The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

On March 27, Congress passed the $2 Trillion CARES Act, the largest financial relief bill in history, aimed at providing financial assistance to businesses and individuals to alleviate the economic fallout caused by the COVID-19 public health crisis.  A core focus of the CARES Act is $350 billion in financial aid for small businesses through federal loans under a new Small Business Administration (“SBA”) loan program called the Paycheck Protection Program (the “PPP”). The highlights of the program for qualifying businesses include the following:

  • Eligibility. Eligible businesses include any business that already meets the applicable regulations to constitute “small business concerns” under the Small Business Act, businesses with up to 500 employees, non-profit organizations, businesses in the accommodation (lodging) and food services businesses with no more than 500 employees at each location, and eligible sole proprietorships and independent contractors.  
  • Terms. An eligible business can borrow 2.5 times their monthly payroll costs, up to $10 million. “Payroll costs” includes salaries, wages, paid sick leave, health insurance premiums, retirement benefits, tips, state and local taxes on employee compensation, but does not include compensation to any individual employee or independent contractor in excess of $100,000.
  • Permitted Uses of Proceeds.Businesses may use PPP proceeds for the following business expenses: payroll costs (as defined above), rent, utilities, and interest payments on any mortgage or debt obligations incurred before February 15, 2020, excluding payments or prepayments of principal.
  • Loan Forgiveness. Borrowers may apply for loan forgiveness in an amount equal to funds used to pay eight weeks of payroll costs, mortgage interest, rent and utilities starting from the date of such Borrower’s PPP loan. The amount of loan forgiveness available is limited to the principal amount loaned under the PPP loan. Furthermore, in an effort to incentivize businesses to keep employees and maintain salaries or wages, the amount of loan forgiveness available is subject to reduction if the Borrower’s average number of full-time employees during the eight week period is lower than the average number of full-time employees in the 12-month period prior, or if there is a 25% reduction of the total salaries or wages of such employees during the eight week period. The 25% reduction guideline does not apply to employees whose annual salary or wages for any pay period in 2019 was greater than $100,000. An exemption from the reductions in loan forgiveness applies if the Borrower had reduced employees or salaries or wages as a result of the COVID-19 pandemic, but eliminates such reduction by rehiring the laid off employees or increasing salaries or wages to prior levels by June 30, 2020.  

The highlights of the CARES Act is intended to be a summary of the over 800 page relief bill. The CARES Act is subject to change over time during the legislative process. For questions or concerns related to impacts of coronavirus on the operations or compliance of funds and advisers, please contact us.


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

Monitoring NAV Triggers Amidst Volatility

Managers Should Be Aware of Additional Termination Events

By David Rothschild

At this time of extreme market volatility, it is critical for managers with ISDA Master Agreements (“ISDAs”) in place to understand the NAV Trigger Additional Termination Events described in their ISDAs, and what actions to take if they trip one. 

As quick background, the Schedule to almost every ISDA Master Agreement to which a hedge fund is party will include an Additional Termination Event (“ATE”) pegged to a specific percentage decline in the fund’s net asset value over various periods (usually monthly, quarterly and annually). Some ISDAs will also include a “NAV Floor” concept triggering an ATE any time the fund’s NAV falls below a specific value (expressed either as a dollar value, or a percentage of a prior NAV, or both). If an ATE is triggered and the dealer elects to act on it, the dealer generally has the right close out all of a fund’s open positions, a result every manager wants to avoid.

NAV Trigger ATEs are among the most heavily-negotiated provisions in a hedge fund’s ISDA, and the specific figures for the monthly, quarterly and annual triggers, as well as NAV Floor provisions, will differ from fund to fund. What some managers may not realize is that the language describing these calculations and when they must be performed may also differ. Ideally, your NAV Trigger ATEs will be “point-to-point” and measured only as of the last day of the month – i.e., your NAV on the last trading day of a month is compared to your NAV on the last trading day of the prior month, quarter or year as applicable, to determine whether you have tripped an ATE. Many ISDAs, however, will have “any day” triggers – i.e., a NAV decline on any day as compared to the prior month, quarter or year could trigger an ATE. At this point, managers should review their NAV Trigger language and consult with legal counsel if they have questions regarding when or how these calculations must be performed.

If your fund has experienced a NAV decline that triggers an ATE under your ISDA, you are obligated to formally notify the dealer of that fact. That notice to the dealer should include an explicit request for them to waive the ATE; depending on your specific facts and circumstances and your relationship with a given dealer, they may grant you a waiver. A waiver means the dealer loses the right to close out your positions as a result of that ATE.

If you negotiated your ISDA, it may also include a “fish or cut bait” provision, which essentially gives the dealer a deadline to declare an ATE after you notify them that the relevant ATE was triggered. If you have a “fish or cut bait” provision in your ISDA that applies to a NAV Trigger ATE, pay close attention to the notice procedures described therein (many dealers require multiple forms of notification to specific addresses or emails in order for the “fish or cut bait” provision to be properly invoked), and follow them exactly to put the dealer on notice and start the clock running on the time period. If you properly follow those procedures and deadline passes, the dealer loses the right to close out your positions as a result of that ATE, whether or not they grant an explicit waiver.

Of course, if you have any questions while reviewing your ISDAs or how to interpret these critical provisions, you should reach out to your legal counsel immediately.


David Rothschild is a partner of Cole-Frieman & Mallon LLP and routinely focuses on ISDA matters. Cole-Frieman & Mallon is a boutique law firm focused on the investment management industry. For more information on this topic, please contact Mr. Rothschild directly at 415-762-2854.

Bitcoin Mining Panel Overview

Thank you to everyone who attended our bitcoin mining panel last week. We had a fantastic audience with many questions for our panel of bitcoin mining experts – Mathew D’Souza of Blockware Solutions, Thomas Ao of MCredit and Yida Gao of Struck Capital.  The panel lasted just over one hour and was ably moderated by Michael Fitzsimmons of Williams Trading and was sponsored by Cole-Frieman & Mallon LLP and Aspect Advisors LLC.  

Here is the presentation with slides referenced below:

Here are the take-aways:

  • Many opportunities for BTC mining – there are many different businesses in the mining space including: direct mining, buying/selling mining rigs, making loans backed by mining rigs, developing a mining farm, and cloud mining, among others.  
  • Potential for high returns – successful mining enterprises can make 8-12% ROI per month when BTC is priced around $10,000.  (The panel focused mainly on the economics of BTC mining and did not touch on the mining of other crypto assets.)
  • Large secondary market for mining rigs – because it is relatively difficult to import mining rigs to the US (time and cost/tariffs), some groups buy and sell rigs on the secondary market in the US in addition to directly mining BTC and this can be a profitable strategy in its own right.  Bitmain is the main supplier of new rigs and the prices from both Bitmain and the secondary market can be as volatile as the BTC market. 
  • Cost of producing BTC – the cost to produce one BTC can vary widely depending on cost of electricity and the type of rig used, as the proprietary research from Blockware Solutions demonstrates (see attached presentation).  Blockware’s research also shows that most rigs coming online are the more efficient next generation machines. 
  • The Halvening – in May the halvening is expected to bolster the generally bullish BTC trend we’ve seen in 2020.  This will undoubtedly impact the economics of mining and the secondary market for rigs. 
  • China and mining – a favorable tax regime and lower electricity costs made China a popular location for mining, despite risks associated with the government’s stated aim to eliminate virtual currency mining as an industry. These risks have significantly abated after the recent announcement by the National Development and Reform Commission of China (NDRC) that mining has been removed from the elimination list.
  • Environmental impact – innovation in rig/chip designs are making mining more environmentally friendly as less watts are required per terahash.  The panel generally believes that after the halvening less efficient miners will go offline.
  • Issues – there has been many scams with respect to mining, especially mining farms and cloud mining.  Also, there is high general investment risk in mining operations because many operators just don’t know what they are doing. 
  • Other BTC financial products – miners may decide to hedge their BTC exposure through OTC products, but in general miners are not concerned with BTC financial products unless they affect the demand/price of BTC.

We hope you enjoyed this event and if you have any feedback, we would love to hear it in our quick survey.  Please feel free to forward this email along to anyone you think might be interested.  We look forward to seeing you at our next event.


Bart Mallon & Michael Fitzsimmons

Aspect Advisors LLC

Aspect Advisors LLC is a modern regulatory consultant providing customized compliance solutions to entrepreneurs.  The firm has a focus on fintech companies, broker-dealers, and investment managers (hedge fund, VC, PE, RIA, etc).  We provide compliance and back-office solutions engineered to decrease worry and save time and resources. Among other items, the firm helps clients with regulatory registration, drafting compliance policies and procedures, conducting annual reviews, and other bespoke items.

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 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 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, which focuses on legal issues that impact the hedge fund community. For more information, please visit us at


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact us or you can call Mr. Mallon directly at 415-868-5345.

Bitcoin Mining Panel Event in San Francisco

CFM & Aspect Advisors Sponsor Mining Discussion

As the price of bitcoin (and other digital assets) rises, the economics of mining changes – we plan to have an event to explore the economics of mining and other aspects of the industry including any digital asset compliance matters. Below is the invitation. If you are interested in attending or would like to see the notes on the event, please contact us.


Please see attached an invitation to attend a discussion on the current environment for bitcoin mining.  This event is presented by Michael Fitzsimmons of Williams Trading and sponsored by Cole-Frieman & Mallon LLP and Aspect Advisors LLC.

This event will feature the following panelists:

  • Mathew D’Souza of Blockware Solutions
  • Thomas Ao of MCredit
  • Yida Gao of Struck Capital

Location is at Cole-Frieman & Mallon LLP offices – 255 California Street, Suite 1350. 


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact us or you can call Mr. Mallon directly at 415-868-5345.

Aspect Advisors & CFM 2020 IA/BD Compliance Update

A while ago we mentioned that we were hosting a compliance update for investment advisers and broker-dealers. The below is our summary of that event.


We wanted to take this opportunity to thank everyone who attended and participated in our 2020 compliance update with Justin Schleifer (Aspect Advisors) and Bart Mallon (Cole-Frieman & Mallon).  We understand that compliance sometimes feels like an obligation.  Still, we think that our discussion last week touched on many important items for financial industry professions to keep top of mind in this new year and new decade.

We have attached a copy of the presentation to this email.  Please feel free to forward along to anyone who might be interested.  Some high points included:

  • High level trends influence how the modern investment manager interacts with compliance.  Trends include the ongoing bull market, the movement of investment dollars from public investments (via IPO) to private markets, and the emergence of technology/ fintech.  While these are distinct trends that need to be acknowledged, traditional compliance concepts still apply to managers although the concepts may be deployed or utilized in a different way than before.  
  • Regulation Best Interest (“Reg BI”) will have an impact on the investment management industry in 2020.    Broker-dealer and IA firms will scurry to meet the Reg BI implementation deadline.  The effects will be felt more keenly by broker-dealers as they revise their practices to account for the updated fiduciary standards.  Asset managers will need to address the regulation through a new Form CRS (sometimes referred to as ADV Part 3). 
  • Privacy is paramount.  There is general momentum toward consumers craving privacy.  Governments and regulators are taking baby steps but are expected to do more in the future – we see that things such as the California Consumer Privacy Act and GDPR have already begun to influence the operations of many investment management companies.  While managers should always maintain fundamental compliance records, there will be changes in the way that investor and customer data is ultimately accessed and available.  It is therefore important for managers to stay up to date with those advances and any accompanying compliance processes.
  • Technological innovation (in both traditional and digital asset markets) is stretching the regulators’ ability to keep up.  Regulators have trouble attracting talent to head new divisions to deal with technological innovation.  Accordingly, money managers and entrepreneurs utilizing new technologies will need to understand the necessity of being able to explain the use of technology to regulators.
  • Access to new capital?  The industry is always looking for ways to get new investors involved.  A new accredited investor standard has been proposed but is not likely to significantly expand the pool of potential accredited investors and thus capital available for investment.  Similar initiatives to broaden the distribution of investment products or management to a broader base of end investors (such as Regulation CF, Regulation A+, and 506(c) general solicitation) have seen generally middling to poor results for various reasons.
  • Information Security/Cybersecurity will continue to be a big regulatory focus and focus on this area is a business best practice.  Larger firms will outsource to high tech IT firms or bring IT talent in-house.  Smaller firms have many basic tools at their disposal and should focus on vendor management and selection, employee training, access to information, and other pivotal ways to increase security (2FA, using non-public wifi, port blockers, screen protectors, etc).
  • Taking humans out of investment management.  Many investment management companies are creating organizations to bring services to the masses; these companies scale to limit human involvement.  Questions on how to deal with compliance on a larger scale naturally emerge.  The integration of technology (including with outside compliance vendors) becomes a key focus and commensurately decreases the reliance on human capital.
  • Other smaller trends have emerged.  The focus on private markets is expected to heat up, not decrease (WeWork notwithstanding). Firms will continue to expand with sophisticated financial services, tools, investment strategies, different products, and new market participants, especially as millennials begin investing and saving more.  As technology improves lower-fee products proliferate; many firms charge very low management fees and rely more on performance fees.   

We look forward to seeing you again at a panel event in the future and wish you the best during this first quarter.


Bart Mallon & Justin Schleifer

Aspect Advisors LLC

Aspect Advisors LLC is modern regulatory consultant providing customized compliance solutions to entrepreneurs.   The firm has a focus on fintech companies, broker-dealers, and investment managers (hedge fund, VC, PE, RIA, etc).  We provide compliance and back-office solutions engineered to decrease worry and save time and resources. Among other items, the firm helps clients with regulatory registration, drafting compliance policies and procedures, conducting annual reviews, and other bespoke items.

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 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 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, which focuses on legal issues that impact the hedge fund community. For more information, please visit us at


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

Regulation D 506(c) Exemption

Regulation D 506(c) Exemption

General Solicitation Allowed for Private Fund Managers Under 506(c)

Regulation D (“Reg. D”) offers issuers exemptions from registration of their securities under the Securities Act of 1933, as amended (the “Securities Act”). Most managers rely on Rule 506(b) which allows sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors, so long as there is no general solicitation. Rule 506(c) was enacted as part of the JOBS Act to permit general solicitation, so long as certain steps are followed. While originally many private fund managers eschewed the exemption because of the additional requirements, the exemption has gained popularity with private fund managers in the digital asset space. The main reason is that such managers can more broadly and generally solicit their fund – something that private fund managers in the traditional securities space would not do.

Background Requirements

Under Rule 506(c) of Reg. D, general solicitation is permitted without having to register the issuer’s securities under the Securities Act, so long as (1) all investors are accredited (as defined under Reg. D); (2) reasonable steps have been taken to verify that all investors are accredited, so long as the issuer does not have prior knowledge that the investor is non-accredited; and (3) certain integration, resale restrictions of securities, and bad actor disqualification rules are followed. If these requirements are met, an issuer can broadly solicit and advertise the offering of its securities and still be in compliance with Reg. D.

The second requirement above imposes an obligation for an issuer to proactively take steps in order to verify that an investor is in fact accredited. The list of verification methods recommended in the statute is non-exhaustive but a common method of verification includes, if confirming on the basis of income, reviewing W-2s or other similar tax forms for the previous two years, and obtaining a written representation from the investor that the investor has a reasonable expectation of qualifying as an accredited investor during the current year. Another method often used is having an investor engage certain parties such as a registered CPA or a licensed attorney to represent that the investor is an accredited investor.

A private fund relying on 506(c) must still follow all other applicable securities regulations, such as the 2,000 investor limit pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (unless the investor is relying on a different exemption that limits investor count in the private fund). Additionally, the private fund must file a Form D electronically with the SEC, and reflect its 506(c) reliance in the fund offering documents. Each state also has specific securities requirements which typically are met by making a “blue sky filing” (i.e. filing a copy of the Form D) in the applicable state that the private fund is soliciting in.

Positive Aspects

Rule 506(c) offers managers avenues that were previously prohibited under Rule 506(b). This expands investor base and provides for a less restrictive discussion of the fund’s strategy and terms. Further, there is no limit on dollars that can be raised and no limit on dollars from particular investors.

Converting from 506(b) to 506(c)

Many investment managers in the digital asset space are seeking to convert their offering from 506(b) to 506(c). In order to convert a previous offering to a 506(c) offering, the private fund needs to (1) file a new Form D with the SEC, indicating its reliance on 506(c); (2) amend the private fund’s offering documents; and (3) follow the verification methods described above for all subsequent investors in the private fund. We confirmed the foregoing procedures with the SEC. The SEC further indicated in a Q&A that if a private fund that previously relied on Rule 506(b) followed all applicable requirements of Rule 506(b), the private fund would only need to take reasonable steps to verify the accredited investor status of subsequent investors, not existing investors. If existing investors make an additional investment in the fund, the verification methods will need to be taken. Thus, it is recommended as a best practice to verify that all existing investors in the fund are accredited.


We anticipate that many investment managers in the digital asset space will begin to increasingly rely on this exemption. Although general solicitation is permitted under this exemption, all applicable securities regulations still need to be followed (i.e. the anti-fraud provisions under the Investment Advisers Act of 1940, as amended). Counsel should be contacted to further discuss the applicable requirements if you are considering conducting an offering pursuant to Rule 506 (c).


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Cole-Frieman & Mallon LLP has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds and works routinely on matters affecting the digital asset industry.  Bart can be reached directly at 415-868-5345.

Aspect Advisors & CFM Compliance Update – January 23, 2020

IA / BD 2020 Compliance Overview & Networking Event

We would like to take this opportunity to introduce you to Aspect Advisors, a firm that focuses on regulatory compliance services for investment managers.  Aspect started at the beginning of 2019 and brings compliance solutions to broker-dealers, fintech companies, and traditional investment managers (hedge, PE, VC, real estate).  In conjunction with Justin Schleifer (President and Co-Founder of Aspect), we’d like to invite you to a compliance update presentation and networking event at the offices of Cole-Frieman & Mallon LLP on January 23rd.  The event will address the following topics:

  • 2020 compliance calendar (including Form ADV annual update)
  • Major issues from the SEC and courts in 2019
  • SEC focus on crypto / digital assets in 2020
  • Fintech regulations and best practices
  • Regulation Best Interest
  • Other hot topics

We are planning an engaging event with audience participation and discussion so come ready with questions!  If you are interested in joining, please review the information below and contact us for more information.

Best regards,



Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

Cole-Frieman & Mallon LLP 2019 End of Year Update


Below is our quarterly newsletter. If you would to be added to our distribution list, please contact us.

Clients, Friends, Associates:

As we prepare for a new year, we also reflect on an eventful 2019 year that included developments impacting both traditional hedge fund managers as well as those in the digital asset space. Regardless of all the changes in the investment management space, year-end administrative upkeep and 2020 planning are always particularly important, especially for general counsels, Chief Compliance Officers (“CCOs”), and key operations personnel. As we head into 2020, we have put together this checklist and update to help managers stay on top of the business and regulatory landscape for the coming year.

This update includes the following

  • California Consumer Privacy Act
  • Annual Compliance & Other Items
  • Annual Fund Matters
  • Annual Management Company Matters
  • Regulatory & Other Items from 2019


California Consumer Privacy Act

There has been much discussion about the California Consumer Privacy Act (“CCPA”) passed earlier this year and effective January 1, 2020.Please be aware that most private fund managers will not be affected by the new law. We have provided a detailed overview of the CCPA here, but below are the main items applicable to private fund managers:

  1. CCPA Will not affect most managers – in general, the law will only apply to California managers who receive $25M of annual gross revenue.
  2. What information is subject to CCPA? – in general, if a manager is a SEC RIA, the only information potentially subject to the CCPA is the “personal information” of the fund manager’s (i) entity or or institutional clients and (ii) prospective clients, because an SEC RIA is already subject to the Gramm-Leach-Bailey Act which covers other types of information. Here “personal information” would include most items collecte dby the manager in fund subscription documents.

Given the above, what should managers do if they are potentially subject to the CCPA? We believe managers should start thinking about the following steps:

  1.  Be prepared to act – within 45 days of a CCPA request, a manager will need to be able to provide a client with (i) access to their specific personal information, (ii) rights with respect to data portability, (iii) data deletion, and (uv) non-discrimination for exercise of any CCPA right.
  2. Review and/or update privacy policy – managers may need to update their privacy policy to inform clients of their rights under the CCPA and instructions on how to exercise those rights. Managers who are RIAs should also distribute their annual privacy policy update to all clientele in January.
  3. Update website policy if you collect personal information – if a manager operates a website which collects personal information (online portal access, cookies, etc.) that manager must publish a separate CCPA compliant prviacy disclosure on the website. If a manager runs a website that does not collection personal information, then no separate disclosure is needed for the website.
  4. Consider updating service provider agreements – given the fund administrator and the auditor will maintain client personal information, managers may want to consider updating their agreements to include a representation from the service provider that it is in compliance with the CCPA regulations.

Annual Compliance and & Other Items

Annual Privacy Policy Notice. On an annual basis, registered investment advisers (“RIAs”) are required to provide natural person clients with a copy of the firm’s privacy policy if (i) the RIA has disclosed nonpublic personal information other than in connection with servicing consumer accounts or administering financial products or (ii) the firm’s privacy policy has changed. The Securities and Exchange Commission (the “SEC”) has provided a model form and accompanying instructions for firm privacy policies.

Annual Compliance Review. On an annual basis, the CCO of an RIA must conduct a review of the adviser’s compliance policies and procedures. This annual compliance review should be in writing and presented to senior management, We recommend that firms discuss the annual review with their outside counsel or compliance firm, who can provide guidance about the review process as well as a template for the assessment and documentation. Conversations regarding the annual review may raise sensitive matters, and advisers should ensure that these discussions are protected by attorney-client privilege. CCOs may also want to consider additions to the compliance program. Advisers that are not registered may still wish to review their procedures and/or implement a a compliance program as a best practice.

Form ADV Annual amendment. RIAs or managers filing as exempt reporting advisers (“ERAs”) with the SEC or a state securities authority must file an annual amendment to Form ADV within 90 days of the end of their fiscal year. For most managers, the Form ADV amendment would be due on March 31, 2020. RIAs must provide a copy of the updated Form ADV Part 2A brochure and Part 2B brochure supplement (Or a summary of changes with an offer to provide the complete brochure) to each “client”. Note that for SEC-registered advisers to private investment vehicles, a “client” for purposes of this rule means the vehicle(s) managed by the adviser and not the underlying investors. State-registered advisers need to examine their state’s rules to determine who constitutes a “client”.

Switching to/from SEC Regulation.

SEC Registration. Managers who no longer qualify for SEC registration as of the time of filing the annual Form ADV amendment must withdraw from SEC registration within 180 days after the end of of their fiscal year (June 29, 2020, for most managers), by filing a Form ADV-W. Such managers should consult with legal counsel to determine whether they are required to register in the states in which they conduct business. Managers who are required to register with the SEC as of the date of their annual amendment must register with the SEC within 90 days of filing the annual amendment (June 29, 2020, for most managers, assuming the annual amendment is filed on March 31, 2020).

Exempt reporting advisers. Managers who no longer meet the definition of an ERA will need to submit a final report as an ERA and apply for registration with the EC or relevant state securities authority, if necessary, generally within 90 days after the filing of the annual amendment.

Custody Rule Annual Audit

SEC RIAs. SEC-registered investment advisers (“SEC RIAs”) must comply with certain custody procedures, including (i) maintaining client funds and securities with a qualified custodian; (ii) having a reasonable basis to believe that the qualified custodian sends an account statement to each advisory client at least quarterly; and (iii) undergoing an annual surprise examination conducted by an independent public accountant.

SEC RIAs to pooled investment vehicles may avoid both the quarterly statement and surprise examination requirements by having audited financial statements prepared for each pooled investment vehicle in accordance with generally accepted accounting principles by an independent public accountant registered with the Public Company Accounting Oversight Board (“PCAOB”). Statements must be sent to investors in the fund within 120 days after the fund’s fiscal year end. Managers should review their custody procedures to ensure compliance with the rules.

California RIAs. California-registered investment advisers (“CA RIAs”) that manage pooled investment vehicles and are deemed to have custody of client assets are also subject to independent party and surprise examinations. However, CA RIAs can avoid these additional requirements by engaging an auditor (that is an independent public accountant registered with the PCAOB) to prepare and distribute audited financial statement to all investors ( or other beneficial owners_ of the pooled investment vehicle, and to the Commissioner of the California Department of Business Oversight (“DBO”). Those CA RIA s that do not engage an auditor must, among other things, (i) provide notice of such custody on the Form ADV; (ii) maintain client assets with a qualified custodian; (iii) engage an independent party to act in the best interest of investors to review fees, expenses, and withdrawals; and (iv) retain an independent certified public accountant to conduct surprise examinations of assets.

Other State RIAs. Advisers registered in other states consult with legal counsel about those states’ specific custody requirements.

California Minimum Net Worth Requirement and Financial Reports.

RIAs with Custody. Every CA RIA that has custody of client funds or securities must maintain at all times a minimum net worth of $35,000, however the minimum net worth is $10,000.00 for a CA RIA (i) deemed to have custody for another type of pooled investment vehicle and (ii) that otherwise complies with the California custody rule described above (such advisers, “GP RIAs”).

RIAs with discretion. Every CA RIA that has discretionary authority over client funds or securities, whether or not they have custody, must maintain at all times a net worth of at least $10,000, and preferably $12,000.00 to avoid certain reporting requirements.

Financial Reports. Every CA RIA that either has custody of, or discretionary authority over, client funds or securities must file an annual financial report with the DBO within 90 days after the adviser’s fiscal year end. The annual financial report must contain a balance sheet, income statement, supporting schedule, and a verification form. These financial statements must be audited by an independent certified public accountant or independent public accountant if the adviser has custody and is not a GP RIA.

Annual Re-Certification of CFTC Exemptions. Commodity pool operators (“CPOs”) and commodity trading advisers (“CTAs” currently relying onc ertain exemptions from registration with the Commodity Futures Trading Commission (“CFTC”) are required to re-certify their eligibility within 60 days of the calendar year end. CPOs and CTAs currently relying on relevant exemptions will need to reevaluate whether they remain eligible to rely on such exemptions.

CPO and CTA Annual Updates. Registered CPOs and CTAs  must prepare and file Annual Questionnaires and Annual Registration Updates with the National Futures Association (“NFA”), as well as submit payment for annual maintenance fees and NFA membership dues. Registered CPOs must also prepare and file their fourth quarter report for each commodity pool on Form CPO-PQR, while CTAs must file their fourth quarter report on Form CTA-PR. or more infomration on Form CPO-PQR, please see our earlier post. Unless eligibel to claim relief under Regulation 4.7, registered CPOs and CTAs must update their disclosure documents periodically, as they may not use any that are materially inaccurate or incomplete and must be corrected promptly, and the corrected version must be distributed promptly to pool participants.

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

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

Schedule 13G/D and Section 16 Filings. Managers who excercise investment discretion over accounts (including funds and separately managed accounts (“SMAs”) that are beneficial owners of 5% or more of a registered voting equity security must report these position on Schedule 13D or 13G. Passive investors are generally eligible to file the short form Schedule 13G, which is updated annually within 45 days of the end of the year. Schedule 13D is required when a manager is ineligible to file Schedule 13G and is due 10 days after the acquisition of more than 5% beneficial ownership of a registered voting equity security. For managers who are also making Section 16 filings, this is an opportune time to review your filings to confirm compliance and anticipate needs for the first quarter.

Section 16 filings are required for “corporate insiders” (including beneficial owners of 10% or more of a registered voting equity security). An initial Form 3 is due within 10 days after becoming an “insider”; Form 4 reports ownership changes and is due by the end of the second business day after an ownership change; and Form 5 reports any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting and is due within 45 days after the end of each fiscal year.

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

Form 13H. Managers who meet the SEC’s large trader thresholds (in general, managers whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month) are required to file an initial Form 13H with the SEC within 10 days of crossing the threshold. Large traders also need to amend Form 13H annually within 45 days of the end of the year. In addition, changes to the information on the Form 13H will require interim amendments following the calendar quarter in which the change occurred.

Form PF. Managers to private funds that are either registered with the SEC or required to be registered with the SEC and who have at least $150 million in regulatory assets under management (“RAUM”) must file Form PF. Smaller private advisers (fund managers with less than $1.5 billion in RAUM or more in RAUM) must file Form PF within 50 days of the end of each fiscal quarter.

Form MA. Investment advisors that provide advice on municipal financial products are considered “municipal advisors” by the SEC, and must file a Form MA annually, within 90 days of their fiscal year end.

SEC Form D. Form D filings for most funds need to be amended on an annual basis, on or before the anniversary of the most recently filed Form D. Copies of Form D are publicly available on SEC’s EDGAR website.

Blue sky filings. On an annual basis, a manager should its blue sky filings for each state to make sure it has met any initial and renewal filings requirements. Several states impose late fees or reject late filings altogether. Accordingly, it is critical to stay on top of filings deadlines for both new investors and renewals. We also recommend that managers review blue sky filings submission requirements. Many states now permit blue sky filings to be filed electronically through the Electronic Filings Depository (“EFD”) system, and certain states will now only accept filings through EFD.

IARD Annual Fees. Preliminary annual renewal fees for state-registered and SEC-registered investment advisers are due on December 16, 2019. If you have not already done so, you should submit full payment into your Renewal Account by E-Bill, check or wire as soon as possible.

Pay-to-Play and Lobbyist Rules. SEC Rules disqualify investment advisers, their key personnel and placement agents acting on their behalf, from seeking to become engaged by a governmental client if they have made certain political contributions. State and local governments have similar rules, including California, which requires internal sales professionals who meet the definition or “placement agents” (people who act for compensation as finders, solicitors, marketers, consultants, brokers, or other intermediaries in connection with offerings or selling investment advisory services to a state or public retirement system in California) to register with the state as lobbyists and comply with California lobbyist reporting and regulatory requirements. Note that managers offering or selling investment advisory services to local government entities must register as lobbyists in the applicable cities and counties. State laws on Lobbyist registration differ widely, so managers should carefully review reporting requirements in the states in which they operate to make sure they are in compliance with the relevant rules.


Annual Fund Matters

New Issue Status. On an annual basis, managers need to confirm or reconfirm the eligibility of investors that participate in initial public offerings or new issues, pursuant to both Financial Industry Regulatory Authority, Inc. (“FINRA”) Rules 5130 and 5131. Most managers reconfirm investor eligibility via negative consent (i.e. are informed of their status on file with the manager and are asked to inform the manager of any changes), whereby a failure to respond by any investor operates as consent to the current status.

ERISA Status. Given the significant problems that can occur from not properly tracking ERISA investors in private funds, we recommend that managers confirm or reconfirm on an annual basis the ERISA status of their investors. This is particularly important for managers that track the underlying percentage of ERISA funds for each investor, with respect to each class of interests in a pooled investment vehicle.

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

Redemption Management. Managers with significant redemptions at the end of the year should carefully manage unwinding positions so as to minimize transaction costs in the current year (that could impact performance) and prevent transaction costs from impacting remaining investors in the next year. When closing funds or managed accounts, managers should pay careful attention to the liquidation procedures in the fund constituent documents and the managed account agreement.

NAV Triggers and Wavers. Managers should promptly seek waivers of any applicable termination events set forth in a fund’s ISDA or other counterparty agreement that may be triggered by redemptions, performance, or a combination of both at the end of the year. (NAV declines are common counterparty agreement termination events).

Fund Expenses. Managers should wrap up all fund expenses for 2019 if they have not already done so. In particular, managers should contact their outside legal counsel to obtain accurate and up to date information about legal expenses for inclusion int he NAV for year-end performance.

Electronic Schedule K-1s. The Internal Revenue Service (“IRS”) authorizes partnerships and limited liability companies to issue Schedule K-1s to investors solely by electronic means, provided the partnership has received the investor’s affirmative consent. States may have different rules regarding electronic K-1s and partnerships should check with their counsel whether they may still be required to send state K-1s on paper. Partnerships must also provide each investor with specific disclosures that include a description of the hardware and software necessary to access the electronic K-1s, how long the consent is effective, and the procedures for withdrawing the consent. If you would like to send K-1s to your investors electronically, you should discuss your options with your service providers.

“Bad Actor” Recertification Requirement. A security offering cannot rely on the Rule 506 safe harbor from SEC registration if the issuer or its “covered persons” are “bad actors.” Fund managers must determine whether they are subject to bad actor disqualification any time they are offering or selling securities in reliance on Rule 506. The SEC has advised that an issuer may reasonably rely on a covered person’s agreement to provide notice of a potential or actual bad actor triggering event pursuant to contractual covenants, bylaw requirements, or undertakings in a questionnaire or certification. If an offering is continuous, delayed, or long-lived, however, issuers must update their factual inquiry periodically through bring-down representations, questionnaires, and certifications, negative consent letters, periodic re-checking of public databases, and other steps., depending on the circumstances. Fund managers should consult with counsel to determine how frequently such an update is required. As a matter of practice, most fund managers should perform such an update at least annually.

U.S. FATCA. Funds should monitor their compliance with the U.S> Foreign Account Tax Compliance Act (“FATCA”). U.S. FATCA reports are due to the IRS on March 31, 2020 or September 30, 2020, depending on where the fund is domiciled. Reports may be required by an earlier date for jurisdictions that are parties to intergovernmental agreements (“IGAs”) with the U.S. Additionally, the U.S> may require that reports be submitted through the appropriate local tax authority in the applicable IGA jurisdiction, rather than the IRS. Given the varying U.S. FATCA reporting requirements applicable to different jurisdictions, managers should review and confirm the specific U.S. FATCA reporting requirements that may apply. AS a reminder, we strongly encourage managers to file required reports and notifications, even if they already missed previous deadlines. Applicable jurisdictions may be increasing enforcement and monitoring of FATCA reporting and imposing penalties for each day late.

CRS. Funds should also monitor their compliance with the Organisation for Economic Cooperation and Development’s Common Reporting Standard (“CRS”). All “Financial Institutions” in the Cayman Islands and the British Virgin Islands are required to register with the respective jurisdiction’s Tax Information Authority and submit returns to the applicable CRS reporting system by May 31 2020. Managers to funds domiciled in other jurisdictions should also confirm whether any CRS reporting will be required in such jurisdictions. CRS reporting must be completed with the CRS XML v1.0 or a manual entry form on the Automatic Exchange of Information portal. We recommend managers contract their tax advisors to stay on top of the U.S. FATCA and CRS requirements and avoid potential penalties.


Annual Management Company Matters

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

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

Compensation Planning. In the fund industry, and the financial services industry in general, the end of the year is the appropriate time to make adjustments to compensation programs. Since much of a manager’s revenue is tied to annual income from incentive fees, any changes to the management structure, affiliated partnerships, or any shadow equity programs should be effective on the first of the year. Make sure that partnership agreements and operating agreements are appropriately updated to reflect such changes.

Insurance. If a manager carries D&O or other liability insurance, the policy should be reviewed on an annual basis to ensure that the manager has provided notice to the carrier of all claims and all potential claims. Newly launched funds should also be added to the policy as appropriate.

Other Tax Considerations. Fund managers should assess their overall tax position and consider several steps to optimize tax liability. Managers should also be aware of self-employment taxes, which can potentially be minimized by structuring the investment manager as a limited partnership. Managers can take several steps to optimize their tax liability. including (i) changing the incentive fee to an incentive allocation; (ii) use of stock-settled stock appreciation rights; (iii) if appropriate terminating swaps and realizing net losses; (iv) making a Section 481(a) election under the Internal Revenue Code of 1986, as amended (the “Code”); (v) making a Section 475 election under the Code; and (vi) making charitable contribution. Managers should consult legal and tax professionals to evaluate these options.


Regulatory & Other Items from 2019

SEC Updates.

SEC Annual Enforcement Report. On November 6, 2019, the SEC Division of Enforcement published its Annual Report, which highlighted enforcement efforts protecting “main street investors” through the SEC Retail Strategy Task Force, Share Class Selection Disclosure Initiative, misleading risk factor disclosures by public companies, and enforcement efforts regarding ICOs and Digital Assets. The 2019 fiscal year also saw the SEC file its first charges for unlawful promotion of an ICO. Enforcement was also brought against an ICO research and rating service for failing it disclose it was compensated by issuers whose offerings it rated. During teh 2019 fiscal year, the SEC brought a total of 862 enforcement actions and obtained monetary judgments worth 4.3 billion dollars, both of which were increases from 2018 figures.

SEC Enforcement for Failure to Disclose Conflicts Arising from Revenue Sharing. On August 1, 2019, the SEC filed a complain against an SEC Registered Investment Adviser (“RIA”) for its failure to disclose conflicts of interest which arose from a revenue sharing agreement with a broker used by most of the adviser’s clients. The revenue sharing agreement in question provided that, if the adviser invested client assets in certain classes of mutual funds which paid the broker to be listed on its platform, the adviser would receive a portion of such revenue. Between July 2014 and December 2019, the adviser received over $100 million from the broker through this revenue sharing agreement. Through this time, the adviser never disclosed to its clients that there were other mutual fund investments less expensive than the investments subject to the revenue split agreement. Considering such omissions to be material, the SEC determined the adviser’s clients did not make these investments with full knowledge of the adviser’s incentives. Lesson to be learned: fund managers should always ensure all pertinent conflicts of interest, including those related to revenue sharing from third parties, are adequately disclosed to their clients.

SEC Bars Chief Compliance Officer from the Securities Industry. On July 17, 2019, the SEC settled charges of fraud against Colorado investment advisers Salus, LP and S.A.I.C. Limited, and their owners Brandon Copeland and Gregory Prusa, who was also the CCO, for making materially false, statements to prospective investors. The SEC alleged that Mr. Prusa in particular made false or misleading statements in the Form ADV filing for Salus, LP., claiming to have up to $178 million in assets under management and 20 high net worth individual clients. Salus, LP also promoted itself as an SEC RIA. None of this information in the Form ADV was true and Salus, LP never had any assets under management or individual clients.

CFTC And NFA Updates.

CFTC Public Enforcement Manual. For the first time ever, the CFTC’s Division of Enforcement published its Enforcement Manual aiming to provide clarity on the CFTC’s investigations and enforcement of violations. Managers may find the manual useful to evaluate the predictability of CFTC enforcement actions. The manual also highlights the CFTC’s intention to incentivize self-reporting and cooperation with the CFTC as the manual notes such cooperation will be considered in deciding the enforcement outcome, including the possibility of a non-prosecution agreement or deferred prosecution agreement.

Digital Asset Updates.

SEC Emphasis on ICOs. Much like the prior year, throughout 2019, the SEC focused much of its regulatory and enforcement efforts on ICOs. Notable developments included:

  • On June 4, 2019, the SEC filed a complain against Kik Interactive Inc., the popular messaging application, for conducting an illegal $100 million-dollar securities offering of digital tokens (the “Kin” tokens), without registering the offer and sale as required by law. This action resulted in Kik shutting down its core messaging service,
  • On September 18, 2019 the SEC filed a complaint against ICOBox and its founder Nikolay Evdokimov for conducting an illegal securities offering of ICOBox’s digital tokens as well as acting as an unregistered broker for other digital asset offerings.
  • On August 29, 2019, the SEC settled charges against Bitqyck and its founders when it created and sold two digital assets, Bitqu and Bitqym, in an unregistered securities offering raising $13 million dollars.
  • On August 27, 2019, in an interview with Bloomberg, SEC Chairman Jay Clayton stated when speaking about cryptocurrencies, that people may have gotten excited “that somehow [the SEC] would change the rules” but the SEC and Clayton have been consistent in their position that “form that start, that ain’t happening.”

SEC Releases a Framework for “Investment Contract” Analysis of Digital Assets. On April 3, 2019, in response to the regulatory and enforcement efforts focused on ICOs, the SEC released guidance on response to the regulatory and enforcement efforts focused on ICOs, the SEC released guidance on ICOs and how to comply with U.S. federal securities law. A key tale-away from the SEC’s guidance and framework is that the SEC is willing to exempt certain digital assets from being treated as securities. While a concrete regulatory scheme has not been crafted to deal specifically with ICOs, the SEC’s framework helps potential digital asset developers understand whether their digital asset is offered or sold as an “investment contract” and therefore subject to U.S. federal securities laws.

Internal Revenue Services Publishes Guidance for Calculating Taxes on Cryptocurrency. On October 9, 2019 the U.S. Internal Revenue service (the “IRS”) published its first guidance in five years relating to taxes owed on cryptocurrency holdings. Most notable in this guidance are the liabilities created by cryptocurrency forks. The IRS guidance states that tax liabilities will only apply to the new cryptocurrencies when they are recorded on the blockchain and if the taxpayer can actually control and spend the coins.

Bakkt Cleared to Launch Bitcoin Futures. Bakkt, a bitcoin futures exchange and digital assets platform founded by the Intercontinental Exchange (“ICE”) was given approval by the CFTC for Bakkt’s futures contracts. Bakkt’s bitcoin futures would be exchanged-traded on ICE Futures U.S. and cleared on IC Clear US, both of whom are regulated by the CFTC. Bakkt also announced it had acquired a New York state trust charter through the New York Department of Financial Services to create the Bakkt Trust Company, a qualified custodian, allowing Bakkt Warehouse – part of the Bakkt Trust Company – to provide bitcoin custodial services for physically delivered futures. September 23, 2019 was the launch date of Bakkt’s custody and physically-settled bitcoin futures contracts products which aims to address issues that have slowed institutional participation in this market in the past.

Other Updates.

SEC Approves First-Ever Reg A+ Token Offering. Blockstack became the first company in history to receive SEC approval for a public securities offering where investors would receive tokens. These securities, called “Stacks”, raised a total of $23 million from more than 4,500 investors. In the United States alone $15.5 million was raised through a Reg A+ sale while the other $7.6 million was raised through a Reg S offering in Asia. This approval, although new, has potentially created a regulatory roadmap for public token offerings.

IRS Guidance on Qualified Opportunity Fund. On April 17, 2019, the IRS issued additional guidance for the deferral of capital gains through investment in qualified opportunity funds. Most notable the IRS clarified the “substantially all” requirement for the holdings period and use of tangible business property. Under these new regulations, certain properties are able to qualified as a “qualified opportunity zone business property” if substantially all of the use of such property is in a qualified opportunity zone for substantially all of the qualified opportunity fund’s holding period of such property. This “substantially all” threshold, the IRS clarified, is (i) 70% with respect to the use of the property; and (ii) 90% with respect to the qualified opportunity fund’s holding period of such property.

Offshore Updates.

Cayman Islands Data Protection Law. Effective from September 30, 2019, the Cayman Islands Data Protection Law (the “DPL” and passed in 2017) came into force. The DPL applies to all investment advisers providing investment advise to Cayman Islands funds. Under the DPL, Cayman  investment funds are considered “data controllers” even if they are not registered with the Cayman Islands Monetary Authority. Investment advisers to such funds are considered “data processors”. The DPL requires data controllers to update their Cayman fund’s subscription agreements to incorporate DPL compliant language and otherwise provide investors with an updated DPL compliant privacy notice. Fund administrators are also subject to the DPL and must ensure that they are compliant. Updates to a fund’s administration agreement may be required.

Privacy Updates.

New York SHIELD Act. New York State passed the Stop Hacks and Improve Electronic Data Security Act (the “SHIELD Act”) on July 25, 2019 amending the State;s data breach notification law. Designed to take effect in March 2020, the SHIELD Act requires certain businesses and/or individuals to implement safeguards to protect the security, confidentiality, and integrity of information. The SHIELD Act Broadens “private information” to include credit card numbers, debit card numbers, usernames and passwords (including security questions and answers) relating to individual’s online account and biometric information (line fingerprints). The SHIELD Act also expands the definition of “beach” to include unauthorized access to private information (instead of just unauthorized acquisition).  The scope of the breach notification was broadened to include persons or businesses that own or license private information of New York resident. This expansion also means the law is no longer limited to those conducting business in New York but also managers who, for example, only store a New York investor’s private information. Managers who own private information of a New York resident should review these updated security measures and implement security programs as specifically discussed in the SHIELD act.


Compliance Calendar. As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

December 26, 2019
Last day to submit form filings via IARD prior to year end
December 31, 2019
Review RAUM to determine 2019 Form PF filing requirement
December 31, 2019
Small and mid-sized registered CPOs must submit a pool quarterly report (CPO-PQR)
December 31, 2019
Cayman funds regulated by CIMA that intend to de-register (i.e. wind down or continue as an exempted fund) should do so before this date in order to avoid 2020 CIMA fees
January 15, 2020
Quarterly Form PF due for large liquidity fund advisers (if applicable)
January 31, 2020
“Annex IV” AIFMD filing
February 14, 2020
Quarterly Form 13F updates due
February 14, 2020
Annual Schedule 13G updates due
February 14, 2020
Annual Form 13H updates due
February 28, 2020
Deadline for re-certification of CFTC exemptions
March 1, 2020
Quarterly Form PF due for larger hedge fund advisers (if applicable)
March 31, 2020
Deadline to update and file Form ADV Parts 1, 2A & 2B
Fund managers should perform “Bad Actor” certifications annually
Amendment due on or before anniversary date of prior Form D and blue sky filing(s), as applicable, or for material changes
CPO/CTA Annual Questionnaires must be submitted annually, and promptly upon material information changes


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Mr. Mallon can be reached directly at 415-868-5345.

California Consumer Privacy Act

The California Consumer Privacy Act (the “CCPA”), which was passed as law on June 28, 2019, will be effective as of January 1, 2020. Please be aware most fund managers will not be affected, but given the upcoming date of effectiveness it may be prudent to evaluate the reach of the law.

First, WHO does the CCPA affect?

The CCPA will affect fund managers who do business in California AND either (i) have at least $25 million of annual gross revenue; (ii) buy, sell, share or receive personal data; or (iii) receive over half of their revenue from the sale of personal data of California residents. Most fund managers who do business in California will not meet any of these prongs. The few managers who the CCPA will affect will likely fall under prong (i) – those who do business in California and have at least $25 million in annual gross revenue.

In calculating the $25 million in annual gross revenue, fund managers operating with a bifurcated management structure (separate management company and general partner entities) will likely have to aggregate the revenues of the general partner and management entities. The CCPA expands the definition of a “business” to entities who control or are in common control with another business and which share a common branding. In this case, if the threshold is met across both management entities, each entity will be subject to the provisions of the CCPA. If the general partner and investment manager do not share common branding, our view is that the revenues of the entities will not need to be aggregated.

Second, WHAT information does the CCPA cover?

The CCPA generally covers “personal information” that identifies, relates to, describes, associates with, directly or indirectly, a particular institutional or prospective client. This information includes, without limitation, names, addresses, email addresses, social security numbers, driver’s license or state issued ID number and passport numbers.

Typically, fund managers maintain the personal information of (i) their own employees (ii) individual clients (iii) institutional or entity clients and (iv) prospective clients. Fund managers may be relieved to learn that, due to certain statutory exemptions, information collected (i) about manager’s employees, (ii) via certain business to business transactions and (iii) about individual clients (if a manager is an SEC Registered Investment Adviser), does not constitute personal information and as a result, does not fall under the scope of the CCPA. Thus, the CCPA will generally only cover personal information of a fund manager’s (i) entity or institutional clients and (ii) prospective clients.

The CCPA exempts from coverage all data pre-empted by the Gramm-Leach-Bliley Act (the “GLBA”), which only applies to SEC Registered Investment Advisers (each, an “RIA”). The GLBA protects nonpublic personal information that is provided by a consumer to a financial institution in connection with obtaining financial products/services from the institution. The GLBA’s definition of nonpublic personal information differs from the definition of personal information under the CCPA, and is limited to individual investor information. Thus, while certain individual investor information may be pre-empted from the scope of the CCPA, personal information of entity investors, institutional investors and prospective investors is not within the scope of the GLBA and as such, will be covered by the CCPA.

Third, HOW should fund managers comply?

To the extent that clients or client prospects of fund managers are protected by the CCPA, their rights include the right to request disclosure of information that is collected and shared, the right to delete personal information and the right to non-discrimination. To ensure such compliance with the CCPA, we recommend that managers within the scope of the CCPA take the below actions:

    • Fund managers must broadly be prepared to promptly respond to California client rights and requests including clients’ rights to (i) access specific personal information (ii) data portability (iii) data deletion and (iv) non-discrimination for exercise of any CCPA right. Once a fund manager has received a verifiable consumer request from a client, it must be prepared to disclose and deliver the required information to the client within 45 days.
    • Typical privacy policies currently used by fund managers may need to be updated to (i) inform clients of their rights under the CCPA and instructions on how to exercise those rights and (ii) reword and incorporate as a comprehensive list all personal information (including drivers licenses, passport numbers or any other personal identifiers) collected and shared with service providers (such as the fund administrator, auditor, legal/regulatory service providers and I.T. providers). RIAs should also distribute their annual privacy policy update to all clientele in January.
    • Fund managers operating a website which collects personal information (either through an online portal access, cookies or other website function) must publish a separate CCPA compliant privacy disclosure on such website relating to the collection and use of such personal information. Many fund managers do not collect personal information on their websites, and thus will not need to include such privacy disclosure on their webpage.
    • Fund managers should consider updating their agreements with their fund administrator and possibly other service providers that have access to covered information of clients to include a representation from the service provider that it is in compliance with CCPA regulations.

Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Mr. Mallon can be reached directly at 415-868-5345.

Allocator Perspectives in Digital Assets – Panel Discussion

On November 19 Cole-Frieman & Mallon hosted an event for managers and investors in the digital asset and cryptocurrency space.  Below are notes from the panel discussion.


Many thanks to all who made our event this week such a success, especially Moderator, Michael Arrington (Arrington XRP Capital) and Panelists, Aram Verdiyan (Accolade Partners), Brooke Pollack (Hutt Capital), Thomas Chladeck (Diginex), and Nabeel Qadri (Protocol Ventures).

Discussion was animated and at brief moments entertainingly off topic but within our hour-long panel we touched on many core issues:

  • Allocators must answer to their own investors/limited partners – currently demand (from endowments, institutions, family office, etc) for digital asset products is not high.
  • We discussed the Bitwise study on allocating crypto in an institutional portfolio.  While that study makes clear the potential positives, the panel was divided on whether exposure to digital assets should be done through FOF vehicles or simply through holding bitcoin at one of the large custodians (Coinbase Anchorage, Fidelity, etc).
  • The panel discussed a broad spectrum of digital asset investment styles – from VC type strategies to long tokens/protocols to trading strategies, acknowledging there are pros and cons with each.  Ultimately panelists were split on what the right mix might be and opinions were informed by their time-horizon preferences.
  • Opinions varied on portfolio construction.  Some believe that protocol layers are the correct play and that businesses will eventually be built on the protocol layers.  Others believe the industry is so much in its infancy that the bets need to be placed on development teams/companies who can develop and pivot as necessary.
  • The panelists agreed that manager pedigree is an important measure of due diligence and the allocators will generally look to a manager’s understanding of the space, their technical capacity and knowledge, and their historical presence in the space.  One panelist noted it is not uncommon to find managers with 5-6 year portfolios.
  • The topic of timing was big – many of the panelists did not think they had the ability to specifically time the market and that all investments in this space should really be focused on the long term prospects of the industry as a whole.
  • Everyone seemed to agree that the digital asset space is waiting for its Lotus123 moment.  As of now it appears Bitcoin is both the religion and killer app even as there are various trends which pop up from time to time (DeFi as the trend right now).


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.