRA or the NFA) would simply be given the new oversight responsibilities. Once an SRO was determined, bylaws and operational issues will need to be addressed including fee and governance structures, board of directors, compliance rules and enforcement rules.

In any event, establishing an SRO for private fund advisers is likely to be resource intensive and subject to various levels of the political process – Congress, the SEC, (potentially) the CFTC, NASAA, and the SRO would all have agendas with respect to the SRO. Additionally, even within the private fund advisers group there is likely to be political positioning – large managers are going to have different concerns

than small managers and are most likely going to want to have a larger say with respect to operations (especially if they are paying a disproportionate amount of the fees to support the IA oversight functions of the SRO).

Potential Advantages of a Private Fund Adviser SRO

The report listed the following as potential advantages of the SRO:

Advantages of a private fund adviser SRO include its potential to (1) free a portion of SEC’s staff and resources for other purposes by giving the SRO primary examination and other oversight responsibilities for advisers that manage private funds, (2) impose higher standards of conduct and ethical behavior on its members than are required by law or regulations, and (3) provide greater industry expertise and knowledge than SEC, given the industry’s participation in the SRO.

Potential Disadvantages of a Private Fund Adviser SRO

The report listed the following as potential disadvantages of the SRO:

Some of the disadvantages of a private fund adviser SRO include its potential to (1) increase the overall cost of regulation by adding another layer of oversight; (2) create conflicts of interest, in part because of the possibility for self-regulation to favor the interests of the industry over the interests of investors and the public; and (3) limit transparency and accountability, as the SRO would be accountable primarily to its members rather than to Congress or the public

State Registration Issues

One of the questions which this particular report did not address is whether managers registered with a state securities division (instead of the SEC) would be subject to oversight by the SRO.  The discussion of the advantages and disadvantages did not include state jurisdictional issues, but these issues are important.  The state securities divisions are subject to the same budgetary limitations as the SEC and many times the states do not (contrary to reports by NASAA) have the expertise necessary to properly examine fund managers and other investment advisers.  If state managers are not required to be part of the SRO then you are likely to see a wide disparity in examination and oversight between state registered managers and SEC registered managers (who would also be subject to SRO oversight).  Expect to see this discussed in greater depth going forward.

Conclusion

The issue of whether or not there should be an IA SRO is not going to go away any time soon – especially with the SEC under intense budget pressure and the looming deadline for hedge fund IA registration (March 30, 2012). It is clear that in the race to be the SRO for investment advisers, FINRA is the leader and really probably the only viable option. While having FINRA oversee both BDs and IAs may not make the most sense, it is probably better than the alternatives which right now include (1) the NFA (which oversees managed futures firms) or (2) starting an SRO from scratch.  Expect to hear more on this issue soon from both Congress and the SEC.

For the full GAO report, please see GAO Private Fund Adviser SRO Report.

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Cole-Frieman & Mallon LLP is a law firm which provides adviser registration, compliance and legal support to SEC registered hedge fund managers. Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.

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Hedge Fund SEC Custody Rule Overview

Compliance Requirements of the SEC Custody Rule

Hedge fund managers are preparing to register as investment advisers with the SEC pursuant to the new Dodd-Frank registration requirements.  One of the issues which managers will be dealing with during that process is the hedge fund custody rule (Rule 206(4)-2 under the Investment Advisers Act).  In general this means that the SEC registered fund manager will need make sure that the fund (1) maintains its assets with a qualified custodian and (2) has an annual audit by a PCAOB Registered and Inspected audit firm.

Hedge Fund Managers Generally Have Custody

The requirements of the SEC Custody Rule are triggered when an investment adviser has “custody.”  A fund manager is deemed to have “custody” of the fund's assets when it, or a related person, directly or indirectly has authority to obtain possession of” the fund's assets.  The Rule specifically indicates that custody includes any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives the investment adviser or a related person “legal ownership of or access to client funds or securities.”

Because hedge funds are generally structured so that the manager or a related entity serves as the general partner, hedge fund managers will generally be deemed to have custody under the Rule.  Managers who also provide advice through separate accounts would not be considered to have custody of those separate accounts unless they have authority to automatically deduct fees from the account (or have custody for some other reason).  If a manager is deemed to have custody, the manager will generally need to follow certain safe-keeping requirements.

Qualified Custodian Requirement

The first safe-keeping requirement of the Rule is that a fund's cash and securities must be maintained at a qualified custodian in “a separate account for each [fund] under that [fund’s] name” or in an account under the name of the fund manager as agent for the fund. Under the Rule, “qualified custodians” include banks, registered broker-dealers, registered futures commission merchants, and foreign financial institutions that customarily hold financial assets for their customers.  Hedge fund managers generally satisfy the qualified custodian requirement by holding funds’ cash and securities at a prime broker or other broker-dealer.

Audit Requirement

Managers of hedge funds are exempt from the Rule’s other safe-keeping requirements (or are deemed to comply with those requirements) if the fund has its financial statements audited annually and upon liquidation.  The audited financial statements must be prepared in accordance with generally accepted accounting principles (GAAP) and the audit must be conducted by an “independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board [(PCAOB)] in accordance with its rules.” Care should be taken to ensure that any audit firm engaged by a fund is subject to regular inspection by the PCAOB.

The annually audited financial statements must be delivered to all limited partners within 120 days of the end of” a fund’s fiscal year.

Alternative to the Annual Audit Requirement

If a hedge fund manager does not qualify for the exemptions from other safe-keeping requirements by conducting an annual fund audit as discussed above, the other provisions to the Rule require that the manager to: (1) instruct the fund's qualified custodian(s) to send quarterly account statements directly to each limited partner, and (2) engage an independent public accountant to conduct an actual “surprise” examination of the funds’ cash and securities and file Form ADV-E with the SEC.

Because most funds will have an annual audit, the surprise examination alternative is rare.

Responses to Form ADV Questions Regarding Custody

In addition to satisfying the safe-keeping requirements of the Rule, hedge fund managers must make certain disclosures regarding custody on their Form ADV.  Form ADV Part 1, Item 9.A requires managers to disclose the amount of funds and securities for which they have custody and Item 9.B requires the same disclosure for related persons of the manager.  Additionally, Item 9.C requires managers to indicate whether they have engaged an accountant to conduct an annual audit of funds’ financial statements (and whether the managers use other means of satisfying the Rule’s safety requirements).  The name and contact information of the accountant so engaged must be provided in Form ADV Schedule D, Section 9.C.  Information provided on Form ADV Part 1, Item 9 (except the amount of funds and securities and number of clients for which the manager has custody) is considered material and must be updated promptly whenever there is a change.

Item 15 of Form ADV Part 2 (the Brochure) requires additional disclosures for those managers who have instructed qualified custodians to send account statements directly to the investors.

Other Items

For most fund managers who will be going through the SEC registration process, complying with the custody rule will be a straight forward exercise.  State-registered investment advisers are subject to the various custody rules of the states in which they are registered.

For more information, please also see SEC Responses to Custody Rule Questions.

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Cole-Frieman & Mallon LLP provides investment adviser registration and compliance support to hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.  Karl Cole-Frieman can be reached at 415-352-2300.

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Rule 206(4)-2 – Hedge Fund Custody Rule

From time to time on this site we discuss the custody rule for SEC registered hedge fund managers.  Below we have reprinted the entire regulation.

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Rule 206(4)-2 –Custody of Funds or Securities of Clients by Investment Advisers

a. Safekeeping required. If you are an investment adviser registered or required to be registered under section 203 of the Act, it is a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act for you to have custody of client funds or securities unless:

1. Qualified custodian. A qualified custodian maintains those funds and securities:

i. In a separate account for each client under that client's name; or

ii. In accounts that contain only your clients' funds and securities, under your name as agent or trustee for the clients.

2. Notice to clients. If you open an account with a qualified custodian on your client's behalf, either under the client's name or under your name as agent, you notify the client in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained, promptly when the account is opened and following any changes to this information. If you send account statements to a client to which you are required to provide this notice, include in the notification provided to that client and in any subsequent account statement you send that client a statement urging the client to compare the account statements from the custodian with those from the adviser.

3. Account statements to clients. You have a reasonable basis, after due inquiry, for believing that the qualified custodian sends an account statement, at least quarterly, to each of your clients for which it maintains funds or securities, identifying the amount of funds and of each security in the account at the end of the period and setting forth all transactions in the account during that period.

4. Independent verification. The client funds and securities of which you have custody are verified by actual examination at least once during each calendar year, except as provided below, by an independent public accountant, pursuant to a written agreement between you and the accountant, at a time that is chosen by the accountant without prior notice or announcement to you and that is irregular from year to year. The written agreement must provide for the first examination to occur within six months of becoming subject to this paragraph, except that, if you maintain client funds or securities pursuant to this section as a qualified custodian, the agreement must provide for the first examination to occur no later than six months after obtaining the internal control report. The written agreement must require the accountant to:

i. File a certificate on Form ADV-E (17 CFR 279.8) with the Commission within 120 days of the time chosen by the accountant in paragraph (a)(4) of this section, stating that it has examined the funds and securities and describing the nature and extent of the examination;

ii. Upon finding any material discrepancies during the course of the examination, notify the Commission within one business day of the finding, by means of a facsimile transmission or electronic mail, followed by first class mail, directed to the attention of the Director of the Office of Compliance Inspections and Examinations; and

iii. Upon resignation or dismissal from, or other termination of, the engagement, or upon removing itself or being removed from consideration for being reappointed, file within four business days Form ADV-E accompanied by a statement that includes:

A. The date of such resignation, dismissal, removal, or other termination, and the name, address, and contact information of the accountant; and

B. An explanation of any problems relating to examination scope or procedure that contributed to such resignation, dismissal, removal, or other termination.

5. Special rule for limited partnerships and limited liability companies. If you or a related person is a general partner of a limited partnership (or managing member of a limited liability company, or hold a comparable position for another type of pooled investment vehicle), the account statements required under paragraph (a)(3) of this section must be sent to each limited partner (or member or other beneficial owner).

6. Investment advisers acting as qualified custodians. If you maintain, or if you have custody because a related person maintains, client funds or securities pursuant to this section as a qualified custodian in connection with advisory services you provide to clients:

i. The independent public accountant you retain to perform the independent verification required by paragraph (a)(4) of this section must be registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and

ii. You must obtain, or receive from your related person, within six months of becoming subject to this paragraph and thereafter no less frequently than once each calendar year a written internal control report prepared by an independent public accountant:

A. The internal control report must include an opinion of an independent public accountant as to whether controls have been placed in operation as of a specific date, and are suitably designed and are operating effectively to meet control objectives relating to custodial services, including the safeguarding of funds and securities held by either you or a related person on behalf of your advisory clients, during the year;

B. The independent public accountant must verify that the funds and securities are reconciled to a custodian other than you or your related person; and

C. The independent public accountant must be registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules.

7. Independent representatives. A client may designate an independent representative to receive, on his behalf, notices and account statements as required under paragraphs (a)(2) and (a)(3) of this section.

b. Exceptions.

1. Shares of mutual funds. With respect to shares of an open-end company as defined in section 5(a)(1) of the Investment Company Act of 1940 (“mutual fund”), you may use the mutual fund's transfer agent in lieu of a qualified custodian for purposes of complying with paragraph (a) of this section;

2. Certain privately offered securities.

i. You are not required to comply with paragraph (a)(1) of this section with respect to securities that are:

A. Acquired from the issuer in a transaction or chain of transactions not involving any public offering;

B. Uncertificated, and ownership thereof is recorded only on the books of the issuer or its transfer agent in the name of the client; and

C. Transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

ii. Notwithstanding paragraph (b)(2)(i) of this section, the provisions of this paragraph (b)(2) are available with respect to securities held for the account of a limited partnership (or a limited liability company, or other type of pooled investment vehicle) only if the limited partnership is audited, and the audited financial statements are distributed, as described in paragraph (b)(4) of this section.

3. Fee deduction. Notwithstanding paragraph (a)(4) of this section, you are not required to obtain an independent verification of client funds and securities maintained by a qualified custodian if:

i. you have custody of the funds and securities solely as a consequence of your authority to make withdrawals from client accounts to pay your advisory fee; and

ii. if the qualified custodian is a related person, you can rely on paragraph (b)(6) of this section.

4. Limited partnerships subject to annual audit. You are not required to comply with paragraphs (a)(2) and (a)(3) of this section and you shall be deemed to have complied with paragraph (a)(4) of this section with respect to the account of a limited partnership (or limite

d liability company, or another type of pooled investment vehicle) that is subject to audit (as defined in rule 1-02(d) of Regulation S-X (17 CFR 210.1-02(d))):

i. At least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year;

ii. By an independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and

iii. Upon liquidation and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) promptly after the completion of such audit.

5. Registered investment companies. You are not required to comply with this section with respect to the account of an investment company registered under the Investment Company Act of 1940.

6. Certain Related Persons. Notwithstanding paragraph (a)(4) of this section, you are not required to obtain an independent verification of client funds and securities if:

i. you have custody under this rule solely because a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services you provide to clients; and

ii. your related person is operationally independent of you.

c. Delivery to Related Person. Sending an account statement under paragraph (a)(5) of this section or distributing audited financial statements under paragraph (b)(4) of this section shall not satisfy the requirements of this section if such account statements or financial statements are sent solely to limited partners (or members or other beneficial owners) that themselves are limited partnerships (or limited liability companies, or another type of pooled investment vehicle) and are your related persons.

d. Definitions. For the purposes of this section:

1. Control means the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract, or otherwise. Control includes:

i. Each of your firm's officers, partners, or directors exercising executive responsibility (or persons having similar status or functions) is presumed to control your firm;

ii. A person is presumed to control a corporation if the person:

A. Directly or indirectly has the right to vote 25 percent or more of a class of the corporation's voting securities; or

B. Has the power to sell or direct the sale of 25 percent or more of a class of the corporation's voting securities;

iii. A person is presumed to control a partnership if the person has the right to receive upon dissolution, or has contributed, 25 percent or more of the capital of the partnership;

iv. A person is presumed to control a limited liability company if the person:

A. Directly or indirectly has the right to vote 25 percent or more of a class of the interests of the limited liability company;

B. Has the right to receive upon dissolution, or has contributed, 25 percent or more of the capital of the limited liability company; or

C. Is an elected manager of the limited liability company; or

v. A person is presumed to control a trust if the person is a trustee or managing agent of the trust.

2. “Custody”means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. You have custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services you provide to clients. Custody includes:

i. Possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them;

ii. Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and

iii. Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.

3. Independent public accountant means a public accountant that meets the standards of independence described in rule 2-01(b) and (c) of Regulation S-X (17 CFR 210.2-01(b) and (c)).

4. Independent representative means a person that:

i. Acts as agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners of a limited partnership (or members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle) and by law or contract is obliged to act in the best interest of the advisory client or the limited partners (or members, or other beneficial owners);

ii. Does not control, is not controlled by, and is not under common control with you; and,

iii. Does not have, and has not had within the past two years, a material business relationship with you.

5. Operationally independent: for purposes of paragraph (b)(6) of this section, a related person is presumed not to be operationally independent unless each of the following conditions is met and no other circumstances can reasonably be expected to compromise the operational independence of the related person:

i. Client assets in the custody of the related person are not subject to claims of the adviser's creditors;

ii. advisory personnel do not have custody or possession of, or direct or indirect access to client assets of which the related person has custody, or the power to control the disposition of such client assets to third parties for the benefit of the adviser or its related persons, or otherwise have the opportunity to misappropriate such client assets;

iii. advisory personnel and personnel of the related person who have access to advisory client assets are not under common supervision; and

iv. advisory personnel do not hold any position with the related person or share premises with the related person.

6. Qualified custodian means:

i. A bank as defined in section 202(a)(2) of the Advisers Act or a savings association as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)) that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act (12 U.S.C. 1811);

ii. A broker-dealer registered under section 15(b)(1) of the Securities Exchange Act of 1934, holding the client assets in customer accounts;

iii. A futures commission merchant registered under section 4f(a) of the Commodity Exchange Act (7 U.S.C. 6f(a)), holding the client assets in customer accounts, but only with respect to clients' funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and

iv. A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients' assets in customer accounts segregated from its proprietary assets.

7. Related person means any person, directly or indirectly, controlling or controlled by you, and any person that is under common control with you.

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Cole-Frieman & Mallon LLP provides comprehensive legal support to hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.

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Hedge Fund Carried Interest on Chopping Block Again?

President Obama Proposes Taxing Carried Interest as Ordinary Income

Every couple of years there are various proposals floated around congress to tax the hedge fund performance fee (or “carried interest”) as ordinary income (see a previous post on this topic from 2009 here).  This week President Obama announced a proposal to tax the “carried interest” of an investment partnership as ordinary income.  The tax will help to pay for the $447 billion American Jobs Act.  According to the White House’s section-by-section analysis of the proposed legislation, the current capital gains treatment of income from the performance of services “creates an unfair and inefficient tax preference.”

The Proposal

Because the carried interest from an investment partnership is derived from the performance of services, the proposal would tax a service partner’s carried interest as ordinary income and make it subject to self-employment tax.  The proposed language indicates that “in the case of an investment services partnership interest . . . an amount equal to the net capital gain with respect to such interest for any partnership taxable year shall be treated as ordinary income.” An investment services partnership interest is defined as “any interest in an investment partnership acquired or held by any person in connection with the conduct of a trade or business” that includes providing investment advice, managing or acquiring assets, arranging financing with respect to acquiring assets, or any activity in support of providing investment advice.

The proposal excludes any partnership interest that is attributed to invested capital (which is called “qualified capital interest” in the proposal) of a partner providing investment management services from being recharacterized as ordinary income as long as the partnership reasonably allocates its income and loss between the invested capital and any interest derived from the performance of services for the partnership.

The proposed language with respect to the carried interest can be found here under Title IV, Subtitle B – Tax Carried Interest in Investment Partnerships as Ordinary Income.

Time to Worry?

The sky is not falling yet. This proposal affects more groups than simply hedge fund managers – private equity, real estate and VC fund managers would be affected by the proposal as well.  Accordingly, there are a number of interested parties ready to challenge the bill and there is already a strong lobbying presence in Washington. In the past we've seen this issue die relatively quickly and, given we are entering another election year, it is likely that we will see it die again in committee soon.

If enacted, the proposal would be effective for taxable years beginning after December 31, 2012.

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Cole-Frieman & Mallon LLP provides legal advice to hedge funds and private equity funds.   Bart Mallon can be reached directly at 415-868-5345.

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Series 31 Exam – Futures Managed Funds Examination

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Overview of Series 31 Exam for Managed Futures Industry

In general persons who are selling futures related products are going to be required to have a Series 3 exam license.  However, some broker-dealer representatives may be able to take the Series 31 exam instead of the Series 3 exam if their activities are limited to selling interests in commodity pools and other similar activities.  This exam is required by the NFA for all individuals who want to sell futures funds, or those who want to receive trailing commissions on commodity pools or managed accounts guided by CTAs.

Series 31 Exam Basics

The following are some of the important items related to the exam:

  • Prerequisites – person taking the exam must (1) be registered with FINRA as a General Securities Representative and (2) limit their futures activities on behalf of their sponsor to soliciting funds, securities or property for participation in a commodity pool, soliciting discretionary accounts to be managed by CTAs or supervising persons who perform these same limited activities.
  • Time Limit – 60 minutes
  • Questions – 45 multiple choice questions.
  • Passing grade – 70%
  • Cost – $70
  • Who – exam is required for those individuals who intend to sell managed futures.
  • Exam topics –
    • Exchange Rules and Regulations
    • CPO and CTA Rules and Regulations
    • Advertising and Disclosure (including NFA Compliance Rule 2-29)
    • Customer Accounts
    • Discretionary Rules
    • Market Terminology.
    • For more information on the exam topics, please see the NFA Study Outline – Series 31.

Other Items

Signing up

A person can take the exam at most Pearson VUE or Prometric testing centers.  You can register for the exam by submitting a Form U-10 through the IARD system.  Please note that, effective September 15, 2010, FINRA requires individuals to use either their CRD number or FINRA ID number in order to schedule an exam and no longer accepts social security numbers.  For more information, please see the NFA Guide to Sign up for Futures Exams.

Studying for the Series 31 Exam

Like the other FINRA and NFA exams, you should use a study guide and practice exams to prepare.  The Series 31 does not have as many materials available as some of the more popular exams (Series 7, 65, 3, etc) but there are some materials which can be found through a simple Google search.   [Note: we have not reviewed any Series 31 exam study guide so we cannot make any recommendations on any materials.]  As with other exams, we recommend taking at least two to three practice exams prior to taking the actual test; persons not familiar with the managed futures industry might want to take more.

The actual exam

The exam is computer-based and will initially instruct you on how to properly answer and mark the following questions.  Note that the beginning of the exam will most likely include the easiest questions, and then the questions will proceed to get harder as you reach the middle.  Always attempt to make the most educated guess on questions that you do not understand.

The exam is fairly short so you should not need to take a break in the middle of the exam.  You should remember that there is always have the option of marking the question for review so you should not spend an extended period of time  on any one question. After you have completed the questions, you will

have the option of changing any of your answers.  After completely answering everything, you will receive your score immediately.

If you don’t pass

A number of individuals who take the exam do not pass.  If this is the case, you will need to wait 30 days before re-taking the exam.  If you do not pass the exam the second time, you will need to wait another 6o days before taking the exam.  If you do not pass either the third or fourth attempt, you will need to wait at least 180 days before taking the exam again.  There is no limit on the number of times allowed for taking a test.

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

Hedge Fund Regulatory Changes Panel Event

100 Women in Hedge Funds September 2011 Event

There are a number of events throughout the country this month for hedge fund managers.  In addition to the end of summer, the industry is preparing for a number of significant changes which will begin affecting managers this year and next year.  As we've discussed previously, we think that some of the major issues for managers going forward will be:

While we will be exploring these topics in greater depth over the coming months, the 100 Women in Hedge Funds San Francisco event will be a great opportunity to hear industry leaders discuss how these issues are likely to affect managers.   For more information, please see the notice below.

If you are interested in registering for the event, you can sign up here.

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Strategically Anticipating & Managing the Impact of Regulatory Reform

September 20, 2011 at 6 PM

San Francisco CA

With the expansion of the SEC’s jurisdiction and mission through regulatory reform, a hedge fund adviser’s efficiency in anticipating and managing the impact of the onslaught of new regulation is critical to its investment and business success. Please join senior hedge fund legal and compliance practitioners for an interactive discussion that will highlight how advisers can better tailor their regulatory risk mitigation practice to specific areas of recent SEC focus.

The discussion will include:

  • An assessment of the SEC’s new focus on investment advisers in examinations and enforcement, including best practice for managing compliance with disclosed investment strategies and risks, redemption and liquidity terms, trading practices, and enforcement actions against CCOs.
  • The cumulative effect of new disclosure requirements: Form ADV, Form PF, FATCA
  • How firms should manage issues created by the regulation of political contributions, including the SEC’s pay-to-play rule and California’s lobbying rules for placement agents

Participants

Helane Morrison, Moderator, Hall Capital Partners LLC

Mark Perlow, K & L Gates LLP

Danell Doty, Passport Capital LLC

Event Details

Date: September 20, 2011

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.

Host: K & L Gates LLP

Location: K&L Gates LLP

Four Embarcadero Center, Suite 1200, San Francisco, CA 94111 – Directions

RSVP: http://www.100womeninhedgefunds.org/pages/event_registration.php

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 Clinton Global Initiative's US Childhood Obesity Prevention Program, the 2011 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 at: http://www.100womeninhedgefunds.org/pages/my_profile.php

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

Biographies

Helane Morrison, General Counsel & CCO, Hall Capital Partners LLC

Helane L. Morrison is a Managing Director, General Counsel, and Chief Compliance Officer of Hall Capital Partners LLC. She is also a member of the firm's Executive Committee.

Prior to joining the firm in 2007, Ms. Morrison headed the San Francisco Office of the U.S. Securities and Exchange Commission (“SEC”) from 1999 to 2007. In her capacity as Regional Director and earlier as District Administrator, Ms. Morrison was responsible for securities enforcement, litigation, and regulatory matters in Northern California and five Northwest States. From 1996 to 1999, Ms. Morrison was head of enforcement for the San Francisco SEC office. She represented the SEC in legal, business, and financial communities, as well as with other government agencies and news media.

Previously, Ms. Morrison practiced law at the San Francisco law firm Howard, Rice , Nemerovski, Canady, Falk & Rabkin from 1986 to 1996 where she was elevated to partner in 1991. Her practice focused on business litigation and defense of private securities actions and SEC matters. She also conducted internal corporate investigations. Before entering private practice, Ms. Morrison served as a law clerk for Supreme Court Justice Harry A. Blackmun (1985-1986) and Hon. Richard A. Posner of tile U.S. Court of Appeals for the Seventh Circuit (1984-1985).

Ms. Morrison has served as a Director of the Bar Association of San Francisco (“BASF”) and a member of the BASF Judiciary Committee. Ms. Morrison served as a Lawyer Representative (Northern District of California) to the Ninth Circuit Judicial Conference, and was Co-Chair. She was a member of the Northern District of California, Civil Justice Reform Act Advisory group. She served on the Board of Directors of the University of California, Berkeley, School of Law Alumni Association and was Secretary of the Board. She was a member of the Federal Courts Committee of the California Bar Association and served on the Contra Costa County Human Relations Commission.

Ms. Morrison received a B.S. in Journalism from Northwestern University and earned a J.D. from the University of California at Berkeley, School of Law, where she was Editor-In-Chief of the California Law Review.

Mark Perlow, Partner, K & L Gates LLP

Mr. Perlow is a partner in the San Francisco office of K&L Gates LLP. His practice focuses on investment management and securities law, and he regularly represents hedge fund managers, mutual funds, investment advisers, fund boards of directors, and broker-dealers on a broad range of regulatory and transactional matters. Before K&L Gates, Mr. Perlow served as senior counsel in the Office of the General Counsel of the Securities and Exchange Commission, focusing on investment management, fund and corporate governance, and enforcement, and he also served in the SEC’s Division of Enforcement. Mr. Perlow is a frequent speaker and author on topics relating to investment management and the law, and he teaches a class at the UC Berkeley School of Law on the structure and regulation of capital markets and financial institutions.

Danell Doty, Senior Compliance Officer, Passport Capital LLC

Ms. Doty is a Senior Compliance Officer at Passport Capital, LLC, a global investment firm managing approximately $4.7 billion in assets. Her responsibilities include a broad range of activities including maintaining the firm’s compliance program. Before joining Passport, Ms. Doty served as Director of Fund Administration at Genworth Financial Wealth Management and Treasurer to its mutual fund companies. Ms. Doty was hired at Barclays Global Investors in 1999, where, as Head of Mutual Fund Administration, she was involved in the creation of the iShares products. She then served as Fund Chief Compliance Officer from 2004 to 2006. Prior to BGI, Ms. Doty served in several capacities for London Pacific Group, including Vice President of Operations. She was also instrumental in creating the Govett Funds and the Berkeley Funds.

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 250 events globally, connected more than 250 senior women through Peer Advisory Groups and raised globally over $21.5 million gross for philanthropic causes in the areas of women's and family health, education and mentoring. For more information about 100 Women in Hedge Funds, please visit www.100womeninhedgefunds.org.

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Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog.  About Cole-Frieman & Mallon LLP:

Informed by significant in-house and private practice experience at some of the most prestigious Wall Street firms, hedge funds, and law firms Cole-Frieman & Mallon LLP has the business acumen and market knowledge to provide legal solutions for a wide range of financial services matters. With offices in San Francisco and New York, Cole-Frieman & Mallon LLP has a nationwide practice that services both start-up managers as well as multi-billion dollar firms. 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/.

Karl Cole-Frieman can be reached at 415-352-2300.

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

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