Rule 202(a)(30)-1 – Foreign Private Adviser Definition

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Proposed Rule 202(a)(30)-1 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 202(a)(30), among other things, defines the terms “client” and “investor” for the purposes of new Section 202(a)(30) of the Advisers Act which requires “foreign private advisers” to register with the SEC.

New section 202(a)(30) of the Advisers Act defines “foreign private adviser” as an investment adviser that

  • has no place of business in the United States,
  • has fewer than 15 clients in the United States and investors in the United States in private funds advised by the adviser, and
  • less than $25 million in aggregate assets under management from such clients and investors.

For the purposes of Section 202(a)(30)-1, a single “client” generally means:

  • a natural person, family members of the same household and accounts for such persons
  • an entity and not the “owners” of an entity (two entities with exactly the same ownership can, together, be counted as a single client)

Other rules with respect to the “client” definition:

  • an “owner” will be deemed to be a client separate from an entity if advisory services are provided to the owner separately from the entity
  • managers to a hedge fund or other private fund do not necessarily need to count the individual investors in the fund as a client
  • a fund entity will be a client of the manager of the fund entity

For the purposes of Section 202(a)(30)-1, the term “investor” will generally mean a “beneficial owner” (if the fund is a 3(c)(1) fund) or a “qualified purchaser” (if the fund is a 3(c)(7) fund).  With respect to any “client” or “investor,” the term “in the United States” generally means any person who is a deemed to be a “U.S. person” as it is defined in Rule 902(k) of Regulation S under the Securities Act of 1933 (which is premised on residence in the United States, regardless of any temporary presence outside the United States).

The full proposed rule is reprinted below.

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§ 275.202(a)(30)-1 Foreign private advisers.

(a) Client. You may deem the following to be a single client for purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)):

(1) A natural person, and:

(i) Any minor child of the natural person;

(ii) Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence;

(iii) All accounts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries; and

(iv) All trusts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries;

(2)

(i) A corporation, general partnership, limited partnership, limited liability company, trust (other than a trust referred to in paragraph (a)(1)(iv) of this section), or other legal organization (any of which are referred to hereinafter as a “legal organization”) to which you provide investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries (any of which are referred to hereinafter as an “owner”); and

(ii) Two or more legal organizations referred to in paragraph (a)(2)(i) of this section that have identical owners.

(b) Special rules regarding clients. For purposes of this section:

(1) You must count an owner as a client if you provide investment advisory services to the owner separate and apart from the investment advisory services you provide to the legal organization, provided, however, that the determination that an owner is a client will not affect the applicability of this section with regard to any other owner;

(2) You are not required to count an owner as a client solely because you, on behalf of the legal organization, offer, promote, or sell interests in the legal organization to the owner, or report periodically to the owners as a group solely with respect to the performance of or plans for the legal organization’s assets or similar matters;

(3) A limited partnership or limited liability company is a client of any general partner, managing member or other person acting as investment adviser to the partnership or limited liability company; and

(4) You are not required to count a private fund as a client if you count any investor, as that term is defined in paragraph (c)(1) of this section, in that private fund as an investor in the United States in that private fund.

Note to paragraphs (a) and (b): These paragraphs are a safe harbor and are not intended to specify the exclusive method for determining who may be deemed a single client for purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)).

(c) Definitions. For purposes of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)),

(1) Investor means any person that would be included in determining the number of beneficial owners of the outstanding securities of a private fund under section 3(c)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1)), or whether the outstanding securities of a private fund are owned exclusively by qualified purchasers under section 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(7)), except that any of the following persons is also an investor:

(A) Any beneficial owner of the private fund that pursuant to § 270.3c-5 of this title would not be included in the above determinations under section 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1), (7)); and

(B) Any beneficial owner of any outstanding short-term paper, as defined in section 2(a)(38) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(38)), issued by the private fund.

Note to paragraph (c)(1): You may treat as a single investor any person that is an investor in two or more private funds you advise.

(2) In the United States means with respect to:

(i) Any client or investor, any person that is a “U.S. person” as defined in § 230.902(k) of this title, except that any discretionary account or similar account that is held for the benefit of a person in the United States by a dealer or other professional fiduciary is in the United States if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.

Note to paragraph (c)(2)(i): A person that is in the United States may be treated as not being in the United States if such person was not in the United States at the time of becoming a client or, in the case of an investor in a private fund, at the time the investor acquires the securities issued by the fund.

(ii) Any place of business, in the United States, Online levitra as that term is defined in § 230.902(l) of this title; and

(iii) The public, in the United States, as that term is defined in § 230.902(l) of this title.

(3) Place of business has the same meaning as in § 275.222-1(a) of this title.

(4) Assets under management means the regulatory assets under management as determined under Item 5.F of Form ADV (§ 279.1 of this title).

(d) Holding out. If you are relying on this section, you shall not be deemed to be holding yourself out generally to the public in the United States as an investment adviser, within the meaning of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)), solely because you participate in a non-public offering in the United States of securities issued by a private fund under the Securities Act of 1933 (15 U.S.C. 77a).

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Bart Mallon, Esq. is a hedge fund attorney and providers legal services to hedge fund managers through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Rule 204-4 – Reporting by Exempt Reporting Advisers

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Proposed Rule 204-4 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 204-4 provides that certain “exempt reporting advisers” are required to file Form ADV with the SEC.  The instructions to Form ADV will specify which information on Form ADV is to be completed by such “exempt reporting advisers.”

The term “exempt reporting advisers” means an adviser exempt from SEC registration because:

  • the adviser only advises solely one or more “venture capital funds” (Advisers Act Section 203(l)); or
  • the adviser acts only as an adviser to private funds and has AUM in the US of less than $150MM (Advisers Act Section 203(m)).

The full proposed revised rule is reprinted below.

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§ 275.204-4 Reporting by exempt reporting advisers.

(a) Exempt Reporting Advisers. If you are an investment adviser relying on the exemption from registering with the Commission under section 203(l) or (m) of the Act (15 U.S.C. 80b-3(l) or 80b-3(m)), you must complete and file reports on Form ADV (17 CFR 279.1) by following the instructions in the Form, which specify the information that an exempt reporting adviser must provide.

(b) Electronic Filing. You must file Form ADV electronically with the Investment Adviser Registration Depository (IARD) unless you have received a hardship exemption under paragraph (e) of this section.

Note to paragraph (b): Information on how to file with the IARD is available on the Commission’s website at http://www.sec.gov/iard.

(c) When filed. Each Form ADV is considered filed with the Commission upon acceptance by the IARD.

(d) Filing fees. You must pay FINRA (the operator of the IARD) a filing fee. The Commission has approved the amount of the filing fee. No portion of the filing fee is refundable. Your completed Form ADV will not be accepted by FINRA, and thus will not be considered filed with the Commission, until you have paid the filing fee.

(e) Temporary hardship exemption.

(1) Eligibility for exemption. If you have unanticipated technical difficulties that prevent submission of a filing to the IARD system, you may request a temporary hardship exemption from the requirements of this chapter to file electronically.

(2) Application procedures. To request a temporary hardship exemption, you must:

(i) File Form ADV-H (17 CFR 279.3) in paper format no later than one business day after the filing that is the subject of the ADV-H was due; and

(ii) Submit the filing that is the subject of the Form ADV-H in electronic format with the IARD no later than seven business days after the filing was due.

(3) Effective date – upon filing. The temporary hardship exemption will be granted when you file a completed Form ADV-H.

(f) Final Report. You must file a final report in accordance with instructions in Form ADV when:

(1) You cease operation as an investment adviser;

(2) You no longer meet the definition of exempt reporting adviser under paragraph (a); or

(3) You apply for registration with the Commission.

Note to paragraph (f): You do not have to pay a filing fee to file a final report on Form ADV through the IARD.

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Bart Mallon, Esq. is a lawyer and providers hedge fund registration and compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Rule 203A-5 – IA Registration Transition Rules

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Proposed Rule 203A-5 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 203A-5 provides that (i) SEC registered investment advisers must report their AUM to the SEC by August 20, 2011 and (ii) if such advisers are at that time below the threshold for SEC registration, the adviser must withdraw from SEC registration by October 19, 2011 (and generally be registered with the state in which the adviser’s maintains its principle office and place of business).

The full proposed revised rule is reprinted below.

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§ 275.203A-5 Transition rules.

(a) Every investment adviser registered with the Commission on July 21, 2011 shall file an other-than-annual amendment to Form ADV (17 CFR 279.1) no later than August 20, 2011 and shall determine its assets under management based on the current market value of the assets as determined within 30 days prior to the date of filing the Form ADV.

(b) If an investment adviser registered with the Commission on July 21, 2011 would be prohibited from registering with the Commission under section 203A(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)), and is not otherwise exempted by § 275.203A-2 from such prohibition, such investment adviser shall withdraw from registration with the Commission by filing Form ADV-W (17 CFR 279.2) no later than October 19, 2011. During this period while an investment adviser is registered with both the Commission and one or more state securities authorities, the Act and applicable State law will apply to the investment adviser’s advisory activities.

(c) If, prior to the effective date of the withdrawal from registration of an investment adviser on Form ADV-W, the Commission has instituted a proceeding pursuant to section 203(e) of the Act (15 U.S.C. 80b-3(e)) to suspend or revoke registration, or pursuant to section 203(h) of the Act (15 U.S.C. 80b-3(h)) to impose cipro dosage terms or conditions upon withdrawal, the withdrawal from registration shall not become effective except at such time and upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors.

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Bart Mallon, Esq. is a hedge fund lawyer and providers legal services to hedge fund managers through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Rule 203A-1 – Switching to or from SEC IA Registration

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Proposed Rule 203A-1 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act.  The following proposed new rule 203A-1 will replace existing Rule 203A-1.  The new rule will provide state and SEC registered investment advisers with information on the time requirements for switching between the registration status.  The full proposed revised rule is reprinted below.

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§ 275.203A-1 Switching to or from SEC registration.

(a) State-registered advisers—switching to SEC registration. If you are registered with a state securities authority, you must apply for registration with the Commission within 90 days of filing an annual updating amendment to your Form ADV reporting that you are eligible for SEC registration and are not relying on an exemption from registration genuine viagra online under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)).

(b) SEC-registered advisers—switching to State registration. If you are registered with the Commission and file an annual updating amendment to your Form ADV reporting that you are not eligible for SEC registration and are not relying on an exemption from registration under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)), you must file Form ADV-W (17 CFR 279.2) to withdraw your SEC registration within 180 days of your fiscal year end (unless you then are eligible for SEC registration). During this period while you are registered with both the Commission and one or more state securities authorities, the Act and applicable State law will apply to your advisory activities.

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Bart Mallon, Esq. runs the hedge fund law blog and provides hedge fund registration and compliance services to managers through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

SEC Proposes New IA and Hedge Fund Registration Rules

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Seeks Public Comment on Proposed Regulations

On November 19, the SEC released proposed rules with respect to the new hedge fund registration requirement under the Dodd-Frank act.  The major proposals include the following:

  1. Rules with respect to the manner and process of registration of hedge fund and private equity fund managers.
  2. Reporting requirements for registered hedge fund and other private fund managers.  This will include:
    • Basic organizational and operational information about the funds they manage, such as information about the amount of assets held by the fund, the types of investors in the fund, and the adviser’s services to the fund.
    • Identification of five categories of “gatekeepers” that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).
  3. Reporting requirements for non-registered private fund managers (including venture capital funds).  This will include:
    • Basic identifying information for the adviser and the identity of its owners and affiliates.
    • Information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.
    • The disciplinary history of the adviser and its employees that may reflect on their integrity.
    • Exempt reporting advisers would file reports on the Commission’s investment adviser electronic filing system (IARD), and these reports would be publicly available on the Commission’s website.
  4. Defining the term “venture capital fund” and the term “foreign private adviser”.
  5. Providing guidance on SEC to state registration for managers who will no longer be allowed to register with the SEC due to increase in registration asset threshold

We will have the opportunity to fully review these proposals over the next few days and will be providing a report on the proposed regulations and will outline the comments we intend to send to the SEC.  Public comments on the proposal will be due to the Commission in early January 2011.

The SEC summary of the proposed regulations can be found discount viagra soft gels here.  The full texts of the two sets of proposals are below:

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Bart Mallon, Esq. runs the hedge fund law blog and provides registration and hedge fund compliance services to managers through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

GSEC to Stop Clearing for Small Hedge Funds

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According to a recent Bloomberg article, and a couple of my recent clients, Goldman Sachs Execution and Clearing (GSEC) will no longer act as the custodian and clearing agent for most small hedge funds with less than $5 million in AUM.  As a quick background, smaller funds which do not have the minimum asset size or strategy to establish a direct relationship a major prime broker will generally establish an account with a mini-prime broker.  The mini-prime broker will act as the relationship manager and will interface with the fund manager while the fund assets will be custodialized at the major prime broker.

This move will only affect the very small fund launches and will limit the mini-primes that small funds can use as some mini-primes only execute through GSEC.  Current funds utilizing GSEC are not likely to be affected, but those funds which are just now establishing their accounts with GSEC should discuss this issue with their contact at the mini-prime.

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Bart Mallon, Esq. runs the hedge fund law blog and provides registration and compliance services to hedge fund managers through Cole-Frieman & Mallon LLP, a hedge fund law firm.  He can be reached directly at 415-868-5345.

NFA Forex Alert

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NATIONAL FUTURES ASSOCIATION

FOREX INVESTOR ALERT

OCTOBER 18, 2010

New Forex Rules Become Effective on October 18

On August 30, the Commodity Futures Trading Commission (CFTC) issued its final rules regarding retail off-exchange foreign currency (forex) trading in the United States. The rules, which become effective on October 18, 2010, have far-reaching implications for all forex investors in the United States.

The rules require, with certain exceptions, any firm acting as a counterparty to certain retail forex transactions to register as a Retail Foreign Exchange Dealer (RFED) or Futures Commission Merchant (FCM). In addition, the rules require, with certain exceptions, any individual acting as a forex solicitor, account manager or pool operator to register with the CFTC as Introducing Brokers (IBs), Commodity Trading Advisors (CTAs) or Commodity Pool Operators (CPOs) or as an associated usa pharmacy cheapest viagra person of one of these entities and become Members of NFA.

Effective October 18, all CFTC-registered forex firms and individuals will be subject to CFTC regulations and NFA rules covering every aspect of their business, including recordkeeping, promotional material and sales practices.

Investors can check the registration status of any forex firm through NFA’s Background Affiliation Status Information Center (BASIC) available on the Association’s website (www.nfa.futures.org). BASIC contains current and historical registration information concerning all current and former CFTC registrants, including name, business address and registration history.

BASIC also provides information concerning disciplinary actions taken by NFA, the CFTC and all the U.S. futures exchanges. If you are researching a firm, you should also conduct a background check of all the individuals listed as principals of the firm. Sometimes the firm will have no disciplinary history, but one or more of the principals may have been disciplined while working at other firms.

Forex investors can register complaints with NFA against any CFTC-registered firm or individual either by telephone or through NFA’s website.

In addition, investors who believe that they have been treated unfairly by their forex firm have the ability to file an arbitration claim with NFA. In most cases, arbitration is mandatory for all NFA Members and Associates required to be registered with the CFTC. NFA arbitration provides an effective and cost-efficient method for the settlement of futures and forex-related disputes.

For additional information, contact NFA’s Information Center at 1-800-621-3570 or (312) 781-1410.

NFA is a self-regulatory organization subject to oversight by the CFTC. NFA’s primary mission is to protect investors and safeguard market integrity.

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Cole-Frieman & Mallon LLP is a law firm and provides legal support and forex registration and compliance services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

SEC Proposes "Family Office" Definition

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In Section 409 of Dodd-Frank Act, Congress required the SEC to define “family office” for the purpose of exempting such groups from the registration requirements under the Advisers Act.  Section 409 provides that any definition the SEC adopts should be “consistent with the previous exemptive policy” of the SEC and recognize “the range of organizational, management, and employment structures and arrangements employed by family offices.”

The public will have the ability to comment on the SEC’s proposed rule until November 18, 2010.  After that time the SEC will take public comments into consideration and then promulgate a final rule sometime thereafter.

The SEC notice can be found here and we have also provided a link to the full Proposed Family Office Rule.

The proposed definition is reprinted below in full.

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§ 275.202(a)(11)(G)-1 Family offices.

(a) Exclusion. A family office, as defined in this section, shall not be considered to be an investment adviser for purpose of the Act.

(b) Family office. A family office is a company (including its directors, partners, trustees, and employees acting within the scope of their position or employment) that:

(1) Has no clients other than family clients; provided that if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person shall be deemed to cialis price in canada be a family client for purposes of this section 275.202(a)(11)(G)-1 for four months following the transfer of assets resulting from the involuntary event;

(2) Is wholly owned and controlled (directly or indirectly) by family members; and

(3) Does not hold itself out to the public as an investment adviser.

(c) Grandfathering. A family office as defined in paragraph (a) above shall not exclude any person, who was not registered or required to be registered under the Act on January 1, 2010, solely because such person provides investment advice to, and was engaged before January 1, 2010 in providing investment advice to:

(1) Natural persons who, at the time of their applicable investment, are officers, directors, or employees of the family office who have invested with the family office before January 1, 2010 and are accredited investors, as defined in Regulation D under the Securities Act of 1933;

(2) Any company owned exclusively and controlled by one or more family members; or

(3) Any investment adviser registered under the Act that provides investment advice to the family office and who identifies investment opportunities to the family office, and invests in such transactions on substantially the same terms as the family office invests, but does not invest in other funds advised by the family office, and whose assets as to which the family office directly or indirectly provides investment advice represents, in the aggregate, not more than 5 percent of the value of the total assets as to which the family office provides investment advice; provided that a family office that would not be a family office but for this subsection (c) shall be deemed to be an investment adviser for purposes of paragraphs (1), (2) and (4) of section 206 of the Act.

(d) Definitions. For purposes of this section:

(1) Control means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of being an officer of such company.

(2) Family client means:

(i) Any family member;

(ii) Any key employee;

(iii) Any charitable foundation, charitable organization, or charitable trust, in each case established and funded exclusively by one or more family members or former family members;

(iv) Any trust or estate existing for the sole benefit of one or more family clients;

(v) Any limited liability company, partnership, corporation, or other entity wholly owned and controlled (directly or indirectly) exclusively by, and operated for the sole benefit of, one or more family clients; provided that if any such entity is a pooled investment vehicle, it is excepted from the definition of “investment company” under the Investment Company Act of 1940;

(vi) Any former family member, provided that from and after becoming a former family member the individual shall not receive investment advice from the family office (or invest additional assets with a family office-advised trust, foundation or entity) other than with respect to assets advised (directly or indirectly) by the family office immediately prior to the time that the individual became a former family member, except that a former family member shall be permitted to receive investment advice from the family office with respect to additional investments that the former family member was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to the time the person became a former family member; or

(vii) Any former key employee, provided that upon the end of such individual’s employment by the family office, the former key employee shall not receive investment advice from the family office (or invest additional assets with a family office-advised trust, foundation or entity) other than with respect to assets advised (directly or indirectly) by the family office immediately prior to the end of such individual’s employment, except that a former key employee shall be permitted to receive investment advice from the family office with respect to additional investments that the former key employee was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to the time the person became a former key employee.

(3) Family member means:

(i) the founders, their lineal descendants (including by adoption and stepchildren), and such lineal descendants’ spouses or spousal equivalents;

(ii) the parents of the founders; and

(iii) the siblings of the founders and such siblings’ spouses or spousal equivalents and their lineal descendants (including by adoption and stepchildren) and such lineal descendants’ spouses or spousal equivalents.

(4) Former family member means a spouse, spousal equivalent, or stepchild that was a family member but is no longer a family member due to a divorce or other similar event.

(5) Founders means the natural person and his or her spouse or spousal equivalent for whose benefit the family office was established and any subsequent spouse of such individuals.

(6) Key employee means any natural person (including any person who holds a joint, community property, or other similar shared ownership interest with that person’s spouse or spousal equivalent) who is an executive officer, director, trustee, general partner, or person serving in a similar capacity of the family office or any employee of the family office (other than an employee performing solely clerical, secretarial, or administrative functions with regard to the family office) who, in connection with his or her regular functions or duties, participates in the investment activities of the family office, provided that such employee has been performing such functions and duties for or on behalf of the family office, or substantially similar functions or duties for or on behalf of another company, for at least 12 months.

(7) Spousal equivalent means a cohabitant occupying a relationship generally equivalent to that of a spouse.

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Bart Mallon, Esq. runs the hedge fund law blog and provides registration and compliance services to hedge fund managers through Cole-Frieman & Mallon LLP, a hedge fund law firm.  He can be reached directly at 415-868-5345.

NFA Issues NTM Regarding Retail Forex

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In a Notice to Members (NTM) issued today, the NFA provides guidance to certain players in the retail forex markets.  The NTM discusses some issues which the NFA levitra online cheap has received inquiries about.  The guidance by the NFA is based on consultations with the CFTC staff.

The NFA has done a nice job of helping forex managers with the registration process and has also held a forex registration and compliance workshop recently.  The full notice is reprinted below.

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Notice to Members I-10-21

October 13, 2010

NFA offers guidance on CFTC’s final forex regulations

The Commodity Futures Trading Commission’s (CFTC) final Forex regulations are effective on October 18, 2010. NFA staff has received a number of inquiries from Members seeking further guidance and clarification on certain requirements. Based on further consultation with CFTC staff on Friday, October 8th, this Notice provides additional guidance on the following areas:

Risk Disclosure Statement Required by CFTC Regulation 5.5

CFTC Regulation 5.5 prohibits FCMs, RFEDs, and in the case of an introduced account, IBs from opening a retail Forex account until the FCM, RFED or IB has provided the customer with the required disclosure statement, along with the most recent quarterly customer account performance information, and obtained a signed acknowledgement of receipt of the disclosure document from the customer. Firms are not required to provide this disclosure statement to, or obtain the disclosure document acknowledgement from, a customer who opened an account prior to October 18, 2010 (existing customers). Additionally, firms are not required to provide the most recent quarterly customer account performance information to existing customers unless the customer requests the information.

Qualifying Institutions for Holding Assets Equal to Retail Forex Obligation

CFTC Regulation 5.8 identifies the financial entities that may be used to hold assets equal to the total amount owed to U.S. customers for Forex transactions. Assets may only be held in the U.S. or a money center country defined in Regulation 1.49. Qualifying institutions in the U.S. are limited to U.S. regulated banks or trust companies, SEC registered broker-dealers that are also members of FINRA and CFTC registered FCMs that are also members of NFA. Qualifying Institutions in a money center country are limited to banks or trust companies with regulatory capital in excess of $1 billion; broker-dealer or FCM equivalents with regulatory capital in excess of $100 million; and FCMs registered with the CFTC and members of NFA. RFEDs are not a qualifying entity for holding these assets. However, pursuant to CFTC Regulation 5.7, funds held at an RFED may be included as a current asset for minimum net capital purposes.

IB, CPO and CTA Registration

Otherwise regulated entities set forth in Section 2(c)(2)(B)(ii)(II)(aa), (bb), (ee) or (ff) of the Commodity Exchange Act do not have to be registered in the appropriate capacity with the CFTC in order to solicit retail Forex orders, manage retail Forex accounts or operate a retail Forex pool. This includes an otherwise regulated entity, such as a broker-dealer, that introduces retail Forex business to an FCM or RFED.

Other Registration Issues

Every firm that is required to be registered as an FCM, RFED, IB, CPO or CTA in connection with its Forex activity must be approved by NFA as a Forex firm. NFA Members are prohibited from engaging in retail Forex transactions with these firms unless the firm has received this designation. In addition, Forex firms must have at least one principal who is registered as an Associated Person (AP) and is approved as a Forex AP. All individuals who solicit retail Forex business or who supervise that activity must have taken and passed two exams — the National Commodity Futures Examination (Series 3) and the Retail Off Exchange Forex Examination (Series 34), which is a new exam focusing exclusively on Forex-related questions. However, individuals who were registered as APs, sole proprietors or floor brokers on May 22, 2008, do not need to take the Series 34 exam unless there has been a two year gap in their registration since that date.

Anyone needing additional information on these regulations should contact Sharon Pendleton (312-781-1401 or [email protected]) or Lauren Brinati (312-781-1215 or [email protected]).

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Bart Mallon, Esq. runs the hedge fund law blog and provides forex registration and compliance services to forex managers through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

NFA Forex Registration/Compliance Workshop | Las Vegas September 25, 2010

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(www.hedgefundlawblog.com)

Overview of Forex Registration & Compliance Issues

By Bart Mallon, Esq.

In preparation for the implementation of the new retail forex regulations, the NFA recently conducted a retail forex registration and compliance workshop in Las Vegas at the Trader’s Expo.  The workshop covered a number of topics which the NFA views as especially important for forex managers.  I attended the workshop and the following discussion is based on my notes of the conference as well as collateral material provided by the NFA.

This overview will cover the various sessions throughout the day including:

  • Registration
  • General Compliance
  • Net Capital, Recordkeeping & Reporting Requirements
  • Discussion/ Individual Consultations

[Note: this article currently only has the summary of the registration session.  I will be adding the additional summaries directly to this page over the next few days.]

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Registration Session

Firm Registration & Exemption Requirements

This first part discusses the various registration categories and the potential exemptions and other pertinent information.

RFED & FCMs

  • These are entities which execute forex trades for managers.  We will not go into the registration and compliance requirements for these groups in this overview and will instead focus on forex managers and introducing brokers.

Commodity Trading Adviser (CTA)

  • Definition: a firm which is compensated for providing advice with respect to forex transactions, usually by having power of attorney (POA) to trade a client’s account held at an FCM or RFED.  Groups that provide individualized advice without a POA may also be considered to be a CTA.
  • Exemptions: a firm is exempt from CTA registration if the firm (i) provides advice to less than 15 people over the past 12 months and (ii) does not generally hold itself out to the public as a CTA. Managers should note that this exemption is narrowly construed by the CFTC and that very few forex managers will  fit within the exemption.  This exemption is self-executing and so the firm will not need to make a filing with the CFTC or NFA if they are claiming this exemption.  There are additional exemptions which are available but not often used by most forex managers.
  • Costs:
    • Firm – $200 non-refundable registration fee
    • APs/Principals – $85 registration fee (for each individual)
    • NFA Membership Fee – $750 (yearly)
    • Exam Fess – varies with respect to exam
  • Principal/AP Requirement: each firm must have at least one Principal listed and at least one Associated Person registered with the firm (see discussion below).  Each Principal and AP will need to have (i) fulfilled the proficiency (exam) requirements and (ii) provided the NFA with fingerprint cards for the FBI background check.
  • Disclosure Documents: CFTC regulations require each forex CTA disclosure document to include the following information:
    • Basic Background Information on the CTA
    • Information on the Trading Program
    • Discussion of the Risk Factors
    • Discussion of Conflicts of Interest
    • Litigation Information (see NFA Litigation Statement Requirement)
    • Certain Performance Reports
    • Supplemental information
  • Timing: with respect to the actual registration of the entity and the Principals/APs, this can usually be done quickly.  In most cases, after all fees have been paid and a Principal has submitted fingerprint cards and has completed all necessary exam requirements, the registration will be complete in about two days.  While the registration is done quickly, the disclosure document acceptance process can be lengthy.  For a normal CTA it will usually take about 5-10 weeks to get the document accepted, however this will depend on a number of items including the NFA examiner you are assigned and the work load of the NFA.

Commodity Pool Operator (CPO)

  • Definition: a firm which is compensated for providing advice to a pooled investment vehicle.  The investment vehicle (colloquially known as a “hedge fund”) is deemed to be a “commodity pool” and the firm providing advice is the operator or CPO.
  • Exemptions: there are a number of CPO exemptions which are potentially available for forex managers.  We have detailed these requirements before in our list of CPO exemptions.
  • Costs:
    • Firm – $200 non-refundable registration fee
    • APs/Principals – $85 registration fee
    • NFA Membership Fee – $750 (yearly)
    • Exam Fess – varies with respect to exam
  • Principal/AP Requirement: same as above.
  • Disclosure Documents: the requirement is generally the same as for CTAs.  However, CPO disclosure documents are usually much longer and deal with a number of other federal laws.  CPO disclosure documents must be drafted by an attorney.
  • Timing: generally timing will be similar to the above.

Guaranteed Introducing Broker

  • Definition: generally a firm which introduces client accounts to an FCM or RFED.  These brokers might include groups that license EA software and receive per trade compensation from a broker.  A guaranteed IB is a firm which only introduces to one FCM or RFED and who enters into a guarantee agreement with the FCM or RFED.
  • Exemptions: generally there are no exemptions.  Firms should note that the exact manner in which the firm is compensated (e.g. for use of the EA software) may make a difference in whether the firm will need to be registered wellbutrin buy as an introducing broker with the NFA.
  • Costs:
    • Firm – $200 non-refundable registration fee
    • APs/Principals – $85 registration fee
    • NFA Membership Fee – $750 (yearly)
    • Exam Fess – varies on exams (see below)
    • Other – written guarantee agreement with the FCM or RFED must be executed prior to registration
  • Principal/AP Requirement: same as above.

Independent Introducing Broker

  • Definition: definition is same as above, except an independant IB may introduce to any number of FCMs or RFEDs and does not need to enter into a guarantee agreement.  The independent IB will need to maintain a certain net capital.
  • Exemptions: generally there are no exemptions.  As above, the manner of compensation will determine whether the firm is an IB.
  • Costs:
    • Firm – $200 non-refundable registration fee
    • APs/Principals – $85 registration fee
    • NFA Membership Fee – $750 (yearly)
    • Exam Fess – varies on exams (see below)
  • Other: must maintain net capital of $45,000 subject to CFTC regulations.  NFA rules require an extra $5,000 buffer.
  • Principal/AP Requirement: same as above.

Discussion of Principals and Associated Persons

Principals

Principals generally mean persons who meet any of the following:

  • Certain title: Director, President, usually any “Chief” role
  • Ownership: generally owners with 10% or more interest, including owners which are entities and owners of those entities (there are also look-through rules for entities)
  • Other: Individuals with management and supervisory authority

Associated Person

Generally any partner, officer, employee, consultant, or agent (or any natural person occupying a similar status or performing similar functions), in any capacity which involves:

  • the solicitation of funds, securities, or property for participation in a commodity pool or
  • the supervision of any person or persons so engaged.

Firms should note that while the definition of AP does not include a person who acts solely as a trader, the NFA highly recommends that such persons become registered as APs.  If a firm decides that such person does not need to register with the NFA, the firm must be extra careful that the trader does not perform any functions of an AP.  This will likely be an issue which the NFA will examine closely during any audit.

Other Important Discussion Items

Soliciting Clients after October 18, 2010

Forex managers who currently are managing client accounts but are not registered with the NFA, will need to be registered by the October 18th deadline and continue to manage accounts for current clients.  However, these managers will not be able to accept new money from existing clients or new clients until the disclosure document is accepted by the NFA.

Managers with a Disciplinary History

Individuals who have certain criminal or regulatory issues in their background will need to make sure that they are able to produce records of the issue.  For persons with these issues, the NFA will require full records and will review those records prior to deciding whether to allow the person to register as an AP.  For more information, please see our discussion of registration issues for managers with disciplinary history.

Heightened Supervisory Procedures

Many forex managers and introducing brokers will need to implement heightened supervisory procedures because they will have Principals/APs which were either subject to prior NFA disciplinary actions or worked for firms subject to NFA disciplinary actions.  Almost every single forex broker has been subject to NFA disciplinary actions so persons who come from these firms will need to be aware of this fact and firms may need to augment their employee base to fit within certain guidelines.  This issue will most likely be identified by NFA staff during the registration process and may delay a registration.

Branch Office

Firms which have more than one office must designate a main office.  All of the other offices will be deemed to be banch offices and each of these branch offices will need to have a branch office manager (who has passed the Series 30 exam).

Firms often wonder whether a home office will count as a branch office.  Generally, it will depend on the exact facts of the situation, but if any person is acting as an AP at the home office, then it will be deemed to be a branch office.

While it does not cost extra to have a branch office, firms must make sure that they institute certain oversight procedures with respect to the branch office.  This means that compliance policies and procedures must be implemented.  This is likely to be another issue which the NFA will examine closely during an audit.

For more information, please see our article on the NFA Branch Office Designation.

Forex Exams

Overview – we have discussed the various exam requirements for forex managers a number of times.  For full information, please see our overview of the forex exams.  We also have specific information on the Series 3 exam, Series 30 exam, and how to pass the Series 34 exam.

Grandfather Provisions – For persons who were registered on May 22, 2008 as an AP (and have remained continuously registered as an AP with the CFTC), such persons will not be required to pass the Series 34 exam prior to providing advice to customers with respect to forex transactions.

Discretionary Waiver – some persons who would normally be required to complete the proficieny requirements may be able to apply for a waiver of the requirements from the NFA.  Such waiver is rarely granted.  For more information, please see NFA Rule 402.

Overview of Registration Process

At this point during the presentation the NFA staff took us completely through the registration process on the NFA’s online registration system.  In general the process is fairly straightforward and the NFA has provided a number of resources on their website which are designed to help managers navigate the process.  In general the process includes the following steps:

  • Obtain Security Manager Access
  • Pay Registration Fees
  • Complete Form 7-R for Firm Application
  • Complete Form 8-R for all Principals and APs

General Compliance Session

[To be forthcoming…]

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Other related hedge fund law articles:

Bart Mallon, Esq. runs the hedge fund law blog and provides forex registration and compliance services to forex managers through Cole-Frieman & Mallon.  He can be reached directly at 415-868-5345.