Tag Archives: alternative mutual fund

CFTC May Consider Vote on CPO Registration for Mutual Fund Managers

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

Background on CFTC Rule 4.5

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

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

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

Wholly-Owned Subsidiaries

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


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


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


Announcing Alternative Mutual Funds Practice


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

– Karl Cole-Frieman & Bart Mallon



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

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

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

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

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

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

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

About Cole-Frieman & Mallon LLP

Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP has an international practice that services both start-up investment managers, as well as multi-billion dollar firms. The firm provides a full suite of legal services to the investment management community, including: hedge fund, private equity fund, venture capital fund, mutual fund and UCITS fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog (http://www.hedgefundlawblog.com), which focuses on legal issues that impact the hedge fund community. For more information please visit us at: www.colefrieman.com.


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

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

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

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

Alternative Mutual Funds Overview

Hedge Fund Strategies Employed by Mutual Funds

Since the financial crisis of 2008, a growing number of retail investors have sought access to more sophisticated investment strategies to protect against downside risk.  Most retail investors are not eligible to invest directly in hedge funds so they have turned to mutual funds that employ alternative investment strategies to achieve greater diversification.  This increasing demand for alternative mutual funds is also fueled by hedge fund investors seeking greater transparency and liquidity, as well as more conservative investment strategies that are typically utilized by mutual funds.  Additionally, the Dodd-Frank Act restricts certain individuals and institutions from investing in hedge funds, which will likely force these investors to seek out “hedge-like” investment vehicles in which to invest the money formerly invested in hedge funds.  To accommodate these new investors and the converging demands of retail and hedge fund investors, investment managers have developed mutual funds designed to mimic hedge fund investment strategies to the extent permitted under federal securities laws.

What is an Alternative Mutual Fund?

An alternative mutual fund is a professionally managed, pooled investment vehicle, designed to provide individual investors with access to investment strategies that offer non-correlated returns and diversification benefits. Generally, the goal of alternative mutual funds is to minimize portfolio volatility and preserve return objectives. Strategies utilized by alternative mutual funds include traditional hedge fund investment strategies such as long-short, market neutral, arbitrage and merger/arbitrage strategies.

Starting an Alternative Mutual Fund – Legal Considerations

Some of the operational and legal steps for launching a mutual fund are similar to starting a hedge fund, but there are some important differences. The high-level legal steps to launch an alternative mutual fund include:

  1. Register the fund manager as an investment adviser with the SEC.
  2. Form a corporation or a business trust (or leveraging an existing business trust) – a mutual fund will typically be established as a Delaware statutory trust or Massachusetts business trust.
  3. Prepare and file Form N-1A with the SEC to simultaneously register the fund as an investment company under the Investment Company Act of 1940 (’40 Act) and register fund shares under the Securities Act of 1933. This filing includes the fund’s prospectus, which discloses the fund’s investment objective, investment strategies and principal investment risks, as well as other material information regarding the fund manager and the fund.
  4. Seed the fund (or fund family) with at least $100,000 as required by the ’40 Act.
  5. Choose a board of directors (or trustees). While board sizes vary, the ’40 Act requires that at least 40% of the directors on a board be independent. Typically, independent directors hold a majority (75%) of board seats in nearly 90% of fund complexes.
  6. Negotiate agreements with fund service providers, including a custodian, prime broker (for fund derivative transactions), transfer agent, fund accountant, independent auditor, administrator, financial printer, and distributor. [Note: some hedge fund service providers also provide services to mutual funds, but in general the service providers are likely to be different.]
  7. Draft fund compliance policies and procedures reasonably designed to detect, prevent, and resolve violations of federal securities laws.
  8. Make requisite blue sky filings (or notice filings) in states where fund shares will be sold.

Other Considerations

The ‘40 Act also imposes leverage and other investment restrictions on mutual funds. While some of these restrictions can be addressed by investing in ETFs and other investments, it is imperative that investment managers consult a ’40 Act attorney prior to launching an alternative mutual fund to fully understand the implications of regulatory restrictions on portfolio management.


Investor preference and regulatory developments are driving the convergence of mutual funds and hedge funds and resulting in a rapidly growing demand for mutual funds that employ hedge fund strategies. This demand is being met by the emergence of alternative mutual funds. The process of launching an alternative mutual fund varies depending on the complexity of the fund, however, these steps along with others can typically be completed in six months with the assistance of a seasoned ’40 Act attorney and other fund service providers.  For more information on registering a mutual fund and the regulations governing mutual funds, please see the SEC’s Investment Company Registration and Regulation Package or contact us.


Cole-Frieman & Mallon LLP is a boutique investment management law firm with an alternative mutual funds law practice. Aisha Hunt, a Partner and the head of the ’40 Act practice at Cole-Frieman & Mallon LLP, can be reached directly at 415-762-2854.