Cole-Frieman & Mallon LLP 2014 Fourth Quarter Update

COLE_FRIEMAN_LOGO_largewww.colefrieman.com

December 29, 2014

Clients, Friends, Associates:

December is the busiest month of the year for most private fund managers. In addition to end of year administrative upkeep, the regulatory landscape has shifted dramatically over the past twelve months. As a result, year-end processes and 2015 planning are particularly important, especially for General Counsels, CCOs and key operations personnel. As we head into 2015, we have put together this checklist to help managers stay on top of the business and regulatory landscape for the coming year.

This overview includes the following:

  • Annual Compliance & Other Items
  • Annual Fund Matters
  • Annual Management Company Matters
  • Regulatory & Other Changes in 2014
  • Focus for Next Year
  • CFTC Regulation
  • Compliance Calendar

****

Annual Compliance & Other Items:

New Issue Status.  On an annual basis, managers need to confirm or reconfirm the eligibility of investors that participate in initial public offerings or new issues, pursuant to both FINRA Rules 5130 and 5131.  Most managers reconfirm investors’ eligibility via negative consent (i.e. investors are informed of their status on file with the manager and are asked to inform the manager of any changes).  No response operates as consent to the current status.

ERISA Status.  Given the significant problems that can occur from not properly tracking ERISA investors in private funds, we recommend that managers confirm or reconfirm on an annual basis the ERISA status of their investors.  This is particularly important for managers that track the underlying percentage of ERISA funds for each investor.  This reconfirmation can also be obtained through negative consent.

Annual Privacy Policy Notice.  On an annual basis, a registered investment adviser must provide its natural person clients with a copy of its privacy policy, even if there are no changes to the policy.

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

Form ADV Annual Amendment.  Registered investment advisers (“RIAs”), or managers filing as exempt reporting advisers (“ERAs”), with the SEC or a state securities authority must file an annual amendment to Form ADV within 90 days of the end of their fiscal year.  RIAs must provide a copy of the updated Form ADV Part 2A brochure and Part 2B brochure supplement (or a summary of changes with an offer to provide the complete brochure) to each “client”.  Note that for SEC-registered advisers to private investment vehicles, a “client” for purposes of this rule include the vehicle(s) managed by the adviser.  State-registered advisers need to examine their state’s rules to determine who constitutes the “client”.

Switching to/from SEC Regulation.  

SEC Registration. Managers who no longer qualify for SEC registration as of the time of filing the annual amendment must withdraw from SEC registration within 180 days after the end of their fiscal year by filing Form ADV-W.  Managers should consult their state securities authorities to determine whether they are required to register in their home states.  Managers who are required to register with the SEC as of the date of their annual amendment must register with the SEC within 90 days of filing the annual amendment.

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

Practices under the Rule require specific implementation, and RIAs advising separately managed accounts will have different obligations than those generally outlined above.  Certain RIAs also may qualify for exemptions under the Rule, and thus RIAs are encouraged to consult with legal counsel about their specific obligations under the new regime.

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

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

Custody Rule Annual Audit.

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

Advisers to pooled investment vehicles may avoid both the quarterly statements and surprise examination requirements by having audited financial statements prepared in accordance with GAAP by an independent public accountant registered with the Public Company Accounting Oversight Board.  Statements must be sent to the fund or, in certain cases, investors in the fund, within 120 days after the fund’s fiscal year end.  Managers should review their custody procedures to ensure compliance with the rules.  Requirements for state-registrants may differ, and we encourage you to contact us if you have any questions or concerns about your custody arrangements.

California Registered IA. California-registered investment advisers that manage pooled investment vehicles and are deemed to have custody of client assets must, among other things, (1) provide notice of such custody on the Form ADV, (2) maintain client assets with a qualified custodian; (3) engage an independent party to act in the best interest of investors to review fees, expenses and withdrawals; and (4) retain an independent certified public accountant to conduct surprise examinations of assets.  Advisers to pooled investment vehicles may avoid the independent party and surprise examinations requirements by having audited financial statements prepared by an independent public accountant registered with the Public Company Accounting Oversight Board and distributing such audited financial statements to all limited partners (or members or other beneficial owners) of the pooled investment vehicle.

Advisers registered in other states should consult with legal counsel about those states’ custody requirements. 

Annual Re-Certification of CFTC Exemptions.  CPOs and CTAs currently relying on certain exemptions from registration with the CFTC will be required to re-certify their eligibility within 60 days of the calendar year end.  CPOs currently relying on CFTC Regulation 4.13(a)(3) will need to evaluate whether the commodity pool is still eligible for the exemption when taking into account the new CFTC regulated products. 

CPO and CTA Annual Updates. Registered CPOs and CTAs must prepare and file Annual Questionnaires and Annual Registration Updates with the NFA, as well as submit payment for annual maintenance fees and NFA membership dues. Registered CPOs must also prepare and file their fourth quarter report for each commodity pool  on Form CPO-PQR and CTAs must file their fourth quarter report on Form CTA-PR (the NFA recently made some changes to both forms, as described in a Notice to Members). Unless eligible to claim relief under Regulation 4.7, registered CPOs and CTAs must update their disclosure documents periodically, as they may not use any document dated more than 12 months prior to the date of its intended use. Disclosure documents that are materially inaccurate or incomplete must be promptly corrected and the corrected version must be promptly distributed to pool participants.

Schedule 13G/D and Section 16 Filings.  Managers who exercise investment discretion over accounts (including funds and separately managed accounts) that are beneficial owners of 5% or more of a registered voting equity security must report these positions on Schedule 13G.  Schedule 13G filings are updated annually within 45 days of the end of the year. For managers who are also making Schedule 13D filings and/or Section 16 filings, this is an opportune time to review your filings to confirm compliance and anticipate needs for Q1.

Schedule 13D is required when a manager is ineligible to file the short form Schedule 13G, and is due ten days after acquisition of more than 5% beneficial ownership of a registered voting equity security.

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

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

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

SEC Form D.  Form D filings for most funds need to be amended on an annual basis, on or before the anniversary of the initial SEC Form D filing.  Copies of Form D can be obtained by potential investors via the SEC’s website.

Blue Sky Filings.  On an annual basis, a manager should review its blue sky filings for each state to make sure it has met any renewal requirements.  States are increasingly imposing late fees or rejecting late filings altogether.  Accordingly, it is critical to stay on top of filing deadlines for both new investors and renewals.

IARD Annual Fees.  Preliminary annual renewal fees for state registered and SEC registered investment advisers are due by December 12, 2014 (submit payment by December 9 in order for payment to post prior to the deadline).

Pay-to-Play and Lobbyist Rules.  SEC rules disqualify investment advisers, their key personnel and placement agents acting on their behalf, from seeking to be engaged by a governmental client if they have made political contributions.  State and local governments are following suit, including California, which requires internal sales professionals who meet the definition of “placement agents” (people who act for compensation as finders, solicitors, marketers, consultants, brokers, or other intermediaries in connection with offering or selling investment advisory services to a state public retirement system in California) to register with the state as lobbyists, and comply with California lobbyist reporting and regulatory requirements. Investment professionals (employees who spend at least one-third of their time managing the assets or securities of the manager) are statutorily excluded from California’s “placement agent” definition, and thus do not have to register as lobbyists. Note that managers offering or selling investment advisory services to local government entities have to register as lobbyists in the applicable cities and counties.

State laws on lobbyist registration differ widely, so we recommend reviewing your reporting requirements in the states in which you operate to make sure you are in compliance with the rules.

Form PF.  Managers to private funds that are either registered with the SEC or required to be registered with the SEC and have at least $150 million must file Form PF.  Smaller private advisers (fund managers with fewer than $1.5 billion in regulatory AUM) must file Form PF annually within 120 days of their fiscal year end. Larger private advisers (fund managers with $1.5 billion or more in regulatory AUM) must file Form PF within 60 days of the end of each fiscal quarter.

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

“Bad Actor” Recertification Requirement. Last year the SEC adopted bad actor disqualification provisions for Rule 506 of Regulation D. These new provisions provide that an issuer is disqualified from relying on Rule 506(b) and 506(c) of a Regulation D offering if the issuer or any other “covered person” has a relevant disqualifying event. Under the rule, fund managers are required to determine whether they are subject to the bad actor disqualification any time they are offering or selling securities in reliance on Rule 506. The SEC issued a Q&A in December 2013 further clarifying, among other things, that “an issuer may reasonably rely on a covered person’s agreement to provide notice of a potential or actual bad actor triggering event pursuant to, for example, contractual covenants, bylaw requirements, or an undertaking in a questionnaire or certification. However, if an offering is continuous, delayed or long-lived, the issuer must update its factual inquiry periodically through bring-down of representations, questionnaires and certifications, negative consent letters, periodic re-checking of public databases, and other steps, depending on the circumstances.” Fund managers should consult with fund counsel to determine how frequently such an update is required. As a matter of practice, most fund managers should perform such an update at least annually.

Annual Fund Matters:

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

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

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

Fund Expenses.  Managers should wrap up all fund expenses for 2014 if they have not already done so.  In particular, managers should contact their outside legal counsel to obtain accurate and up to date information about legal expenses for inclusion in the NAV for year-end performance.

Annual Management Company Matters:

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

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

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

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

Regulatory & Other Changes in 2014:

Second Circuit Overturns Insider Trading Convictions. On December 10, 2014, the Second Circuit Court of Appeals reversed convictions of two former hedge fund managers for insider trading; a result that may make it harder for prosecutors to prove the crime in the future.  The issue on appeal in the case – United States v. Newman – was whether, in order to be convicted of insider trading, a downstream tippee of the material, non-public information has to know that the insider who leaked the information received a personal benefit from doing so.  The three-judge panel ruled unequivocally that “a jury must find that a tippee knew that the insider disclosed confidential information in exchange for a personal benefit.”  This case will likely impact how far down a tipper/tippee chain prosecutors can go in prosecuting “remote tippees” for insider trading.

FATCA Updates.

Implementing Regulations.  Many jurisdictions in which offshore funds are commonly domiciled, such as the Cayman Islands and the British Virgin Islands, have entered into intergovernmental agreements (“IGAs”) with the U.S. regarding the Foreign Account Tax Compliance Act (“FATCA”).  Such IGAs generally provide that a foreign government office in the country of domicile will collect the information required by FACTA and transmit it to the IRS.  However, until each jurisdiction passes domestic implementing legislation to enact its IGA, it is often unclear exactly what information must be provided, how it will be collected, and to which government entity it should be directed.

In early July, the Cayman Islands passed such implementing legislation as well as corresponding regulations that detail a fund’s obligations.  BVI regulators released implementing legislation in October, but to date it has not been passed.  Managers should remain in touch with both U.S. and offshore fund counsel regarding the regulatory landscape and to plan any changes to the fund’s offering documents, and/or any investor communications that may become necessary.

UK FATCA. The United Kingdom and its Overseas and Crown Dependences, including the British Virgin Islands and the Cayman Islands, have entered into intergovernmental agreements (“UK IGAs”) to implement an automatic exchange of information for tax purposes.  These UK IGAs are similar to FATCA in that they will require investment funds domiciled in those jurisdictions to undertake due diligence and annual reporting on specified UK persons, however, unlike FATCA, there are no withholding taxes assessed in the event of non-compliance.

New Investors to funds will have to identify themselves as either a “Specified UK Person” or “Passive Non-Financial Foreign Entity”.  Funds ought to perform thorough searches on pre-existing investors regarding UK mailing addresses and UK account numbers.  Managers should discuss the implications with their tax advisor and legal counsel.

 Global FATCA. On October 29, over 50 jurisdictions (notably including the Cayman Islands and British Virgin Islands but excluding the United States) signed on to the Organisation for Economic Co-operation and Development’s (“OECD”) Multilateral Competent Authority Agreement (“MCAA”) for the implementation of the automatic exchange of tax information pursuant to the OECD’s Common Reporting Standard.

 Like many IGAs implementing FATCA, the MCAA requires each signatory jurisdiction to implement standardized customer due-diligence procedures and reporting requirements for financial institutions and to automatically exchange the reported information with other governments signatory to the MCAA. The MCAA will be activated when the tax authorities in each signatory jurisdiction confirm to the OECD that they have the necessary implementing legislation in place. The Cayman Islands’ implementing legislation discussed above should suffice for purposes of MCAA implementation as well.

The MCAA signifies the increasing global importance of tax transparency regimes like FATCA, and will result in expanded international tax compliance obligations for financial institutions in signatory jurisdictions. Managers should monitor the OECD’s website (available here) for implementation updates.

SEC Guidance on “Reasonable Steps” to Verify Accredited Investors. We receive a lot of questions about general solicitations, but few managers have actually taken steps to engage in them. In order to engage in general solicitation under Rule 506(c), fund managers must, among other items, take “reasonable steps” to verify that each subscriber for fund interests meets the accredited investor standard. The SEC has previously described “safe harbors” with steps that, if followed, constitute sufficient evaluation of a prospective investor’s accredited investor status. The SEC this year released a new Q&A that addresses common questions regarding income and net worth calculations under the safe harbor rules.   

AIFMD Annex IV Reporting. The European Union’s Alternative Investment Fund Managers Directive (“AIFMD”), generally requires alternative investment fund managers (“AIFMs”) that manage or market alternative investment funds (“AIFs”) to EU investors to comply with heightened reporting and disclosure requirements. Notable is the imposition of a new Annex IV reporting requirement on AIFMs with assets under management of at least €100 million. Annex IV is a large complex filing, similar to the Form PF filed with the SEC, and it must be filed either semiannually or quarterly (depending on various factors) in each EU Member State where AIFs are marketed. The first Annex IV filings are due no later than January 30, 2015.

Annex IV requires substantial information reporting, and although it shares almost 60% of data points with Form PF, a number of differences (including differences in how AUM is calculated) prevent merely transferring Form PF data to Annex IV.

The UK’s Financial Conduct Authority (“FCA”) recently issued guidance specifying that managers marketing an AIF in the UK that is a feeder fund need only report on the assets of the feeder (whose only investment may be the master fund) on Annex IV, significantly reducing the burden of such reporting.

NFA Late Disciplinary Disclosure Fee. This year the NFA began imposing a $1,000 late fee when a firm or individual does not disclose a disciplinary matter upon registration or fails to promptly update an existing registration to disclose a new disciplinary matter. Generally, the NFA considers a matter to have been promptly disclosed if the firm discloses the matter before the NFA discovers the matter and requests disclosure. Managers that are members of the NFA should make sure they have sufficient compliance policies in place to ensure that all disciplinary matters are promptly disclosed.

Cayman Islands Revised Licensing Regime. The Directors Registration and Licensing Law (the “DRLL”), effective as of June 4, 2014, established a new registration and licensing regime for directors of certain Cayman Island regulated entities, including directors of entities registered as mutual funds with the Cayman Islands Monetary Authority (“CIMA” and such entities “Covered Entities”).  The DRLL does not, at present, apply to Covered Entities which are partnerships.  All directors of Covered Entities will need either to (i) register with CIMA; or (ii) apply to be licensed by CIMA in the case of corporate directors, or directors acting for 20 or more entities.

NFA Pursuing Net Capital Requirements for CPOs and CTAs.  The NFA is currently in the process of reviewing comments submitted on a proposal that would require CPOs and CTAs to maintain minimum amounts of capital and follow other customer protection measures. While the full scope of the proposed regulations has yet to be determined, likely changes to the regulatory regime include requirements that (1) CPOs and CTAs maintain a minimum amount of capital and file periodic reports with the NFA to demonstrate compliance; and (2) CPOs retain an independent third party to approve pool disbursements (i.e., a “gatekeeper” requirement).  For more information, please see our article and the NFA notice.

Amendments to FINRA Rule 5131.  FINRA has issued amendments to its Rule 5131, which bans certain practices related to allocating and distributing shares in initial public offerings.  Pursuant to the amendments, FINRA now may exempt a person from any provisions of Rule 5131 if, in light of the facts and circumstances, FINRA deems an exemption to be consistent with the protection of investors and the public interest.  As a result, FINRA members may apply for relief from Rule 5131.

Deferral of Tax on Incentive Fee Arrangements with Offshore Funds. On June 10, 2014, the IRS issued a ruling which may expand the ability of U.S. managers to offshore funds to defer performance-based compensation through nonstatutory stock options and stock-settled stock appreciation rights (“SAR”) in the offshore fund. Managers that want to explore the alternative fee arrangement should discuss the implications with their tax advisor and legal counsel.  More information can be found here.

Focus for Next Year:

Cybersecurity Focus.  Cybersecurity preparedness was a major focus of the SEC’s Office of Compliance Inspections and Examinations in 2014.  Awareness about the dangers posed by inadequate cybersecurity to capital markets is growing.  Both the SEC and the North American Securities Administrators Association (“NASAA”) put particular emphasis on the type of hardware and forms of communication that are used at firms.  Additionally, the SEC and NASAA recommend that firms should have a written policy regarding cybersecurity prevention and how to respond to an attack. Although 2014 is quickly coming to an end, cybersecurity preparedness will continue to be a concern for investment managers.  Managers should make sure they have sufficient policies in place regarding cybersecurity prevention and response.

SEC Charges Fraud and Breach of Fiduciary Duty for Improper Expense Sharing Among Funds. This year, the SEC charged a fund manager, Lincolnshire Management, with violating fraud and policy requirement provisions of the Investment Advisers Act, and breaching its fiduciary duty to a pair of private equity funds that it managed, by sharing portfolio company expenses in a way that benefited one fund over the other.  The factual situation was that each fund owned a separate portfolio company, but the manager integrated the portfolio companies and operated them as one.  However, an SEC investigation found that the expense allocation practices between the two funds occasionally caused one fund to pay more than its fair share of joint expenses that equally benefited both funds’ portfolio companies.  The SEC found that this preferential practice of commingling the funds’ assets violated the manager’s fiduciary duty to the funds.  In September, Lincolnshire Management settled the SEC’s charges for more than $2.3 million.  In light of this settlement, fund managers should be cognizant that fiduciary duties are owed separately to each fund, and that shared but uneven expense allocations may be recognized not only as a breach of fiduciary duties, but also as defrauding the investors that overpaid.

CFTC Regulation:

CFTC Grants Relief for General Solicitation.  After the JOBS Act relaxation of the general solicitation rules, fund managers exempt from CPO registration pursuant to CFTC Regulations 4.13(a)(3) or 4.7 were still prohibited from engaging in general solicitation with respect to the offering of private fund interests under Rule 506(c). However, a recent CFTC Letter 14-116 now allows such fund managers to engage in public offerings under Rule 506(c) without risking their exemptions, subject to the following conditions:

  1. The fund issuing interests must do so under Rule 506(c) or as a reseller under SEC Rule 144A.
  2. The fund manager must file a notice with the CFTC.
  3. The fund manager must represent that it meets all other requirements of the CFTC exemption on which it is relying.

Fund managers utilizing the CFTC Regulation 4.13(a)(3) exemption should take special note of the third requirement listed above. Even under the relief granted by CFTC Letter 14-116, such managers must refrain from marketing funds “as or in a vehicle for trading in the commodity futures or commodity options markets.”

SEC Guidance on Cross-Border Security-Based Swaps. Last year the CFTC issued guidance on cross-border swaps transactions. This guidance did not apply to security-based swaps, which are regulated instead by the SEC. Now the SEC has adopted final rules governing cross-border security-based swaps. This set of rules is the first in what is expected to be a series of SEC rules on these transactions, and it covers only a few select topics, including certain compliance-related rules and which entities must register as security-based swap dealers or security-based major swap participants. Although the rules technically went into effect on September 7, 2014, they will not have practical effect until the SEC adopts additional final rules on topics such as the actual registration process for security-based swap dealers and security-based major swap participants.

 CFTC Announces Streamlined Approach for Considering Requests for Relief From Registration for Delegating CPOs. In May, the CFTC issued a no-action letter adopting a streamlined approach for requesting CPO registration relief. The letter clarifies the conditions under which a CPO otherwise required to register (“Delegating CPO”) may delegate its CPO functions to another CPO (“Designated CPO”) and be relieved from a registration requirement under Section 4m(1) of the Commodity Exchange Act (the “CEA”). To request a relief through the streamlined approach, the Delegating CPO and its Designated CPO must meet a number of criteria. CPOs wishing to request relief under this streamlined approach should consult with their legal counsel.

Segregation of Initial Margin for Non-Cleared Swaps. This year, the CFTC adopted new rules relating to segregation of initial margin with respect to non-cleared swap transactions. Under these new rules, a swap dealer (“SD”) is required to segregate the initial margin of non-cleared swaps at a third-party custodian upon request from its swap counterparties (the “Segregation Rule”). The Segregation Rule requires the SD to notify counterparties of the right to require segregation of initial margin and to provide one or more non-affiliated custodians and price information for each. An SD will be required to obtain confirmation of notification and election prior to entering into any swap transaction, however a counterparty may change its election at any time.  If a counterparty elects segregation, the counterparty and SD must put in place a tri-party custodial agreement between the SD, counterparty and custodian to segregate the initial margin, which must include certain specific CFTC prescribed provisions. More information can be found here.

Compliance Calendar:

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

Deadline Filing
December 12, 2014 IARD Preliminary Renewal Statement payments due (submit by December 9 to ensure processing by deadline)
December 27, 2014 Last day to submit form filings via IARD prior to year-end
December 31, 2014 Review AUM to determine 2015 Form PF filing requirement
January 1, 2015 FATCA cutoff date of the transitional period for entities with “pre-existing obligations”
January 30, 2015 “Annex IV” AIFMD Filing
February 16, 2015 Form 13F due
February 16, 2015 Annual Schedule 13G updates due
February 16, 2015 Annual Form 13H updates due
March 1, 2015 Deadline for Re-Certification of CFTC Exemptions
March 3, 2015 Quarterly Form PF Due for Larger Private Advisers (if applicable)
March 31, 2015 Annual ADV Amendments Due
April 30, 2015 Annual Form PF Due for Smaller Private Advisers (if applicable)
June 30, 2015 Extended FBAR deadline for certain individuals that have signature authority over, but no financial in, one or more foreign financial accounts
Periodic Filings Form D and Blue Sky filings should be current
Periodic Filings Fund managers should perfor “Bad Actor” Recertifications annually

Please feel free to reach out to us if you have any questions regarding your end-of-the-year compliance. We will you all the best as 2014 comes to a close.

Sincerely,

Karl Cole-Frieman, Bart Mallon & Lilly Palmer

****

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, and venture capital fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog which focuses on legal issues that impact the hedge fund community. For more information please visit us at: www.colefrieman.com.

Cole-Frieman & Mallon LLP

One Sansome Street, Suite 1895

San Francisco, CA  94104

     Karl Cole-Frieman                                   Bart Mallon                                             Lilly Palmer

karl@colefrieman.com                 bmallon@colefrieman.com                  lpalmer@colefrieman.com

415-762-2841                                    415-868-5345                                          415-762-2845

This newsletter is published as a source of information only for clients and friends of the firm and should not be construed as legal advice or opinion on any specific facts or circumstances.  The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.  Cole-Frieman & Mallon LLP is a California limited liability partnership and this publication may be considered attorney advertising in some jurisdictions.

Hedge Fund Events December 2014

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.

****

Date: December 3, 2014

Date: December 3-4, 2014

  • Sponsor: RG & Associates
  • Event: Consortium West
  • Location: Los Angeles, CA

Date: December 3-4, 2014

Date: December 3-4, 2014

Date: December 4, 2014

Date: December 4, 2014

Date: December 4, 2014

Date: December 4, 2014

Date: December 4, 2014

Date: December 7-9, 2014

Date: December 7-9, 2014

Date: December 7-9, 2014

  • Sponsor: Opal Financial
  • Event: CLO Summit
  • Location: Dana Point, CA

Date: December 7-9, 2014

Date: December 8, 2014

Date: December 8, 2014

Date: December 8, 2014

Date: December 9, 2014

Date: Decemer 9, 2014

Date: December 9-10, 2014

Date: December 10, 2014

Date: December 10, 2014

Date: December 10, 2014

Date: December 11, 2014

Date: December 11, 2014

Date: December 11, 2014

Date: December 11, 2014

Date: December 11, 2014

****

Cole-Frieman & Mallon provides legal services for hedge fund managers and other groups within the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.

3rd Annual Alternative Investments Summit – November 20th

Please see below information on the Seattle Investment Association event on November 20th.

****

The Seattle Alternative Investment Association, together with the CFA Society of Seattle, invites you to join us on November 20th, 2014 for the 3rd Annual Alternative Investments Summit.  Joshua Harris, Senior Managing Director and Co-Founder of Apollo Global Management will be sharing his views as to “Identifying Private Equity Opportunities in a Challenging Market.”  Mr. Harris is also the Managing Partner of the Philadelphia 76ers, and a member of the Federal Reserve Bank of New York Investors Advisory Committee on Financial Markets.

When: Thursday Eve November 20th, 2014
Registration and Networking: 5:30 to 6:15pm
Program: 6:15 – 7:30pm
Where: The Fairmont Olympic Hotel
411 University Street
Seattle, WA 98101

Special Room Rate for Summit Attendees: $209 per night

More details and registration for this event can be found on our website:
https://www.gosaia.com/events/

Would you like to become a Sponsor for this event?  Contact us: info@gosaia.com

This event is sure to sell out, so please take a moment and register!  If you are already an SAIA member; just click ‘register’ once you log in.

$30 for CFA Members
$75 for Non-Members

We look forward to seeing you on November 20th.

This Event is Co-Hosted with the CFA Society of Seattle.

A special thank you to our Platinum Sponsor, PricewaterhouseCoopers LLP. 

Additional Sponsors include UMB Fund Services, Precedent Consulting, Bank of America Merill Lynch, BlackRock, BNP Paribas and Deutsche Asset & Wealth Management. , 

Academic Sponsors include University of Washington Applied Mathematics and Pacific Lutheran University Science in Finance. 

****

Cole-Frieman & Mallon LLP provides legal advice to the managed futures industry and works with FCMs, IBs, CPOs, and CTAs.  Bart Mallon can be reached directly at 415-868-5345.

Cole-Frieman & Mallon LLP 2014 Third Quarter Update

www.colefrieman.com

October 23, 2014

Clients and Friends:

It has already been a busy fourth quarter, but we would like to take this opportunity to provide you with a brief overview of some of the legal, business and regulatory updates from the third quarter.

Before we begin, Cole-Frieman & Mallon LLP is pleased to announce that Lilly A. Palmer has been promoted to partner, effective October 1, 2014. Lilly’s practice focuses on advising private funds and investment advisers in connection with their structuring, formation and ongoing operational needs, general securities laws matters, and regulatory and compliance issues. Please join us in congratulating Lilly.

JOBS Act Updates

  • CFTC Grants Relief for General Solicitation.  After the JOBS Act relaxation of the general solicitation rules, fund managers exempt from CPO registration pursuant to CFTC Regulations 4.13(a)(3) or 4.7 were still prohibited from engaging in general solicitation with respect to the offering of private fund interests under Rule 506(c). However, a recent CFTC Letter 14-116 now allows such fund managers to engage in public offerings under Rule 506(c) without risking their exemptions, subject to the following conditions:
    1. The fund issuing interests must do so under Rule 506(c) or as a reseller under SEC Rule 144A.
    2. The fund manager must file a notice with the CFTC.
    3. The fund manager must represent that it meets all other requirements of the CFTC exemption on which it is relying.

Fund managers utilizing the CFTC Regulation 4.13(a)(3) exemption should take special note of the third requirement listed above. Even under the relief granted by CFTC Letter 14-116, such managers must refrain from marketing funds “as or in a vehicle for trading in the commodity futures or commodity options markets.”

  • SEC Guidance on “Reasonable Steps” to Verify Accredited Investors. In order to engage in general solicitation under Rule 506(c), fund managers must, among other items, take “reasonable steps” to verify that each subscriber for fund interests meets the accredited investor standard. The SEC has previously described “safe harbors” with steps that, if followed, constitute sufficient evaluation of a prospective investor’s accredited investor status. The SEC has now released a new Q&A that addresses income and net worth calculations under the safe harbor rules, including (among others):
    • How to calculate income when the investor’s income is not reported in USD;
    • How to calculate net worth when an asset is held jointly with a person other than the prospective investor’s spouse;
    • How recent certain documentation must be (including tax documents) to demonstrate sufficient income or net worth; and
    • Alternatives to satisfy the “reasonable steps” requirement if the safe harbors are not available.
  • SIFMA Guidance on “Reasonable Steps” to Verify Accredited Investors. The Securities Industry and Financial Markets Association (“SIFMA”) also released its own guidance  on the “reasonable steps” required to verify accredited investor status. This guidance applies with respect to the written confirmation that third parties can provide to issuers under Rule 506(c)(2)(ii)(C) with respect to the accredited investor status of investors.

AIFMD Annex IV.  The Alternative Investment Fund Managers Directive (“AIFMD”) requires alternative investment fund managers (“AIFMs”) that manage or market alternative investment funds (“AIFs”) to EU investors to comply with heightened reporting and disclosure requirements. Notable is the imposition of a new Annex IV reporting requirement on AIFMs with assets under management of at least €100 million. Annex IV is a large complex filing, similar to the Form PF filed with the SEC, and it must be filed regularly with the National Competent Authority (“NCA”) of each EU Member State where AIFs are marketed. Annex IV is required on either a semiannual or quarterly basis, determined by the types of investments, the AIFM’s assets under management, and whether the AIFs are leveraged. Reports are due one month after the period end. This means AIFMs must make the first Annex IV filings no later than January 30, 2015.

Annex IV requires information such as the manager’s principal types of investments, the markets of which the AIFM is a member or on which it actively trades, and information on the AIF’s investment strategy, principal exposures and concentrations, risk profile, market and liquidity stress tests and leverage information. Although Annex IV and Form PF share almost 60% of data points, a number of differences prevent merely transferring Form PF data to Annex IV. Managers with Form PF infrastructure have a good starting point, but they will have to add classifications, and the data will need to be mapped and regrouped. Note also that the instructions for calculating assets under management are different from that of Form PF. Further, unlike Form PF, Annex IV requires the entire template to be populated notwithstanding size or strategy, and does not permit managers to list assumptions made on any questions or explain how a particular question may not be applicable.

The Annex IV must be filed in XML format with the NCA of each EU Member State where AIFs are marketed. Although the Annex IV template provided by the European Securities and Markets Authority has been adopted consistently by most EU Member States, managers should verify the format and filing requirements of each NCA.

“Bad Actor” Recertification Requirement. Last year the SEC adopted bad actor disqualification provisions for Rule 506 of Regulation D. These new provisions provide that an issuer is disqualified from relying on Rule 506(b) and 506(c) of a Regulation D offering if the issuer or any other “covered person” has a relevant disqualifying event. Under the rule, fund managers are required to determine whether they are subject to the bad actor disqualification any time they are offering or selling securities in reliance on Rule 506. The SEC issued a Q&A in December 2013 further clarifying, among other things, that “an issuer may reasonably rely on a covered person’s agreement to provide notice of a potential or actual bad actor triggering event pursuant to, for example, contractual covenants, bylaw requirements, or an undertaking in a questionnaire or certification. However, if an offering is continuous, delayed or long-lived, the issuer must update its factual inquiry periodically through bring-down of representations, questionnaires and certifications, negative consent letters, periodic re-checking of public databases, and other steps, depending on the circumstances.” Fund managers should consult with fund counsel to determine how frequently such an update is required. As a matter of practice, most fund managers should perform such an update at least annually.

Municipal Advisor Regulatory Updates. Municipal advisors generally include firms (including hedge fund managers and other asset managers) who provide advice to state and local governments and other borrowers involved in the issuance of municipal securities.  In general, this will include advisors to funds that contain any proceeds of municipal securities or municipal escrow investments. The Municipal Securities Rulemaking Board (“MSRB”) and the SEC have recently issued guidance, including both proposed and final rules, affecting registered municipal advisors. The rules involve the following topics, among others:

Examinations of Selected Newly Registered Municipal Advisors. The National Exam Program (“NEP”), a sub-organization of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), has launched a new initiative to examine selected Municipal Advisors for compliance with federal securities laws, including the SEC’s final Municipal Advisor rules and final MSRB rules “as and when those rules” are approved. If selected for examination, the selected Municipal Advisor will be notified and the NEP staff will review the Municipal Advisor in “one or more” of the following identified risk areas: registration, fiduciary duty, disclosure, fair dealing, supervision, books and records, and training and qualifications. The NEP will report the examination results, which may include “high-risk focus areas, industry trends, and significant issues” to the SEC.

SEC  Guidance on Proxy Voting. Two SEC divisions jointly published a new Q&A with guidance on proxy voting responsibilities for investment advisers and proxy advisory firms. For investment advisers, the Q&As include a number of examples of acceptable practices. These examples address compliance issues in areas such as meeting an investment adviser’s fiduciary duty in implementing proxy policies, entering into arrangements to assume some (but not all) proxy voting authority, and selecting and overseeing a proxy advisory firm. The Q&As also provide guidance to proxy advisory firms, including information on what proxy rules apply to proxy advisory firms, and how such firms can comply with common exemptions from certain information and filing requirements.

FATCA Implementing Legislation in Cayman & BVI. Many jurisdictions in which offshore funds are commonly domiciled, such as the Cayman Islands and the British Virgin Islands, have entered into intergovernmental agreements (“IGAs”) with the U.S. regarding the Foreign Account Tax Compliance Act (“FATCA”). Such IGAs generally provide that a foreign government office in the country of domicile will collect the information required by FATCA and transmit it to the IRS. However, until the jurisdiction passes domestic implementing legislation to enact its IGA, it is often unclear exactly what information must be provided, how it will be collected, and to which government entity it should be directed.

In early July, the Cayman Islands passed such implementing legislation as well as corresponding regulations that detail a fund’s obligations. The BVI regulators are expected to issue guidelines in October. Managers should remain in touch with both U.S. and offshore fund counsel regarding the regulatory landscape and to plan any changes to the fund’s offering documents, and/or any investor communications that may become necessary.

SEC Guidance on Cross-Border Security-Based Swaps. Last year the CFTC issued guidance on cross-border swaps transactions. This guidance did not apply to security-based swaps, which are regulated instead by the SEC. Now the SEC has adopted final rules governing cross-border security-based swaps. This set of rules is the first in what is expected to be a series of SEC rules on these transactions, and it covers only a few select topics, including certain compliance-related rules and which entities must register as security-based swap dealers or security-based major swap participants. Although the rules technically went into effect on September 7, 2014, they will not have practical effect until the SEC adopts additional final rules on topics such as the actual registration process for security-based swap dealers and security-based major swap participants.

SEC Charges Breach of Fiduciary Duty for Improper Expense Sharing Among Funds. The SEC charged a fund manager, Lincolnshire Management, with breaching its fiduciary duty to a pair of private equity funds that it managed by sharing portfolio company expenses in a way that benefited one fund over the other. The factual situation was that each fund owned a separate portfolio company, but the manager integrated the portfolio companies and operated them as one. However, an SEC investigation found that the expense allocation practices between the two funds occasionally caused one fund to pay more than its fair share of joint expenses that equally benefited both funds’ portfolio companies. The SEC found that this preferential practice of commingling the funds’ assets violated the manager’s fiduciary duty to the funds. Lincolnshire Management settled the SEC’s charges for more than $2.3 million.

CFTC and NFA Updates

  • Broker-Dealers and NFA Registration. Our firm recently received informal guidance in a series of conversations with the NFA and CFTC. The topic at issue was under what circumstances a broker-dealer that is registered with FINRA might also have to register as an Introducing Broker with the CFTC. We had a series of phone calls with the NFA and the CFTC, and while we were not provided definitive or formal guidance, we were told that a broker-dealer soliciting for a fund that is managed by a registered CPO may have to register with the NFA as an Introducing Broker. We suspect that many broker-dealers engage in this activity and may not realize that the funds for which they solicit are managed by a registered CPO, especially in cases where the fund manager manages multiple funds, some of which are operated under an exemption – such as the de minimis exemption from CPO registration – while others are operated as non-exempt commodity pools. Broker-dealers that provide services to funds operated by registered CPOs should consult with counsel regarding their obligation to register as an Introducing Broker.

Updates to Form CPO-PQR and Form CTA-PR. Registered CPOs and CTAs are required to submit quarterly filings to the NFA and CFTC via Form CPO-PQR or Form CTA-PR (respectively), which are submitted via the NFA’s online EasyFile system. The NFA recently made some changes to both forms, as described in a Notice to Members.  For CPO filers that submit via XML uploads, the XML schema files have changed, in part to accommodate changes to the box numbers on the Form CPO-PQR. (The Form CTA-PR still does not support XML capabilities.) A number of questions in both forms have been removed and replaced with different questions, with the goal of better quantifying the percentage of the firm’s AUM invested in futures and swaps. Finally, certain questions and help text boxes have been added or amended for the sake of clarity. All changes have gone into effect for the Q2 2014 forms.

COMPLIANCE CALENDAR

Deadline Description
October 30, 2014 Quarterly Account Statements (small CPOs and CPOs claiming the 4.7 exemption)
November 14, 2014 Form 13F filing (advisers managing $100 million in 13F Securities)
November 14, 2014 CTA-PR Filing with NFA
November 29, 2014 CPO-PQR Filing with NFA
December 12, 2014 IARD Preliminary Renewal Statement payments due (submit by December 9 to ensure processing by deadline)
December 27, 2014 Last day to submit form filings via IARD prior to year-end
December 31, 2014 Review AUM to determine 2015 Form PF filing requirement
January 30, 2015 “Annex IV” AIFMD Filing
Periodic Filings Form D and Blue Sky filings should be current

Please contact us with any questions or for assistance with any compliance, registration or planning issues on any of the above topics.

Sincerely,

Karl Cole-Frieman & Bart Mallon

****

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, and venture capital fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog which focuses on legal issues that impact the hedge fund community. For more information please visit us at: www.colefrieman.com.

Cole-Frieman & Mallon LLP

One Sansome Street, Suite 1895

San Francisco, CA  94104

 

    Karl Cole-Frieman                             Bart Mallon              

              karl@colefrieman.com               bmallon@colefrieman.com                

415-762-2841                              415-868-5345   

 

This newsletter is published as a source of information only for clients and friends of the firm and should not be construed as legal advice or opinion on any specific facts or circumstances.  The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.  Cole-Frieman & Mallon LLP is a California limited liability partnership and this publication may be considered attorney advertising in some jurisdictions.

 

Hedge Fund Events October 2014

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.

****
Date: October 1, 2014

Date: October 1, 2014

Date: October 1-2, 2014

Date: October 1-2, 2014

Date: October 5-7, 2014

Date: October 6, 2014

Date: October 6-7, 2014

Date: October 6-7, 2014

Date: October 6-7, 2014

Date: October 6-8, 2014

  • Sponsor: Reuters Hedgeworld West
  • Event: HedgeWorld West 2014
  • Location: Half Moon Bay, CADate: October 7, 2014

Date: October 7, 2014

Date: October 7, 2014

Date: October 7, 2014

Date: October 7-8, 2014

Date: October 8, 2014

  • Sponsor: Terrapinn
  • Event: Trading Show
  • Location: New York, NY

Date: October 8, 2014

Date: October 8, 2014

Date: October 8, 2014

Date: October 8, 2014

Date: October 8-10, 2014

Date: October 9, 2014
Sponsor: Accredited Investors
Event: Accredited Investors Lead Generation Webinar
Location: Online via Skype

Date: October 9, 2014

Date: October 14-15, 2014

Date: October 14-16, 2014

Date: October 15, 2014

Date: October 15, 2014

Date: October 15, 2014

Date: October 15-16, 2014

Date: October 16, 2014

  • Sponsor: FTF News
  • Event:CAPCon
  • Location: New York, New York

Date: October 16-17, 2014

Date: October 17, 2014

Date: October 20-22, 2014

Date: October 20-23, 2014

  • Sponsor: Incisive Media
  • Event: Risk USA
  • Location: New York, NY

Date: October 21, 2014

Date: October 21, 2014

Date: October 21-22, 2014

Date: October 22, 2014

Date: October 23, 2014

  • Sponsor: FTF News
  • Event: ReCon
  • Location: New York, NY

Date: October 23, 2014

Date: October 23-24, 2014

Date: October 27, 2014

Date: October 27, 2014

Date: October 27-28, 2014

Date: October 27-29, 2014

Date: October 27-29, 2014

Date: October 27-30, 2014

Date: October 27-29, 2014

  • Sponsor: Big Data TechCon
  • Event: Big Data Techon
  • Location: San Francisco, CA

Date: October 28-29, 2014

Date: October 28-29, 2014

Date: October 28-30, 2014

Date: October 28-31, 2014

Date: October 30, 2014

****
Cole-Frieman & Mallon provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.

 

 

 

Hedge Fund Events September 2014

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.

****

Date: September 8, 2014

Date: September 8, 2014

Date: September 8-9, 2014

Date: September September 8-9, 2014

Date: September 8-10, 2014

Date: September 8-10, 2014

Date: September 9, 2014

Date: September 9-10, 2014

Date: September 11, 2014

Date: September 11, 2014

Date: September 11, 2014

Date: September 14-16, 2014

Date: September 15, 2014

Date: September 15-16, 2014

Date: September 15-16, 2014

Date: September 16-17, 2014

Date: September 17-18, 2014

Date: September 17-18, 2014

Date: September 18, 2014

Date: September 18, 2014

Date: September 21-23, 2014

Date: September 22, 2014

Date: September 22, 2014

Date: September 22, 2014

Date: September 22-23, 2014

Date: September 24, 2014

Date: September 28-October 1, 2014

Date: September 29, 2014

Date: September 29-30, 2014

Date: September 29-30, 2014

Date: September 29-30, 2014

Date: September 29-30, 2014

Date: September 29-October 1, 2014

Date: September 30-October 1, 2014

****

Cole-Frieman & Mallon provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.

NFA Action Against Firm for Inadequate 1101 Investigation

Doing Business with Non-Members – NFA Action Raises Compliance Questions

Under NFA Bylaw 1101, NFA members are restricted from doing business with individuals or entities that should be, but are not, registered with the CFTC and members of the NFA. In a recent action against a forex firm, the NFA shed some light on its enforcement approach to this rule (among other issues).

Note that this action deals with the NFA rule on doing business with non-members as it applies specifically to Forex Dealer Members (under NFA Compliance Rule 2-36(d)). However, the NFA’s enforcement approach here is analogous to the way it views the rule for all NFA members.

The Complaint

The alleged fact pattern: a firm registered as a Forex Dealer Member, Forex Capital Markets LLC (“FXCM”), was approached by the general partner of Revelation Forex Fund LP (“Revelation”) to open an account. FXCM initially declined to open the account after determining that Revelation’s general partner was not registered as a CPO. FXCM instructed Revelation to contact the NFA regarding its registration requirements. Following this, Revelation’s general partner filed with the NFA a CPO registration exemption – the de minimis exemption under CFTC Rule 4.13(a)(3). FXCM then agreed to open an account for Revelation.

Describing these facts, the NFA stated “It is apparent that FXCM did not take adequate steps” to evaluate the registration status of Revelation’s CPO. The NFA also stated “FXCM should have questioned whether [Revelation] qualified for the de minimis exemption. Had FXCM done this, it would have been apparent to FXCM that [Revelation] did not meet the de minimis requirement of 4.13(a)(3) as it exclusively traded forex – and not in a de minimis amount – and was marketed to the public.”

Analysis – Compliance Implications

The facts of the action as alleged by the NFA certainly make Revelation’s eligibility for 4.13(a)(3) sound suspect. Assuming that FXCM knew Revelation’s business was primarily (or exclusively) trading forex, it does not seem reasonable that FXCM took Revelation at its word that it qualified under 4.13(a)(3). More broadly, though, this action raises important questions for what constitutes “adequate” compliance steps to evaluate a business associate’s reliance on a registration exemption.

Specifically, what did the NFA mean when it said an NFA member should “question” whether a business counterparty qualifies for its claimed exemption? One thing is clear: it is not sufficient to merely request proof that an exemption has been filed. But how far must one go? For example, assume an NFA member does business with a registered CPO that relies on the exemptive relief under CFTC Rule 4.7, which requires all investors to be Qualified Eligible Persons (“QEPs”). How does an NFA member “question” this exemption? Must it request a representation – or even some kind of evidence – that the CPO’s pool investors are QEPs?

Another scenario: assume an NFA member wants to do business with a CTA that relies on the exemption under CFTC Rule 4.14(a)(10), which limits the number of clients to 15 in a rolling 12-month period and forbids holding oneself out to the public as a CTA. Would the NFA member have to ask this CTA for representations and/or information on its number of clients? Should it review the CTA’s website and other public-facing materials? It is unclear what degree of diligence the NFA would deem “adequate” here.

Practical Take-Aways

 In terms of interpreting NFA rules, this NFA action probably raises more questions than it answers. However, one practical consequence that is likely is that NFA member firms – especially FCMs and Introducing Brokers with a high volume of new account openings – will implement increasingly stringent account opening procedures for customers that rely on registration exemptions.

****

Cole-Frieman & Mallon LLP acts as legal counsel to the investment management industry.  If you have questions on the above please contact us or call Bart Mallon directly at 415-868-5345.

Hedge Fund Events August 2014

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.

****

August 4-5, 2014

August 5, 2014

August 5-6, 2014

August 6, 2014

August 6-9, 2014

August 7, 2014

August 12, 2014

August 12, 2014

August 12, 2014

August 13, 2014

August 14, 2014

August 14, 2014

****

Cole-Frieman & Mallon provides legal services for hedge fund managers and other groups within the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.

New IA Rules in Washington State

Amendments to Investment Adviser Rules in Washington State

Washington State Department of Financial Institutions has amended the rules governing the registration and activities of investment advisers set forth in Chapter 460-24A WAC. Effective July 13, 2014, the amendments update various provisions, including examination and registration requirements, financial reporting requirements, custody, performance compensation arrangements, books and records requirements, and unethical business practices. There are new rules addressing compliance policies and procedures, proxy voting, and advisory contracts. In addition, there are new exemptions from registration for certain private fund and venture capital fund advisers. The amendments repeal WAC 460-24A-058, which defines when an application is considered filed; and make additional updates, clarifications, and changes to the rules.

The full text of the revised rules can be found here.  Some notable amendments:

Exemptions from Registration for 3(C)(7) Fund Advisers and Venture Capital Fund Advisers

The amendments created a new exemption from registration for investment advisers who provide advisory services solely to one or more qualifying private funds (as defined by the SEC Rule 203(m)-1, but excluding 3(c)(1) funds) or venture capital funds. In order to qualify for this exemption, investment advisers have to satisfy the following requirements: (i) an investment adviser and its affiliates are not subject to disqualification pursuant to WAC 460-44A-505(2)(d); and (ii) an investment adviser has to file with WA Securities Division same reports and amendments as an exempt reporting adviser is required to file with the SEC. The filings must be submitted electronically through IARD.

Compliance Policies and Procedures

The amendments codified the requirement that investment advisers registered or required to be registered in WA adopt and implement written compliance procedures designed to prevent violation of the securities laws.  Investment advisers must review the procedures at least annually, and designate an individual administering the adopted code of ethics.

Proxy Voting

The amendments make it unlawful for an investment adviser registered or required to be registered in WA to exercise voting authority with respect to client securities absent: (1) the implementation of written policies and procedures designed to ensure proxy voting will be in the best interests of clients and include how to address material conflicts that may arise between the investment adviser and the clients; (2) disclose to clients how they may obtain information on the investment adviser voted with respect to their securities; and (3) describe to clients the proxy voting policies and procedures, and provide a written copy upon request.

Financial Reporting Requirements

The amendments created the following financial reporting requirements for investment advisers:

(1) An investment adviser with custody of client accounts must submit an audited balance sheet within 120 days of the end of the adviser’s fiscal year. Each balance sheet must be prepared in conformity with generally accepted accounting principles, audited by an independent certified public accountant, and accompanied by an audit opinion of the accountant.
(2) An investment adviser with custody of client accounts that manages pooled investment vehicles must provide audited financial statements of each pooled investment vehicle of which the investment adviser is a general partner (or comparable position) within 120 days of the end of the pooled investment vehicle’s fiscal year.
(3) An investment adviser who does not have custody of client accounts must submit a yearly unaudited balance sheet within 120 days of the end of the adviser’s fiscal year.

New Custody Requirements for Investment Advisers that Manage a Pooled Investment Vehicle

The amendments created new safekeeping and reporting requirements for investment advisers that manage a pooled investment vehicle. Such advisers must: (a) enter into a written agreement with an independent party to review all fees, expenses, and capital withdrawals from the pooled accounts and approve all payments; or (b) provide audited financial statements of the pooled investment vehicle to all limited partners within 120 days of the end of the pooled investment vehicle’s fiscal year. Further, investment advisers that manage a pooled investment vehicle must deliver account statements at least quarterly to all limited partners in accordance with WAC 460-24A-105 and include the following information:

(1) The total amount of all additions to and withdrawals from the fund as a whole, as well as the opening and closing net asset value of the fund at the end of the quarter;
(2) listing of the fund’s long and short positions on the closing date of the statement; and
(3) The total amount of additions to and withdrawals from the fund by the investor, as well as the total value of the investor’s interest in the fund at the end of the quarter.

Conclusion

Washington state investment advisors should review their practice to determine if they must implement new procedures in order to comply with the amendments. For individuals who are considering becoming an investment adviser in Washington, it will be important to review the new examination and registration requirements.  If you have any questions or would like assistance, please contact us.

 ****
Cole-Frieman & Mallon LLP provides legal services for hedge fund managers and other groups within the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.

Cole-Frieman & Mallon LLP 2014 Second Quarter Update

COLE-FRIEMAN & MALLON LLP
www.colefrieman.com

July 10, 2014

FATCA Transitional Period. The IRS and U.S. Treasury Department issued a notice (the “Notice”) announcing that calendar years 2014 and 2015 will be deemed a “transition period” with respect to IRS enforcement and administration of certain due diligence, reporting and withholding provisions of FATCA. In order to rely on this relief, the withholding agent, Foreign Financial Institution (“FFI”) or other subject entity must make a “good faith” effort to comply with FATCA requirements. In addition, the Notice:

  • extended the cutoff date for “pre-existing obligations” to January 1, 2015 (however this extension not apply to individual accounts opened on or after July 1, 2014);
  • provides transitional rules for documentation of expiration dates for account holders;
  • relaxes the requirements for treatment as a “Limited FFI” or “limited branch”; and
  • clarifies the requirements of a reasonable explanation of foreign status for an individual under FATCA.

Fund managers should work with their tax advisers, administrators and legal counsel to properly address the new account on-boarding and due diligence procedures required under FATCA, including updating their offering documents and subscription materials.

FATCA IRS Tax Forms. The IRS has finally issued instructions for new Form W-8BEN-E, one of the IRS forms that includes specific FATCA certifications investment funds will need to obtain from non-U.S. investors in order to satisfy their obligations under FATCA. U.S. withholding agents and FFIs will be required to begin withholding on payments beginning July 1, 2014. In addition, maintaining updated documentation regarding the FATCA status of the fund and its investors is necessary for FATCA compliance. Fund managers should make sure to use the new FATCA compliant IRS forms and applicable instructions to obtain information regarding non-U.S. investors prior to the deadline and for new investors after July 1, 2014. The new versions of Form W-8BEN for individuals and entities can be found on the IRS website (see Form W-8BEN and Form W-8BEN-E).

Deferral of Tax on Incentive Fee Arrangements with Offshore Funds. On June 10, 2014, the IRS issued a ruling which may expand the ability of U.S. managers to offshore funds to defer performance-based compensation through nonstatutory stock options and stock-settled stock appreciation rights (“SAR”) in the offshore fund. U.S. fund managers would need to structure their incentive fee arrangements with offshore funds based on a multi-year, rather than annual, calculation of the incentive fee. The incentive fee allocated in such manner would not be taxable until the fund shares are distributed to the manager pursuant to the terms of the SAR, i.e. until the manager actually receives the payment of the incentive fees.  However, once received, the value of the shares would be subject to U.S. income taxation as ordinary compensation and will not be eligible to be treated as capital gains irrespective of the underlying character of the gains in the offshore fund.  Managers that want to explore the alternative fee arrangement should discuss the implications with their tax advisor and legal counsel. More information can be found here.

Upcoming Deadline for an Annual Report of Foreign Bank and Financial Accounts (“FBAR”). Every U.S. person who holds a financial interest in or signature authority over any financial accounts outside of the U.S. with the aggregate maximum value exceeding $10,000 at any time during the calendar year must file an FBAR. “Financial account” includes mutual funds or similar pooled funds which issue shares to the general public and have a regular net asset value determination and regular redemptions. According to the IRS FBAR Reference Guide, foreign hedge funds and private equity funds are generally not reportable on the FBAR. However, a U.S. hedge fund itself, as well as officers and employees of the fund’s investment manager or general partner, may still have a filing obligation under certain circumstances. For instance, a U.S. feeder fund may have to file the FBAR if it owns more than 50% of a foreign master fund that owns a foreign bank account.

The FBAR for the 2013 calendar year has to be filed electronically on or before June 30, 2014. Certain individuals who have signature authority over, but no financial interest in, one or more foreign financial accounts (including officers and employees of the SEC-registered investment advisers who have only signature authority over foreign financial accounts) have been given an extension until June 30, 2015.

CFTC Announces Streamlined Approach for Considering Requests for Relief From Registration for Delegating CPOs. In May, the CFTC issued a no-action letter adopting a streamlined approach for requesting CPO registration relief. The letter clarifies the conditions under which a CPO otherwise required to register (“Delegating CPO”) may delegate its CPO functions to another CPO (“Designated CPO”) and be relieved from a registration requirement under Section 4m(1) of the Commodity Exchange Act (the “CEA”). To request a relief through the streamlined approach, the Delegating CPO and its Designated CPO must meet the following criteria:

  1. The Delegating CPO must: (a) delegate all of its investment management authority with respect to the commodity pool to the Designated CPO; (b) not participate in the solicitation of participants for the pool; and, (c) not manage any property of the pool.

  2. The Designated CPO is a registered CPO.
  3. The Delegating CPO is not subject to a statutory disqualification from registration.
  4. There is a business purpose for the Designated CPO being a separate entity from the Delegating CPO that is not solely to avoid CPO registration by the Delegating CPO.

  5. The Designated CPO maintains the Delegating CPO’s books and records with respect to the commodity pool in accordance with Regulation 1.31.

In addition, depending on whether the Delegating CPO and Designated CPO are entities or individuals, one or both of the parties will need to comply with additional requirements.  The Delegating CPO seeking registration relief through the streamlined approach must submit a request to the CFTC’s Division of Swap Dealer and Intermediary Oversight using the forms attached to the no-action letter. Delegating CPOs who do not meet all the criteria may still submit a request for relief to the CFTC for review.

NFA Late Disciplinary Disclosure Fee. The National Futures Association (“NFA”) announced that effective on June 1, 2014 it will impose a $1,000 late fee when a firm or individual does not disclose a disciplinary matter upon registration or fails to promptly update an existing registration to disclose a new disciplinary matter. Generally, NFA considers a matter to have been promptly disclosed if the firm, whether for itself or its associated persons (“AP”) and principals, discloses the matter before NFA discovers the matter and requests disclosure. The sponsor of a principal or AP is responsible for performing sufficient due diligence to ensure that all matters requiring disclosure are promptly disclosed as well as for the payment of the late disclosure fee. Managers that are members of NFA should make sure they have sufficient compliance policies in place to ensure that all disciplinary matters of the firm, its APs and principals are promptly disclosed.

Cayman Islands Revised Licensing Regime. The Directors Registration and Licensing Law (the “DRLL”), effective as of June 4, 2014, established a new registration and licensing regime for directors of certain Cayman Island regulated entities, including directors of entities registered as mutual funds with the Cayman Islands Monetary Authority (“CIMA” and such entities “Covered Entities”).  The DRLL does not, at present, apply to Covered Entities which are partnerships.  All directors of Covered Entities will need either to (i) register with CIMA; or (ii) apply to be licensed by CIMA in the case of corporate directors, or directors acting for 20 or more entities.

Directors of Covered Entities should be contacted by the relevant registered office service provider for their Covered Entity, however, if you have not been contacted and you serve as a director for a CIMA registered fund you should contact your registered office provider or counsel. Individual directors must submit their applications no later than September 3, 2014.  Once registered, the director must provide certain information to CIMA and the annual fee of $855. Failure to comply with the director registration requirements under the DRLL is an offence and conviction carries a maximum fine of approximately $60,000 and/or up to 12 months imprisonment.

California Custody Rule. Effective April 1, 2014, a new custody rule (the “Rule”) applies to California-registered investment advisers (“RIAs”) deemed to have custody of client assets.  Generally, an RIA will be deemed to have “custody” of assets if it directly or indirectly holds client funds or securities or has the authority to obtain them, such as where an RIA can deduct fees directly from client accounts.

Under the Rule, RIAs with custody that manage pooled investment vehicles must provide notice of such custody on the Form ADV.  As well, these RIAs must implement certain additional practices pursuant to the Rule, including (1) maintaining client assets with a qualified custodian; (2) engaging an independent party to act in the best interest of investors to review fees, expenses and withdrawals; and (3) retaining an independent certified public accountant to conduct surprise examinations of assets.  RIAs also are obligated to provide certain quarterly statements to investors, with the first statements required to report Q2 2014.

Practices under the Rule require specific implementation, and RIAs advising separately managed accounts will have different obligations than those generally outlined above.  Certain RIAs also may qualify for exemptions under the Rule, and thus RIAs are encouraged to consult with legal counsel about their specific obligations under the new regime.

Segregation of Initial Margin for Non-Cleared Swaps. The CFTC adopted new rules relating to segregation of initial margin with respect to non-cleared swap transactions. Under these new rules, a swap dealer (“SD”) is required to segregate the initial margin of non-cleared swaps at a third-party custodian upon request from its swap counterparties (the “Segregation Rule”). The Segregation Rule requires the SD to notify counterparties of the right to require segregation of initial margin and to provide one or more non-affiliated custodians and price information for each. An SD will be required to obtain confirmation of notification and election prior to entering into any swap transaction, however a counterparty may change its election at any time.  If a counterparty elects segregation, the counterparty and SD must put in place a tri-party custodial agreement between the SD, counterparty and custodian to segregate the initial margin, which must include certain specific CFTC prescribed provisions. More information can be found here.

Washington State Amendments to Investment Adviser Regulations. On June 19, 2014, Washington State Department of Financial Institutions issued a notice regarding amendments of certain rules governing the registration and activities of investment advisers. The amendments update various provisions, including the requirements for financial reporting, custody, books and records, and unethical practices.

One of the amendments, effective July 13, 2014, provides an exemption from investment adviser registration for advisers solely to one or more qualifying private funds (excluding private funds that rely on the Section 3(c)(1) exemption from registration under the Investment Company act of 1940) or venture capital funds. In order to take advantage of the exemption, an investment adviser will need to make an annual exempt reporting adviser filing with the Washington Securities Division. Furthermore, the amendments codified the code of ethics requirements such that advisers registered with the Washington Securities division will need to adopt and implement and administer a written code of ethics. More information can be found here.

OTHER ITEMS

SEC Cybersecurity Initiative. On April 15, 2014, the SEC issued a risk alert announcing that it would conduct examinations of more than 50 registered investment advisers to assess cybersecurity preparedness in the securities industry and to obtain information about the industry’s recent experiences with certain types of cyber threats. The examinations will focus on the entity’s cybersecurity governance;identification and assessment of cybersecurity risks; protection of networks and information;risks associated with remote customer access and funds transfer requests;risks associated with vendors and other third parties;detection of unauthorized activity; and experiences with certain cybersecurity threats. This announcement reaffirms the SEC’s increased interest in cybersecurity preparedness of regulated entities-the concern that was initially raised and identified as an examination priority for 2014.

SEC’s Responses to the FAQs regarding the Volcker Rule. On June 10, 2014, the SEC provided some guidance regarding the recently implemented Volcker Rule by issuing responses to the frequently asked questions. Among other things, the guidance provides clarification regarding a banking entity’s ownership/interest in covered funds. The SEC may update or modify these questions and answers periodically.

Upcoming Second Circuit’s Ruling on Tippee’s Liability in Insider Trading Cases. On April 22, 2014, the Second Circuit Court of Appeals heard oral arguments in United States v. Newman, a joint appeal from two former hedge fund managers who were found guilty of insider trading. The issue on appeal is whether, in order to be convicted of insider trading, a downstream tippee of the material, non-public information (“MNPI”) has to know that the insider who leaked the information received a personal benefit from doing so. This case may implicate how far down a tipper/tippee chain prosecutors can go in prosecuting “remote tippees” for insider trading. In Newman, the appellants received and traded on MNPI, but they were four or five degrees removed from the initial source of the inside information. One of the appellants did not even know the identity of the sources. It is unclear how the Court will rule on the issue. If the Court rules for the appellants, the government will face a greater challenge to proving insider trading cases where the tippee is several degrees removed from the insider, which will likely decrease the number of the insider trading cases against downstream tippees. On the contrary, if the Court rules in favor of the government, hedge funds and trading firms may need to re-evaluate and revise their insider trading policies and the ways they receive information about securities.

Qualified Institutional Buyer (“QIB”). Although this is not a new rule, we receive frequent inquiries from managers regarding qualifying as a QIB for purposes of purchasing certain restricted securities exempted from the registration requirements of the Securities Act under Rule 144A (the “144A Securities”). In order for the broker to rely on Rule 144A, it must reasonably believe that the offerees/purchasers are QIBs and will usually require the manager to complete a QIB certification.

In general, a QIB is an entity that, acting for its own account of the accounts of other QIBs, owns and invests on a discretionary basis of at least $100 million in securities of issuers not affiliated with the QIB as of a specific date on or after the close of the entity’s most recent fiscal year. For these purposes, the aggregate value of securities is calculated on a cost basis, except where the entity reports its securities holdings in its financial statements on the basis of their market value, and no current information with respect to the cost of those securities has been published. In the latter event, the securities may be valued at market.

In order to be eligible to purchase 144A Securities, both the manager and each account for which orders are placed must be a QIB. This means that while the manager can aggregate its proprietary holdings and the assets it manages in determining whether the manager is a QIB, this determination is not useful unless each fund or account has $100 million in securities to qualify as a QIB as well. As a practical matter, if a manager’s fund or account is a QIB, the manager will also be a QIB, assuming it has discretion over the account.

SEC Charges Private Equity Firm with “Pay-to-Play” Violations.  On June 20, 2014, the SEC charged a Philadelphia-based private equity firm TL Ventures Inc. (“TLV”) with violating “pay-to-play” rules. Under these rules, investment advisers are prohibited from receiving compensation for advisory services from government entities for two years if the firm or its associates make contributions (above a certain de minimus threshold) to a government official who can influence the hiring of the investment adviser. TLV continued receiving advisory fees from two public pension funds within two years following campaign contributions made to the governor of Pennsylvania and a candidate for mayor of Philadelphia by a TLV associate. TLV has agreed to settle the charges by paying nearly $300,000. This is the first case the SEC brings under the “pay-to-play” rules after they were adopted in 2010.

The SEC Guidance on Application of the Custody Rules to Private Funds Using SPVs and Escrows.  The SEC has issued a guidance update (the “Update”) regarding the application of Rule 206(4)-2 of the Investment Advisers Act of 1940, as amended (“Custody Rule”) to special purpose vehicles used to facilitate investments in certain securities private funds (“Investment SPVs”) and escrows.

Investment SPVs: An investment adviser (“IA”) or its related persons can, in certain cases, treat the assets of an Investment SPV as assets of the pooled investment vehicles they manage and do not have to comply with the Custody Rule audited financial statement distribution requirements with respect to such Investment SPV. An Investment SPV may be treated as assets of the pooled investment vehicle as long as (1) the assets of this SPV are considered within the scope of the pooled investment vehicle client’s financial statement audit; and (2) the SPV has no owners other than the IA or IA’s related persons (i.e. investment funds that have owners other than an IA or IA’s related persons would not qualify).

Escrow Accounts:  The Update clarifies that maintaining client funds with other client and non-client assets in an escrow account in connection with a sale or merger of a portfolio company owned by a pooled investment fund would not violate the Custody Rule if the pooled investment vehicle relies on the audit provision of the Custody Rule and includes its portion of the escrow in its financial statements.  In addition, the escrow funds must be maintained at a qualified custodian and the certain escrow formalities are adhered to.

COMPLIANCE CALENDAR

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

Deadline              Description

June 1, 2014        Limited   partnerships    and    limited   liability   companies formed in                                      Delaware were required to pay an annual tax in the amount of $250 by June                             1 of each year. For the tax year 2015, the annual tax amount will be $300.

June 30, 2014      Delivery of audited financial statements to investors (fund of funds)

June 30, 2014      Annual Report of Foreign Bank and Financial Accounts (FBAR) Filing

July 30, 2014       Quarterly NAV Reports (CPOs claiming the 4.7 exemption)

August 14, 2014   Form 13F filing (advisers managing $100 million in 13F Securities)

August 14, 2014   CTA-PR filing with NFA

August 29, 2014   CPO-PQR filing with NFA

August 29, 2014   Form PF filing for quarterly filers

Periodic Filings      Form D and Blue Sky filings should be current

Please contact us with any questions or for assistance with any compliance, registration or planning issues on any of the above topics.

Sincerely,

Karl Cole-Frieman & Bart Mallon

***

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, and venture capital fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog which focuses on legal issues that impact the hedge fund community. For more information please visit us at: www.colefrieman.com.

Cole-Frieman & Mallon LLP
One Sansome Street, Suite 1895
San Francisco, CA 94104

Karl Cole-Frieman                          Bart Mallon
karl@colefrieman.com          bmallon@colefrieman.com
415-762-2841                              415-868-5345


This newsletter is published as a source of information only for clients and friends of the firm and should not be construed as legal advice or opinion on any specific facts or circumstances. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Cole-Frieman & Mallon LLP is a California limited liability partnership and this publication may be considered attorney advertising in some jurisdictions.                    

This newsletter is published as a source of information only for clients and friends of the firm and should not be construed as legal advice or opinion on any specific facts or circumstances.  The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.  Cole-Frieman & Mallon LLP is a California limited liability partnership and this publication may be considered attorney advertising in some jurisdictions.