Tag Archives: hedge fund

Massachusetts Proceeds Against Fund Manager Using Expert Networks

Revocation of Investment Adviser License & Disgorgement of Profits

Managers are becoming more aware of the various securities laws and compliance issues involved with the use of expert networks.  While the SEC has recently been active in this area (both in the RR insider trading complaint and the recent expert network action), the states are also becoming more aware of the potential issues involved with expert networks.  Recently the Massachusetts Securities Division instituted an administrative complaint against a Massachusetts state registered fund manager who utilized expert networks to gain inside information.  This post will provide an overview of that compliant.

Overview

James Silverman was registered as an investment adviser representative for a Massachusetts registered IA firm which was managing the RRC Bio Fund, LP (“Fund”).  The IA firm was subject to a routine announced examination by the Massachusetts Securities Division (“Division”).  During that routine examination, the examiners found a number of violations of the various state securities laws including the fact that Silverman was trading on inside information obtained from an expert network firm.

The examiners found that Silverman started using the expert network firm after the Fund suffered a long period of losses.  After utilizing the expert network firm, the Fund posted consecutive years of gains in excess of 50%.  During the course of the relationship with the expert network firm, the Fund paid $80,000 a year to the firm so that Silverman could have access to certain consultants in the biotechnology industry.  Many of these consultants were either insiders or otherwise bound to confidentiality agreements with respect to their activities in the industry.  The expert network firm did not monitor their consultants in any way but, pursuant to the firm’s policies, the consultants’ had a duty to identify and avoid any disclosure that would violate a confidentiality agreement.  The agreement that Silverman signed with the expert network fir

m provided that Silverman agreed not to elicit or otherwise obtain any “material nonpublic or otherwise confidential information” from the expert consultants.

In addition to the insider trading, Silverman and the IA firm engaged in either blatantly illegal or egregiously sloppy business practices, especially once the examination began.  For example, the complaint states that Silverman did the following:

  • deleted notes containing study results prior to producing the notes to the Division in response to its subpoena
  • deleted certain documents and correspondence
  • failed to maintain required records
  • made false filings with the Division
  • violated minimum financial requirements
  • violated document retention requirements
  • improperly assessed performance fees
  • left client data vulnerable

The Order

The consequences for breaking the securities laws, whether at the state or federal level, are severe.  The Enforcement Section of the Massachusetts Securities Division sought the following items in its action against Silverman:

  • accounting and disgorgement of all ill-gotten gains as a result of insider trading
  • disgorgement of direct and indirect remuneration from the insider trading
  • revocation of the IA registration for the firm and Silverman
  • enjoining Silverman from performing any investment advisory services for compensation on behalf of any person or entity within the Commonwealth of Massachusetts
  • imposition of a fine

Protecting Your Firm – Developing Compliance Programs

This case and the earlier SEC actions do not mean that fund managers can no longer use expert network firms.  However, managers need to be careful and the best practice is for managers to develop compliance policies for all interaction with expert network firms.  These policies and procedures need to be tailored to the business practices of each manager and need to be followed consistently.

****

Cole-Frieman & Mallon LLP is a boutique hedge fund law firm.  We provide hedge fund compliance and registration services to SEC and state registered hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.

zp8497586rq

Form ADV Part 2 Questions & Answers

Leave a reply

SEC Provides Guidance on ADV Part 2

Many SEC and state registered investment advisers have completed the new Form ADV 2 as part of the annual updating amendment.*  The SEC recently published guidance with respect to certain aspects of the new form.  The question and answer style guidance deals with such topics as: IARD submission deadlines, delivery of the brochure, and the Part 2B brochure supplement (for certain “supervised persons” with client contact).  For hedge fund managers, the most important points include:

  • Fund managers do not need to provide investors in the fund with copies of Form ADV Part 2.
  • In Part 2A, hedge fund managers are required to only briefly discuss the major risks of the fund’s investment strategy and then may direct investors to the fund’s offering documents for more detailed information on the risks of the program.
  • Offshore hedge fund managers who only provide advice to offshore funds do not have to file or prepare an ADV Part 2.
  • Part 2B Brochure Supplements (for “supervised persons”) do not need to be delivered until later this year.

Below we have reprinted some of the more applicable portions of the guidance.  The full set of questions and answers can be found here.

For additional information on preparation and delivery of the new form, please also see Form ADV Instructions for Part 2A.

* Note: most state registered advisers were required to complete the new Part 2 by March 31 as required by the state securities administrator.  Some states, such as Colorado, do not require the new Part 2 until later this year.  If you are a state or SEC registered adviser who has not submitted the new Part 2, please feel free to contact us and we can help you with this process.

****

Updated as of March 18, 2011

Staff Responses to Questions About Part 2 of Form ADV

The staff of the Division of Investment Management has prepared the following responses to questions about Part 2 of Form ADV, under the Investment Advisers Act of 1940 and expects to update from time to time our responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Securities and Exchange Commission, and the Commission has neither approved nor disapproved this information. The adopting release for the most recent Amendments to Form ADV (dated July 28, 2010, the “Adopting Release”) can be found at: http://www.sec.gov/rules/final/2010/ia-3060.pdf.

Compliance Dates

Question I. 1

Q: The Commission has extended the compliance dates for certain advisers to deliver Part 2B, the brochure supplement. What are the new compliance dates?

A: On December 28, 2010, the Commission extended the compliance dates for delivery of Part 2B for certain investment advisers. (See IA-3129 athttp://www.sec.gov/rules/final/2010/ia-3129.pdf)

  • All advisers registered with the Commission as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011, to prepare and begin delivering brochure supplements to new and prospective clients and have until September 30, 2011 to deliver brochure supplements to existing clients. The compliance dates for delivering brochure supplements for all other advisers registered with the Commission as of December 31, 2010 remain unchanged. Upon filing their new brochures through the IARD, they must start to provide to their new clients a brochure supplement for a supervised person before or at the time that supervised person begins to provide advisory services to the client. In addition, they must deliver brochure supplements to their existing clients within 60 days of when they are required to file their new brochures with the Commission.
  • All newly registered advisers filing their applications for registration from January 1, 2011 through April 30, 2011, have until May 1, 2011 to prepare and begin delivering brochure supplements to new and prospective clients and have until July 1, 2011 to deliver brochure supplements to existing clients. The compliance dates for delivering brochure supplements for newly registered advisers filing applications for registration after April 30, 2011 remain unchanged. (Posted March 18, 2011)

Question I. 2

Q: Has the Commission also extended the compliance dates for filing and delivering Part 2A, the brochure (“new brochure”)?

A: No. The compliance dates for delivering new brochures remain unchanged for both newly registered advisers and existing advisers.

  • Each adviser currently registered with the Commission whose fiscal year ends on or after December 31,

    2010 must include in its next annual updating amendment to its Form ADV a new brochure. (Rule 204-1(c)) Upon filing its new brochure with the Commission, an adviser must (i) begin to deliver the new brochure to new clients and prospective clients in lieu of its old brochure in accordance with its obligations under rule 204-3, and (ii) deliver to its existing clients within 60 days of when an adviser is required to file it. (Rule 204-3(g)).

  • Each adviser applying for registration with the Commission after January 1, 2011 must file a brochure or brochures that meet the requirements of amended Part 2A as part of the application for registration on Form ADV. (Rule 203-1(b)). Such an adviser must, upon registering, begin to deliver to its clients and prospective clients the new brochure or brochures in accordance with rule 204-3(a). (Posted March 18, 2011)

Preparing Brochures

***

Question II. 4

Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses pooled investment vehicles as a significant investment strategy or method of analysis to duplicate the risk disclosures contained in a prospectus or other offering document for the pooled investment vehicle?

A: An adviser may satisfy the requirement of Item 8.B by providing a brief explanation of the material risks for each strategy and referring clients to the prospectus, offering memoranda, or other documents that a client participating in the pool will or has received that set out a more detailed discussion of risks. (Posted March 18, 2011)

Question II. 5

Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses multiple investment strategies or methods of analysis to explain the material risks for each significant investment strategy or method of analysis in the brochure?

A: Yes, an investment adviser using multiple significant investment strategies or methods of analysis must explain the risks for each significant investment strategy or method of analysis it uses. An adviser using multiple strategies or methods of analysis may satisfy the requirements of Item 8.B by summarizing the strategies and methods and their material risks and referring clients and prospective clients to a separate disclosure document that the client has or will receive that sets out a more detailed explanation of the material risks of investment strategies or methods of analysis that are or will be used to manage the client’s account. (Posted March 18, 2011)

Question II. 6

Q: The staff has previously stated its view that an offshore adviser to an offshore private fund does not have an obligation to deliver a brochure under rule 204-3 to the offshore fund or to any investors in an offshore private fund it advises. ABA Subcommittee on Private Investment Entities, SEC Staff Letter (Aug. 10, 2006). The note to rule 203-1 states that an adviser that does not have to deliver a brochure to any clients does not have to prepare or file a brochure with the Commission. Does the 2006 staff response and the note work together such that an offshore adviser whose only clients are offshore funds would not have to prepare or file a brochure as part of its Form ADV?

A: Yes. (Posted March 18, 2011)

Filing and Delivering Brochures

***

Question III. 2

Q: Rule 204-3 requires an adviser to deliver a brochure and one or more brochure supplements to each client or prospective client. Does rule 204-3 require an adviser to a hedge or other private fund to deliver a brochure and supplement(s) to investors in the private fund?

A: Rule 204-3 requires only that brochures be delivered to “clients.” A federal court has stated that a “client” of an investment adviser managing a hedge fund is the hedge fund itself, not an investor in the hedge fund. (Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006)). An adviser could meet its delivery obligation to a hedge fund client by delivering its brochure to a legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity. (Posted March 18, 2011)

Question III. 3

Q: Must an adviser to a hedge fund or other private fund file as part of its Form ADV the brochure it is required to deliver to the hedge fund or other private fund?

A: Yes. (Posted March 18, 2011)

Covered Persons for Brochure Supplements

***

Preparing Brochure Supplements

***

Delivery of Brochure Supplements

***

****

Cole-Frieman & Mallon LLP is a boutique hedge fund law firm.  We provide investment adviser registration and compliance services to SEC and state registered hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.

Important Hedge Fund Articles

Leave a reply

As of the date we published this list of important hedge fund articles, the Hedge Fund Law Blog has over 600 posts.  In order to highlight some of the more important items on this website we have created the following list of articles which we think will be useful for most of our readers.  Articles without links will be forthcoming and we look forward to hearing your feedback on what information you would like to see in the future.  The categories include:

  1. Basics & Structure
  2. Offering Documents
  3. Service Providers
  4. Investment Adviser Regulation
  5. Futures & Commodities Regulation
  6. Marketing & Advertising
  7. Operational Issues

We would also like to remind managers who are thinking of starting a fund to view our Start Up Presentation.

BASICS & STRUCTURE

OFFERING DOCUMENTS

INVESTMENT ADVISER

FUTURES & COMMODITIES

MARKETING & ADVERTISING

OPERATIONAL ISSUES

ERISA

LAWS & REGULATIONS

OTHER ISSUES

FOREX

COLE-FRIEMAN & MALLON LLP QUARTERLY NEWSLETTERS

****

Cole-Frieman & Mallon LLP, a hedge fund law firm, sponsors the Hedge Fund Law Blog.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Financial Reform Bill Passes Senate

Leave a reply

As has been widely reported, the Senate passed the Financial Reform Bill setting the stage for President Obama to sign the bill within the next week.  With respect to investment advisors, one of the central items is the private equity and hedge fund registration requirement.  We will be reporting further on the bill in the coming days and weeks.

Pay to Play Rule Adopted by SEC

Leave a reply

Investment Advisers Act Rule 206 (4)-5

Today the SEC approved new Rule 206 (4)-5 under the Investment Advisers Act of 1940 which prohibits investment advisers from making political contributions in certain situations.  The new rule has three essential elements:

  • Investment advisory firms and employees are prohibited from managing assets for compensation if the adviser or employees make political contributions to an elected official who could influence the allocation of assets to the adviser.  The prohibition would last two years from the date of the political contribution.
  • Investment advisory firms and employees are prohibited from coordinating contributions from numerous sources to an elected official who could influence the allocation of assets to the adviser.
  • Investment advisory firms are prohibited from hiring third parties to solicit assets from government clients unless such third parties are registered with the SEC as investment advisers or broker-dealers.

While this rule may not be applicable to certain hedge fund managers and other investment advisers, it is important that all firms implement policies and procedures to make sure that the firm and employee’s activities do not inadvertently fall outside the regulations.  It is important that private equity fund managers, who will likely be subject to investment adviser registration under the Wall Street Reform and Consumer Protection Act, understand that this will be applicable to their business as well.

The text of the new rule has not yet been released.

For more information, please see the SEC press release.  SEC Chairman Mary Shapiro also provided comments on the new rule.

****

Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides comprehensive regulatory support and hedge fund registration.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Hedge Fund Events July 2010

Leave a reply

The following are various hedge fund events happening this month.  Please email us if you would like us to add your event to this list.

****

July 1

July 6-7

July 6-7

July 8

July 9

July 12-14

July 12-15

July 13

July 13-14

July 13-15

July 14-15

July 14-16

July 15

July 15

July 15

  • Sponsor: Seattle Alternative Investment Association
  • Event: The China Century
  • Location: Seattle, WA

July 19

July 19-20

July 19-21

July 19-21

July 20

  • Sponsor: Southeastern Hedge Fund Association
  • Event: SEHFA Barbeque
  • Location: Atlanta, GA

July 21

July 21

July 21-22

July 21-23

July 21-23

July 22

July 22

July 22-23

July 22-23

July 27

July 27

July 27

July 27

July 27-28

July 28

  • Sponsor: Bay Area Hedge Funds
  • Event: Bay Area Hedge Fund Roundtable
  • Location: San Francisco, CA

****

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

Hedge Fund Law Blog Notes For Week

Leave a reply

Adviser Registration, Accredited Investors, Carried Interest, Insider Trading, Cap and Trade

Below are some thoughts on some of the major issues over the last couple of weeks.

Have a great Memorial Day Weekend!

****

Hedge Fund Regulation and Registration – While the Private Fund Investment Advisers Registration Act of 2010 was passed this month in the Senate, there has not been as much discussion in the news about this issue and manager registration.  I expected that we would hear more, especially with regard to the following issues:

  • Section 407 – Exemption of VC Funds
  • Section 408 – Exemption from Reporting Requirements for Private Equity Funds
  • Section 410 – State Authority for Managers with AUM of up $100MM (this is generally a bad idea in my opinion and we will be writing a post about this soon…)
  • Section 412 – Adjusting Definition of Accredited Investor (see also below)

I imagine we will hear more as the Senate and House begin to reconcile their two bills and before President Obama signs the final Financial Reform bill into law, which some think may happen before the July 4th holiday.

**

Definition of Accredited Investor – The Senate version of the Financial Reform bill will change the definition of an “accredited investor” in the future.  Generally “accredited investors” are those individuals with a net worth of $1,000,000.  Under current regulations, individuals can include the equity in their private residence when determining their net worth.  In the future, they will need to exclude the equity in their private residence when determining their net worth.  This potentially may have a deleterious effect on the hedge fund industry, but also on other industries which rely on private placements.

According to some sources, at least one Senator is asking that the definition of accredited investor be expanded to include state and local governments.  I agree with this approach – if the Senate is taking the time to mess with the definition right now then the Senate should spend a little time addressing other issues.  For instance, the definition of accredited investor should also be expanded to include Native American Tribes.  I have specifically talked with the SEC staff about this issue a couple of years ago and they have categorically refused to issue a no-action or other interpretive release on this issue – we believe that now is the time to include Native American Tribes in the definition of accredited investor.

For more information, please see the Native American Capital, LP policy briefing and the National Congress of American Indians letter to the SEC on this issue.

See also Perkins Coie discussion of this issue.

**

Carried-Interest Issue -it looks like the carried interest tax laws will be changing in 2011.  In addition to hedge fund managers, managers to other pooled investment vehicles will be greatly affected (such as VC and private equity fund managers, as well as real estate fund managers).  The change in the laws will likely affect more VC and PE managers than hedge fund managers because of the nature of the underlying gains in the respective investment vehicles (VC and PE fund managers typically have mostly long term capital gains and hedge fund managers may have a combination of long term and short term capital gains).  There is likely to be a large number of industry groups which come out in opposition to the changes in the next couple of weeks.

We do not agree with the proposed changes – it seems as though Congress is specifically attacking an easy target  in the investment management community.

**

Insider Trading Issue – just today the SEC announced an insider trading case brought against a hedge fund manager Pequot Capital Management, Inc., and its Chairman and CEO Arthur Samberg.  This issue has been thoroughly discussed most recently after the Galleon affair.  Hedge funds managers and compliance personnel need to be even more vigilant about establishing comprehensive compliance programs and making sure that traders are not engaging in insider trading.  Please see our previous thoughts on Hedge Funds and Insider Trading.

**

Green Tech/ Cap and Trade – clean and green tech continue to gain traction in the investment management industry as a bill which would create federal carbon cap and trade system was introduced recently.  Next weekend the South Asian Bar in San Francisco will have a panel discussion. entitled “Green 2 Green: Carbon Credits, Renewable Energy Certificates and the New Markets driving the Clean Energy Economy”.  According to the program,

Attendees will receive a quick primer on market-based regulatory responses to climate change designed to foster the development of renewable power plants and spur long term investment in clean and sustainable energy. Panelists will address state and federal legislation setting green house gas emission caps, establishing renewable portfolio standards, and creating new markets for carbon credits and renewable energy certificates. We’ll discuss the regulatory origins and key characteristics of these and other green commodities, as well as the structure and rules of markets created to transition industry and consumers from the present carbon economy toward tomorrow’s clean energy economy.

Mallon P.C. will be represented at the panel discussion so please come and talk to us there.

****

Other related hedge fund law articles:

Cole-Frieman & Mallon LLP works with many managers who invest in various commodities and with groups who work in the clean tech space.  Mallon P.C. is a top hedge fund law firm which provides comprehensive formation and regulatory support for hedge fund managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Private Fund Investment Advisers Registration Act of 2010

2 Replies

Full Text of PFIARA of 2010 (requiring Hedge Fund Registration)

The following is the full text of the Private Fund Investment Advisers Registration Act of 2010 which was part of the recently passed Senate financial regulation bill.  The central part of this act eliminates the Section 203(b)(3) exemption for registration for hedge fund managers (see Section 403).  The act also requires hedge fund managers to provide the SEC with certain information about their trading program and investment positions (see Section 404).

****

TITLE IV—REGULATION OF ADVISERS TO HEDGE FUNDS AND OTHERS

SEC. 401. SHORT TITLE.

This title may be cited as the ‘‘Private Fund Investment Advisers Registration Act of 2010’’.

SEC. 402. DEFINITIONS.

(a) INVESTMENT ADVISERS ACT OF 1940 DEFINITIONS.—Section 202(a) of the Investment Advisers Act of1940 (15 U.S.C. 80b–2(a)) is amended by adding at the end the following:

‘‘(29) The term ‘private fund’ means an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3), but for section 3(c)(1) or 3(c)(7) of that Act.

‘‘(30) The term ‘foreign private adviser’ means any investment adviser who—

‘‘(A) has no place of business in the United States;

‘‘(B) has, in total, fewer than 15 clients who are domiciled in or residents of the United States;  on DSKH9S0YB1PROD with BILLS

‘‘(C) has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than $25,000,000, or such higher amount as the Commission may, by rule, deem appropriate in accordance with the purposes of this title; and

‘‘(D) neither—

‘‘(i) holds itself out generally to the public in the United States as an investment adviser; nor

‘‘(ii) acts as—

‘‘(I) an investment adviser to any investment company registered under the Investment Company Act of 1940; or

‘‘(II) a company that has elected to be a business development company pursuant to section 54 of the Investment Company Act of 1940 (15 U.S.C. 80a–53), and has not withdrawn its election.’’.

(b) OTHER DEFINITIONS.—As used in this title, the terms ‘‘investment adviser’’ and ‘‘private fund’’ have the same meanings as in section 202 of the Investment Advisers Act of 1940, as amended by this title.

SEC. 403. ELIMINATION OF PRIVATE ADVISER EXEMPTION; LIMITED EXEMPTION FOR FOREIGN PRIVATE ADVISERS; LIMITED INTRASTATE EXEMPTION.

Section 203(b) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3(b)) is amended—

(1) in paragraph (1), by inserting ‘‘, other than an investment adviser who acts as an investment adviser to any private fund,’’ before ‘‘all of whose’’;

(2) by striking paragraph (3) and inserting the following:

‘‘(3) any investment adviser that is a foreign private adviser;’’; and

(3) in paragraph (5), by striking ‘‘or’’ at the end; (4) in paragraph (6), by striking the period at the end and inserting ‘‘; or’’; and (5) by adding at the end the following: ‘‘(7) any investment adviser, other than any entity that has elected to be regulated or is regulated as a business development company pursuant to section 54 of the Investment Company Act of 1940 (15 U.S.C. 80a–54), who solely advises— ‘‘(A) small business investment companies that are licensees under the Small Business Investment Act of 1958; ‘‘(B) entities that have received from the Small Business Administration notice to proceed to qualify for a license as a small business investment company under the Small Business Investment Act of 1958, which notice or license has not been revoked; or ‘‘(C) applicants that are affiliated with 1 or more licensed small business investment companies described in subparagraph (A) and that have applied for another license under the Small Business Investment Act of 1958, which application remains pending.’’.

SEC. 404. COLLECTION OF SYSTEMIC RISK DATA; REPORTS; EXAMINATIONS; DISCLOSURES.

Section 204 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–4) is amended—

(1) by redesignating subsections (b) and (c) as subsections (c) and (d), respectively; and

(2) by inserting after subsection (a) the following:

‘‘(b) RECORDS AND REPORTS OF PRIVATE FUNDS.—

‘‘(1) IN GENERAL.—The Commission may require any investment adviser registered under this title—

‘‘(A) to maintain such records of, and file with the Commission such reports regarding, private funds advised by the investment adviser, as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the Financial Stability Oversight Council (in this subsection referred to as the ‘Council’); and

‘‘(B) to provide or make available to the Council those reports or records or the information contained therein.

‘‘(2) TREATMENT OF RECORDS.—The records and reports of any private fund to which an investment adviser registered under this title provides investment advice shall be deemed to be the records and reports of the investment adviser.

‘‘(3) REQUIRED INFORMATION.—The records and reports required to be maintained by a private fund and subject to inspection by the Commission under this subsection shall include, for each private fund advised by the investment adviser, a description of—

‘‘(A) the amount of assets under management and use of leverage;

‘‘(B) counterparty credit risk exposure;

‘‘(C) trading and investment positions;

‘‘(D) valuation policies and practices of the fund;

‘‘(E) types of assets held;

‘‘(F) side arrangements or side letters, whereby certain investors in a fund obtain more favorable rights or entitlements than other investors;

‘‘(G) trading practices; and

‘‘(H) such other information as the Commission, in consultation with the Council, determines is necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk, which may include the establishment of different reporting requirements for different classes of fund advisers, based on the type or size of private fund being advised.

‘‘(4) MAINTENANCE OF RECORDS.—An investment adviser registered under this title shall maintain such records of private funds advised by the investment adviser for such period or periods as the Commission, by rule, may prescribe as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk.

‘‘(5) FILING OF RECORDS.—The Commission shall issue rules requiring each investment adviser to a private fund to file reports containing such information as the Commission deems necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.

‘‘(6) EXAMINATION OF RECORDS.—

‘‘(A) PERIODIC AND SPECIAL EXAMINATIONS.—The Commission—

‘‘(i) shall conduct periodic inspections of all records of private funds maintained by an investment adviser registered under this title in accordance with a schedule established by the Commission; and

‘‘(ii) may conduct at any time and from time to time such additional, special, and other examinations as the Commission may prescribe as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk.

‘‘(B) AVAILABILITY OF RECORDS.—An investment adviser registered under this title shall make available to the Commission any copies or extracts from such records as may be prepared without undue effort, expense, or delay, as the Commission or its representatives may reasonably request.

‘‘(7) INFORMATION SHARING.—

‘‘(A) IN GENERAL.—The Commission shall make available to the Council copies of all reports, documents, records, and information filed with or provided to the Commission by an investment adviser under this subsection as the Council may consider necessary for the purpose of assessing the systemic risk posed by a private fund.

‘‘(B) CONFIDENTIALITY.—The Council shall maintain the confidentiality of information received under this paragraph in all such reports, documents, records, and information, in a manner consistent with the level of confidentiality established by the Commission pursuant to paragraph (8). The Council shall be exempt from section 552 of title 5, United States Code, with respect to any information in any report, document, record, or information made available, to the Council under this subsection.’’.

‘‘(8) COMMISSION CONFIDENTIALITY OF REPORTS.—Notwithstanding any other provision of law, the Commission may not be compelled to disclose any report or information contained therein required to be filed with the Commission under this subsection, except that nothing in this subsection authorizes the Commission—

‘‘(A) to withhold information from Congress, upon an agreement of confidentiality; or

‘‘(B) prevent the Commission from complying with—

‘‘(i) a request for information from any other Federal department or agency or any self-regulatory organization requesting the report or information for purposes within the scope of its jurisdiction; or

‘‘(ii) an order of a court of the United States in an action brought by the United States or the Commission.

‘‘(9) OTHER RECIPIENTS CONFIDENTIALITY.— Any department, agency, or self-regulatory organization that receives reports or information from the Commission under this subsection shall maintain the confidentiality of such reports, documents, records, and information in a manner consistent with the level of confidentiality established for the Commission under paragraph (8).

‘‘(10) PUBLIC INFORMATION EXCEPTION.—‘‘(A) IN GENERAL.—The Commission, the Council, and any other department, agency, or self-regulatory organization that receives information, reports, documents, records, or information from the Commission under this subsection, shall be exempt from the provisions of section 552 of title 5, United States Code, with respect to any such report, document, record, or information. Any proprietary information of an investment adviser ascertained by the Commission from any report required to be filed with the Commission pursuant to this subsection shall be subject to the same limitations on public disclosure as any facts ascertained during an examination, as provided by section 210(b) of this title.

‘‘(B) PROPRIETARY INFORMATION.—For purposes of this paragraph, proprietary information includes—

‘‘(i) sensitive, non-public information regarding the investment or trading strategies of the investment adviser;

‘‘(ii) analytical or research methodologies;

‘‘(iii) trading data;

‘‘(iv) computer hardware or software containing intellectual property; and

‘‘(v) any additional information that the Commission determines to be proprietary.

‘‘(11) ANNUAL REPORT TO CONGRESS.—The Commission shall report annually to Congress on how the Commission has used the data collected pursuant to this subsection to monitor the markets for the protection of investors and the integrity of the markets.’’.

SEC. 405. DISCLOSURE PROVISION ELIMINATED.

Section 210(c) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–10(c)) is amended by inserting before the period at the end the following: ‘‘or for purposes of assessment of potential systemic risk’’.

SEC. 406. CLARIFICATION OF RULEMAKING AUTHORITY.

Section 211 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–11) is amended—

(1) in subsection (a), by inserting before the period at the end of the first sentence the following:

‘‘, including rules and regulations defining technical, trade, and other terms used in this title, except that the Commission may not define the term ‘client’ for purposes of paragraphs (1) and (2) of section 206 to include an investor in a private fund managed by an investment adviser, if such private fund has entered into an advisory contract with such adviser’’; and

(2) by adding at the end the following:

‘‘(e) DISCLOSURE RULES ON PRIVATE FUNDS.—The Commission and the Commodity Futures Trading Commission shall, after consultation with the Council but not later than 12 months after the date of enactment of the Private Fund Investment Advisers Registration Act of 2010, jointly promulgate rules to establish the form and content of the reports required to be filed with the Commission under subsection 204(b) and with the Commodity Futures Trading Commission by investment advisers that are registered both under this title and the Commodity Exchange Act (7 U.S.C. 1a et seq.).’’.

SEC. 407. EXEMPTION OF VENTURE CAPITAL FUND ADVISERS.

Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3) is amended by adding at the end the following:

‘‘(l) EXEMPTION OF VENTURE CAPITAL FUND ADVISERS.—No investment adviser shall be subject to the registration requirements of this title with respect to the provision of investment advice relating to a venture capital fund. Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules to define the term ‘venture capital fund’ for purposes of this subsection.’’.

SEC. 408. EXEMPTION OF AND RECORD KEEPING BY PRIVATE EQUITY FUND ADVISERS.

Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3) is amended by adding at the end the following:

‘‘(m) EXEMPTION OF AND REPORTING BY PRIVATE EQUITY FUND ADVISERS.—

‘‘(1) IN GENERAL.—Except as provided in this subsection, no investment adviser shall be subject to the registration or reporting requirements of this title with respect to the provision of investment advice relating to a private equity fund or funds.

‘‘(2) MAINTENANCE OF RECORDS AND ACCESS BY COMMISSION.—Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules—

‘‘(A) to require investment advisers described in paragraph (1) to maintain such records and provide to the Commission such annual or other reports as the Commission taking into account fund size, governance, investment strategy, risk, and other factors, as the Commission determines necessary and appropriate in the public interest and for the protection of investors; and

‘‘(B) to define the term ‘private equity fund’ for purposes of this subsection.’’.

SEC. 409. FAMILY OFFICES.

(a) IN GENERAL.—Section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)(11)) is amended by striking ‘‘or (G)’’ and inserting the following:

‘‘; (G) any family office, as defined by rule, regulation, or order of the Commission, in accordance with the purposes of this title; or (H)’’.

(b) RULEMAKING.—The rules, regulations, or orders issued by the Commission pursuant to section 202(a)(11)(G) of the Investment Advisers Act of 1940, as added by this section, regarding the definition of the term ‘‘family office’’ shall provide for an exemption that—

(1) is consistent with the previous exemptive policy of the Commission, as reflected in exemptive orders for family offices in effect on the date of enactment of this Act; and

(2) recognizes the range of organizational, management, and employment structures and arrangements employed by family offices.

SEC. 410. STATE AND FEDERAL RESPONSIBILITIES; ASSET THRESHOLD FOR FEDERAL REGISTRATION OF INVESTMENT ADVISERS.

Section 203A(a)(1) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3a(a)(1)) is amended —

(1) in subparagraph (A)—

(A) by striking ‘‘$25,000,000’’ and inserting ‘‘$100,000,000’’; and

(B) by striking ‘‘or’’ at the end;

(2) in subparagraph (B), by striking the period at the end and inserting ‘‘; or’’; and

(3) by adding at the end the following:

‘‘(C) is an adviser to a company that has elected to be a business development company pursuant to section 54 of the Investment Company Act of 1940, and has not withdrawn its election.’’.

SEC. 411. CUSTODY OF CLIENT ASSETS.

The Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) is amended by adding at the end the following new section:

‘‘SEC. 223. CUSTODY OF CLIENT ACCOUNTS.

‘‘An investment adviser registered under this title shall take such steps to safeguard client assets over which such adviser has custody, including, without limitation, verification of such assets by an independent public accountant, as the Commission may, by rule, prescribe.’’.

SEC. 412. ADJUSTING THE ACCREDITED INVESTOR STANDARD FOR INFLATION.

The Commission shall, by rule—

(1) increase the financial threshold for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, by calculating an amount that is greater than the amount in effect on the date of enactment of this Act of $200,000 income for a natural person (or $300,000 for a couple) and $1,000,000 in assets, as the Commission determines is appropriate and in the public interest, in light of price inflation since those figures were determined; and

(2) adjust that threshold not less frequently than once every 5 years, to reflect the percentage increase in the cost of living.

SEC. 413. GAO STUDY AND REPORT ON ACCREDITED INVESTORS.

The Comptroller General of the United States shall conduct a study on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds, and shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study not later than 1 year after the date of enactment of this Act.

SEC. 414. GAO STUDY ON SELF-REGULATORY ORGANIZATION FOR PRIVATE FUNDS.

The Comptroller General of the United States shall—

(1) conduct a study of the feasibility of forming a self-regulatory organization to oversee private funds; and

(2) submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study, not later than 1 year after the date of enactment of this Act.

SEC. 415. COMMISSION STUDY AND REPORT ON SHORT SELLING.

(a) STUDY.—The Division of Risk, Strategy, and Financial Innovation of the Commission shall conduct a study, taking into account current scholarship, on the state of short selling on national securities exchanges and in the over-the-counter markets, with particular attention to the impact of recent rule changes and the incidence of—

(1) the failure to deliver shares sold short; or

(2) delivery of shares on the fourth day following the short sale transaction.

(b) REPORT.—The Division of Risk, Strategy, and Financial Innovation shall submit a report, together with any recommendations for market improvements, including consideration of real time reporting of short sale positions, to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of the study conducted under subsection (a), not later than 2 years after the date of enactment of this Act.

SEC. 416. TRANSITION PERIOD.

Except as otherwise provided in this title, this title and the amendments made by this title shall become effecttive 1 year after the date of enactment of this Act, except 5 that any investment adviser may, at the discretion of the investment adviser, register with the Commission under the Investment Advisers Act of 1940 during that 1-year period, subject to the rules of the Commission.

****

Other related hedge fund law articles:

Cole-Frieman & Mallon LLP is a hedge fund law firm which provides comprehensive formation and regulatory support for hedge fund managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Hedge Funds Care Event – San Francisco | April 28, 2010

Leave a reply

Gala Event Brings Hedge Fund Community Together to Help Children

The 9th Annual San Francisco Open Your Heart to the Children Benefit will take place at The Bently Reserve in San Francisco on April 28, 2010 from 4:30 p.m. to 9 p.m. The event will raise money for charities dedicated to the prevention and support of abuse toward children. The benefit will include a silent auction, a golf raffle for the Bay Area’s finest golf courses, and appearances from the San Francisco 49ers’ players, coaches and cheerleaders.  This article provides an overview of the event and below we have reprinted a press release issued by the 49ers.

Venue

This year’s event will be held at The Bently Reserve, an eco-friendly conference center for corporate events, business meetings, and private gatherings. The center is equipped with various boardrooms and a historic banking hall that was originally a part of the 1924 Federal Reserve. It is located downtown near the Embarcadero on Battery Street. More than 10 wineries will be serving wine at the event, which will also have cocktails, food, and dessert stations.

Special Guests

The special guests in attendance this year will be the San Francisco 49ers, including the players, coaches, cheerleaders, and alumni. The team partners every year with Hedge Fund Cares to host the annual event to support non-profit child abuse services in the area. The 49ers have helped raise more than $1,000,000 at previous events.

Silent Auction and Golf Raffle

To help raise money, there will be over 50 items up for bidding during the silent auction (electronic brochure to be forthcoming). Companies who donate an item to be auctioned off will be featured in the benefit’s brochure and have their advertising materials displayed at the event. Silent auction donations often include dinners, wine, theater tickets, sporting tickets, vacation packages, golf certificates, spa certificates, and airline certificates. There will also be a golf raffle where there will be an opportunity to win a round on one the Bay Area’s best private golf courses. Raffle tickets will be sold individually for $20 or $100 for six tickets.

Special thanks to Nicole Goddard Photography for donating a professional photography session.  [Note: it is not too late to donate, purchase raffle tickets or purchase event tickets.]

New York’s Open Your Heart to the Children Benefit

While the West Coast event is taking place in April, the 12th Annual New York Open Your Heart to the Children Benefit took place on February 25, 2010 on East 42nd Street in Manhattan. The event, which had 1,100 attendees, topped its total earnings from last year’s event at $2 million.

Call to Action

For more information about the event, including how to register and donate items to the auction, please click here (http://www.hedgefundscare.org/event.asp?eventID=34). Your participation and donations are what make this important event successful every year.

About Hedge Funds Care

Founder Rob Davis established Hedge Funds Care in 1998 with the dream of helping to prevent and treat child abuse. With the encouragement and participation of his colleagues in the hedge fund industry, the first Open Your Heart to the Children Benefit took place in New York in February of 1999 and raised $542,000. What began as a single fundraiser has grown into an international nonprofit organization. Hedge Funds Care has distributed over $21 million through more than 600 grants. In 2010, annual benefits will take place in New York, San Francisco, Chicago, Atlanta, Boston, Denver, Toronto, London and the Cayman Islands. Through the ongoing generosity and commitment of hedge fund industry professionals, HFC continues its rapid expansion. We anticipate future growth to cities in the U.S. and abroad.

****

FOR IMMEDIATE RELEASE
WEDNESDAY, MARCH 31, 2010

CONTACT: LISA GOODWIN
408-595-4957

HEDGE FUNDS CARE AND SAN FRANCISCO 49ERS FOUNDATION HOST 9th ANNUAL DINNER TO RAISE MONEY FOR CHILD ABUSE PREVENTION CHARITIES

49ers ownership and players to participate to raise funds

SANTA CLARA, Calif. – Hedge Funds Care will sponsor the 9th Annual West Coast “Open Your Heart to the Children Benefit” at The Bently Reserve in San Francisco on Wednesday, April 28th at 4:30 p.m. The event will feature a silent auction, raffle, and wine tasting from premier Napa and Sonoma Valley vineyards. San Francisco 49ers Owner John York will be accompanied by several 49ers players, along with 500 people from the West Coast hedge fund industry at this year’s dinner.

Funds raised by the event will be used to distribute grants to existing organizations that address child abuse treatment and prevention in the Bay Area.

“The 49ers Foundation’s mission is to keep kids safe, on track and in school,” said 49ers Owner John York. “The goal of Hedge Funds Care is to quell domestic violence and eradicate child abuse which fits directly with our mission. We have been a part of this event for the past nine years and are looking forward to continuing to raise money and awareness for our youth in need.”

After last year’s event, Dr. Bart Grossman from the University of California at Berkeley School of Social Welfare provided guidance to help Hedge Funds Care allocate funds raised to the following designated agencies: APA Family Support Services, CALICO Center, Community Violence Solutions, Compass Community Services, Contra Costa County Employment and Human Services Department, Edgewood Center for Children and Families, FamiliesFirst, First Place for Youth, La Casa de Las Madres, La Clínica de La Raza, Inc., The Link to Children, San Francisco Child Abuse Prevention Center, San Francisco Court Appointed Advocates, Shelter Network, The University of California – San Francisco, Child Trauma Research Project.

The co-chairs of this year’s West Coast Committee of Hearts, who plan the “Open Your Heart to the Children Benefit,” are Angela Osborne from Blackrock, Elisabeth MacKnight from Conifer Securities, and Todd Goldman from Rothstein Kass.

“We are excited to host this event in San Francisco and to partner with the 49ers Foundation for the ninth time,” Osborne said. “Last year’s event was a tremendous success, raising more than $650,000. We look forward to the continued support of the hedge fund industry for this very worthy cause.”

Hedge Funds Care is an industry alliance formed in 1998 with the sole mission of raising funds to prevent and treat child abuse. To date, the group has distributed over $21 million internationally through local agencies. In addition to the dinner in San Francisco, Hedge Funds Care also holds events in Atlanta, Boston, Chicago, Denver, London, Toronto, Cayman Islands, and New York.

Money will be raised through ticket sales, a golf raffle, and a silent auction. Tables for 10 guests may be purchased for $15,000. Individual tickets are available for $1,750. There are also event corporate sponsorship opportunities. For more information, please call Dan Butchko at 212-991-9600 ext. 336.

About the 49ers Foundation The San Francisco 49ers Foundation is the non-profit community funding arm of the San Francisco 49ers. Now in its 19th year, the San Francisco 49ers Foundation supports development programs for underserved youth that “Keep Kids Safe, On Track and In School.” A significant portion of its funding goes toward family violence prevention and youth development programs that teach leadership and respect. Through the direction of team owners Denise and John York, the 49ers Foundation has raised and distributed over $10 million to non-profit organizations over the last eight years. For more information, visit www.49ers.com.

****

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides legal services through Cole-Frieman & Mallon LLP He can be reached directly at 415-868-5345.

San Francisco Hedge Fund Event | April 14, 2010

Leave a reply

The Bay Area Hedge Fund Roundtable is hosting an event next week.  We have reprinted the information below.

****

Bay Area Hedge Fund Roundtable

presents:

Reasonable Expectations:
Capitalizing On Secular Stock Market Cycles

Featuring:

Ed Easterling

Author of Unexpected Returns and Investment Manager

Ed Easterling is the founder and President of Crestmont Holdings, an Oregon-based investment management and research firm. Crestmont manages a fund of hedge funds and publishes provocative research on the financial markets at www.CrestmontResearch.com. Mr. Easterling has over twenty-five years of alternative investment experience, including private equity, financial markets, and business operations. He is the author of Unexpected Returns: Understanding Secular Stock Market Cycles, a contributing author to Just One Thing (John Wiley & Sons; 2005), and he co-authored chapters in Bull’s Eye Investing by John Mauldin. In addition, Mr. Easterling is a Senior Fellow at the Alternative Investment Center at SMU’s Cox School of Business in Dallas and previously served as a member of the adjunct faculty teaching the course on alternative investments and hedge funds for MBA students. Mr. Easterling holds a BBA in business, a BA in psychology, and an MBA from Southern Methodist University.

April 14, 2010  ♦  3:30 pm  ♦  San Francisco, CA

Registration begins at 3:00

Sens Restaurant @ 4 Embarcadero Center Promenade Level

Admission is $25 – Cash only please, receipts will be provided.

♦ Cocktail Reception to Immediately Follow ♦

The Bay Area Hedge Fund Roundtable (“BAHR”) is an informal (and not for profit) organization of members of the Bay Area hedge fund community that was established in 2001. BAHR strives to provide intelligent, fresh perspectives from industry leaders on current developments and offer an open, casual environment where members can exchange information and expertise and further develop their relationships within the industry.

****

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Cole-Frieman & Mallon LLP He can be reached directly at 415-868-5345.