Clients, Friends, Associates:

Although we are late in publishing this year-end planning memo, we believe it may still be helpful for managers on this last day of 2011 and into the new year.  In addition to all of the administrative details involved in closing out the year, the regulatory landscape has shifted dramatically over the past year. As a result, year-end processes and 2012 planning are particularly important, especially for General Counsels, Chief Compliance Officers (CCOs) and key operational and financial personnel. We have updated our own year-end checklist to help managers stay on top of these priorities.

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Regulatory Compliance:

New Issue Status. On an annual basis, a manager needs to confirm or reconfirm the eligibility of investors that participate in initial public offerings or new issues. Most managers reconfirm this via negative consent, i.e., investors are informed of their status as on file with the manager and asked to inform the manager of any changes. No response operates as consent to the current status.

In addition, this is a good time to review your offering documents to confirm that they include FINRA’s anti-spinning rule (Rule 5131), as well as the SEC’s current thresholds for accredited investor and qualified client status, which became effective this year.

ERISA Status. Given the significant problems that can occur from not properly tracking ERISA investors, we recommend that managers also confirm or reconfirm on an annual basis the ERISA status of its investors. This is particularly important for managers that track the underlying percentage or ERISA funds for each investor. This reconfirmation can also be obtained through a negative consent.  [For more information, please see our post on ERISA issues for hedge funds.]

Annual Privacy Policy Notice. On an annual basis, a registered investment adviser must also provide its investors 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 an annual review of a manager’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, who can provide guidance about the review as well as a template for the review. Managers 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, including implementation of policies relating to use of social media, a hot topic for both managers and regulators in 2011.

Managers who are not registered may still wish to review their procedures and/or implement a compliance program as a best practice.

Trade Errors. Managers should make sure that all trade errors are addressed by the end of the year, pursuant to the manager’s polices regarding trade errors. Documentation of trade errors should be finalized, and if the manager is required to reimburse the funds, 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 by the end of the year.

Custody Rule Annual Audit. SEC-registered advisers must (i) maintain client funds and securities with a qualified custodian in a separate account for each client under that client’s name, or in an account that contains only client funds and securities with the adviser listed as agent or trustee for the clients; (ii) have a reasonable basis, formed after “due inquiry,” for believing that the qualified custodian holding client funds or securities sends an account statement to each advisory client at least quarterly; (iii) notify clients upon opening any new custodial account on behalf of the client (or changes to any such account) and include a legend in such notice urging the clients to compare custodial account statements with any statements received from the adviser (if the adviser elects to send any such statements directly); and (iv) undergo 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 the fund within 120 days after the fund’s fiscal year end. Managers should review their custody procedures to ensure compliance with the rule. Requirements for state-registrants may differ, and we encourage you to contact us if you have any questions or concerns about your custody arrangements.

Please see our post on the SEC Custody Rule for more information.

Schedule 13G/D and Section 16 Filings. A manager whose managed funds 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 filing Schedule 13D and/or Section 16 filings, this is an opportune time to review your filings to confirm compliance and anticipate needs for Q1.

Form 13F. A manager must also 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 new 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) were required to file an initial Form 13H with the SEC on December 1, 2011. Large traders will need to file amended 13Hs on an annual basis. In addition, changes to the information on 13H will require interim amendments following the calendar quarter in which the change occurred.

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 any renewals.

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.

IARD Annual Fees. Preliminary annual renewal fees for state registered and SEC registered investment advisors were due by December 12, 2011. In the event a manager has not submitted these fees, the manager should submit these fees immediately through the IARD system. The manager will likely be subject to additional late filing fees and these must be paid through the IARD by February 3, 2012.

Pay-to-Play Rules. In 2010, the SEC’s adopted Rule 206(4)-5, which disqualified 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 such persons to register with the state as lobbyists, and mandates lobbyist registration in California’s cities and counties as well. This is an important issue for any manager seeking investments by government pension plans.

Registered Commodity Pool Operators and Commodity Trading Advisers. Registered CPOs and CTAs must prepare and file Annual Questionnaires and Annual Registration Updates with the NFA. Registered CPOs must also prepare and file an annual report for each commodity pool. Unless its funds qualify for an exemption, registered CPOs and CTAs must update their disclosure documents periodically, as they may not use any document dated more than 9 months prior to the date of its intended use. Disclosure documents that are materially inaccurate or incomplete must be promptly corrected and the correction must be promptly distributed to pool participants.

Fund Accounting and Financial 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 Conversions. These strategies should be considered carefully to make sure they are consistent with the investment objectives of the fund.

Financial Accounting Standards Board Interpretation No. 48 (“FIN48″). Under FIN48, which became effective in 2009, managers must implement procedures to assess material tax positions, and potentially accrue liabilities. Managers should begin preparing to implement FIN48 as soon as possible, and should discuss with their auditors whether FIN48 will apply to them. Funds with exposure to certain countries, including Spain and Australia, should make sure they are aware of the implications of FIN48.

Redemption Management. Managers with significant redemptions at the end of the year should carefully manage the unwinding of 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 shall pay careful attention to the liquidation procedures in the managed account agreement and the fund constituent documents. Offshore funds may involve unusual or lengthy dissolution procedures. Please contact us to help you evaluate and manage any fund dissolutions you are considering.

NAV Triggers and Waivers. If redemptions, performance or a combination of these are expected cause a termination event (NAV declines are typical inclusions in these provisions) in a fund’s ISDA or other counterparty agreement, managers should seek waivers of those events before the end of the year. We recommend starting this process early as credit officers at many banks may become unavailable during the holiday season.

Fund Expenses. Managers should make sure that all fund expenses for a particular year are paid for in that year, and do not roll over into the next year. In particular, managers should contact their outside legal counsel to obtain accurate and up to date information about legal expenses. Outside counsel and other vendors should be given a deadline so that checks do not need to be processed on New Year’s Eve.

Management Company Issues:

Management Company Expenses. Similarly, managers who distribute profits on an annual basis should attempt to pay 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 for 2011.

Compensation Planning. In the hedge fund industry, and the financial services industry in general, the end of the year is the appropriate time to make adjustments to the compensation program. 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 program should begin on the first of the year.

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.

Future Regulatory Change:

Form ADV. Current registrants must file an annual amendment to Form ADV within 90 days of the end of its fiscal year. For SEC registrants, an updated Part 1A will be due on March 30, 2012, regardless of your FYE, to indicate your AUM for purposes of eligibility to remain registered with the SEC.

Annual amendments for SEC registrants will include Parts 1A and 2A (the firm brochure). For most state registrants, this will include all parts of the ADV as well as U4s for its investment adviser representatives. For managers who have not yet filed using the revised ADV Part 2 (for example, those who filed at the end of 2010, but were not approved until after January 1, 2011), you should anticipate additional time translating your old Part II and Schedule F information into the narrative format of Part 2A and B.

Additionally, on an annual basis, registered investment advisers must provide a copy of the updated Form ADV 2A brochure and Part 2B brochure supplement to clients (or a summary of changes, with an offer to provide the complete brochure).

For managers who are required to register with the SEC, the deadline to be registered is March 30, 2012. We recommend filing the ADV by at least February 14, 2012 to ensure meeting this deadline.

Managers who will no longer meet the AUM threshold to maintain registration with the SEC will have until June 28, 2012 to transition to state registration.

Form PF. Managers to private funds who are either registered with the SEC, or required to be registered with the SEC, will begin filing Form PF in 2012. Most private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. Those with $5 billion or more in private fund assets must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012.

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For assistance with any compliance, registration, or planning issues with respect to any of the above topics, please contact Karl Cole-Frieman at 415-352-2300, Bart Mallon at 415-868-5345 or Aisha Hunt at 415-762-2854.

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.

Cole-Frieman & Mallon LLP
150 Spear Street, Suite 825
San Francisco, CA 94105
t. 415-352-2300
f. 646-619-4800
www.colefrieman.com

This Cole-Frieman & Mallon LLP Announcement 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.

Information on the event is posted below and can be found on the PEI website by clicking here.

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PEI Private Fund Compliance Forum: San Francisco

An enormous collective sigh of relief was felt around the private equity world when the SEC announced that the deadline to register was moved to March 30, 2012. This extension has given private equity firms more time to designate a chief compliance officer, implement a compliance program, and file all necessary forms with the SEC.

The PEI Private Fund Compliance Forum: San Francisco provides private equity and venture capital firms an opportunity to gain a more complete understanding of what newly registered private funds should expect post-registration and how to implement and manage an effective compliance program.

This one and a half day event, divided into panel discussions and in-depth workshop sessions, is tailored to firms that are in the process of registering with the SEC, those firms that are seeking more information about the scope of what is entailed in registration as well as those who are already operating as RIAs that are looking to enhance their compliance functions.

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Panel: Effective and appropriate marketing materials

10:40 – 11:45

• Interpreting rules governing marketing and advertising

• Making sure that presentations are reviewed by compliance

• Making sure your web sites are in compliance

• Guidelines regarding talking to the press

Moderator:

Janis Kerns, Editor, ACA Insight

Panel Members:

Karl A. Cole-Frieman, Partner, Cole-Frieman & Mallon LLP

Jennifer Keese-Powell, Marketing Manager, Hall Capital Partners LLC

Lois Towers, Compliance Officer, Pantheon Ventures (US)

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Cole-Frieman & Mallon LLP provides a variety of services including: hedge fund formation, advisor registration and counterparty documentation, CFTC and NFA matters, seed deals, internal investigations, operational compliance, regulatory risk management, hedge fund due diligence, marketing and investor relations, employment and compensation matters, and routine business matters. For more information please visit us at: http://www.colefrieman.com/.

Below the reprint of the petition, we have also posted a recent statement by the FIA on MF Global.

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Release remaining cash balances of former MF Global customers

Greetings NIBA members and supporters,

We urge you to sign the following petition in order for the bankruptcy court to have a chance to hear from you – the broker, the trading advisor, the IB – directly. Some of you have the resources to pursue your interests individually, that’s great. But, the court needs to hear from all of you. Our voice is much stronger if we are unified; acting collectively, we can make a difference. This is one of the reasons you belong to and support the NIBA. We are standing up for the rights of all our members. Please sign regardless of whether you cleared with MFG.

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Honorable Martin Glenn
U.S. Bankruptcy Court, Courtroom 501
One Bowling Green
New York City, NY 10004

The National Introducing Brokers Association (NIBA) submits this Petition urging you to exercise your authority and immediately, to the extent it does not hinder the bankruptcy process, permit the release of the remaining cash balances of liquidating and transferred customers of MF Global, and of customers who were included in the bulk transfer process. To the extent there are sufficient “segregated” funds available, they are the assets of the customers. Further, those funds are absolutely vital for the marketplace to function fully. The result of withholding these funds is affecting the ability of customers to maintain and trade their positions, and will impact liquidity and trading volume – absolutely necessary for an efficient market.

The NIBA is a 20-year old non-profit association of registered Introducing Brokers, Commodity Trading Advisors and Associated Persons who transact business for customers in the retail sector of the futures industry, as well as in managed futures. Our membership includes professionals associated with MF Global, as well as IBs, CTAs and APs at the receiving futures commission merchants. Our customers include individuals and entities as diverse as farmers, pension funds and users of energy and metals.

Customers and futures professional alike are suffering under the current scheme. We urge you to heed Petition and release these funds. We want to get back to work.

Respectfully, The National Introducing Brokers Association

(www.theniba.com)

—————-

Sincerely,

[Your name]

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FIA Issues Statement Regarding MF Global

WASHINGTON, D.C. ―Nov. 9, 2011― The Futures Industry Association issued the following statement in response to the events involving the bankruptcy of MF Global.

The Futures Industry Association (FIA) is deeply troubled by the failure of MF Global (MFG) and the financial distress that the apparent shortfall in customer segregated funds has caused our members’ customers and the markets generally. Segregation of customer funds is the cornerstone that assures the financial integrity of our markets and any violation of these segregation requirements cannot be tolerated.

Since the appointment of a Trustee for MFG on October 31, FIA member firms have been working closely with all affected stakeholders, including the CME Group, ICE Clear US, ICE Clear Europe and other relevant derivatives clearing organizations, to effect the prompt and orderly transfer of customer positions to other futures commission merchants (FCMs).

FIA supports a full review of the circumstances that led to the failure of MFG and, in particular, the apparent shortfall in customer segregated funds. FIA recognizes that this apparent shortfall will delay the date by which customers will receive all of the funds that were on deposit with MFG. Futures customers cannot afford to have the funds they had deposited to support their positions held up while the claims process runs its course. FIA strongly encourages the Trustee, with the assistance of the Commodity Futures Trading Commission and the clearing organizations, to complete an interim accounting and facilitate the prompt return of all customer funds.

The FIA is the primary industry association for centrally cleared futures and swaps. Its membership includes the world’s largest derivatives clearing firms as well as derivatives exchanges from more than 20 countries. For more information, please contact Joanne Morrison (jmorrison@futuresindustry.org) at 202.466.5460 or visit our website at www.futuresindustry.org.

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Cole-Frieman & Mallon LLP provides legal services to the managed futures community.  Please contact us if you have questions or call Bart Mallon directly at 415-868-5345.

Marketing, of course, is an issue close to the heart of every hedge fund manager. You spend so much time and effort making your pitchbook and other materials exactly right in terms of strategy, investment process and all the details that help you make the most of your investor meetings. It needs to look great; it needs to tell your story, and as the SEC recently reminded us, it needs to be the truth, the whole truth, and nothing but the truth.

Overview of Case

On October 26, 2011, the SEC filed an action in the US District Court for the District of Massachusetts against Andrey C. Hicks (“Hicks”) and Locust Offshore Management, LLC (“LOM”). Hicks and LOM purported to manage a British Virgin Islands-based investment vehicle named Locust Offshore Fund, Ltd. (the “Fund” and collectively with Hicks and LOM, “Locust”), which employed a strategy based on a quantitative model developed by Hicks. The SEC alleged that the Fund was in fact part of a fraudulent scheme that ultimately funneled incoming subscriptions into Hicks’ personal accounts.

According to the complaint (see SEC v. Hicks & Locust),  the scheme depended on a number of misrepresentations found in LOM’s website, the Fund’s offering memorandum, Hicks’ email correspondence, Hicks’ verbal statements to at least one investor, post-subscription correspondence with investors.

The SEC asserted causes of action under Section 17(a) of the Securities Act (fraudulent interstate transactions), Section 10(b) of the Exchange Act and related rules (prohibiting the use of manipulative and deceptive devices); Section 206(4) of the Advisers Act (prohibiting act, practice or course of business that is fraudulent, deceptive or manipulative), and for equitable relief.

The District Court issued a temporary restraining order and asset freeze against Locust.

Takeaways for Managers

The alleged misrepresentations included the following:

• Statements that the Fund was formed and registered as a professional fund in the British Virgin Islands, when in fact no such entity had existed or been registered there;
• Flowing from the above, any statement identifying Hicks as the portfolio manager, director, or other principal of the Fund or LOM, as well as any statement that LOM was the manager of the Fund;
• Identifying Ernst & Young as the auditor of the Fund, and Credit Suisse as the Fund’s prime broker, when in fact neither company had ever been retained to provide services to the Fund;
• Statements that the 27 year old Hicks held an undergraduate degree and doctorate degree in applied mathematics from Harvard, when in fact he had only attended three semesters as an undergraduate, and was forced to withdraw due to repeated failure to meet academic standards. Hicks received a D minus in the only math course he took;
• Statements that Hicks managed a book of futures, options and foreign exchange investments at Barclays, and grew his book nearly two-fold during his brief tenure, when in fact he had never been employed at Barclays; and
• Assurances to at least one investor that his subscription monies had been received and were “entered into live trading,” and similar statements.

The first investor in the Fund, referred to as Investor A, met Hicks on an airplane and the two fell into conversation. The above statements, found in the offering documents, on the website and in other materials, were reinforced during their conversation. Hicks talked about his education and professional experience, showed Investor A LOM’s website on his Blackberry, and the two parted, exchanging their business cards. The chance meeting and follow-up emails were evidently persuasive; Investor A wired his subscription monies about a month later.

This action highlights several points for managers:

• Do not lie in your marketing materials; in biographies especially, take care to avoid statements that exaggerate education, qualifications, experience and expertise;
• Carefully check all facts, even basic data such as service provider information and fund formation details in all areas where they appear (not merely obvious places like your fund offering documents, but any presentations, pitchbooks, websites or other materials);
• Maintain files of backup materials to document every factual statement made in your offering documents, marketing materials and on your website;
• The anti-fraud provisions of the securities laws have a long reach and managers should be careful about all communications, not just in their marketing materials. Evaluate letterhead, business cards, email signatures and speak with all employees, but especially those involved in marketing, regarding appropriate parameters for meetings (planned or chance) with potential investors.

Conclusion

Although Hicks is an extreme example, all managers should ensure that their funds’ offering documents marketing materials, stationery, written correspondence, and verbal statements are accurate, including with respect to service provider information, fund formation details, and biographies. To the extent that managers provide such information on their websites, all of these details should be confirmed as accurate on the website itself, and in any linked or uploaded materials.

We recommend that your attorney, in-house counsel or compliance consultant review all marketing materials prior to distributing them, and retaining these materials and backup information in your files.

For more information please see the complaint above of the SEC litigation release.

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Cole-Frieman & Mallon is a boutique hedge fund law firm which provides fund formation, business and compliance services to fund managers.  Bart Mallon can be reached directly at 415-868-5345.

For those commodity pool operators who are registered with the NFA, there is a quarterly reporting requirement under Rule 2-46.  This filing must be submitted to the NFA by November 14 through the NFA’s EasyFile system.  Today the NFA sent the following reminder email to those managers who have not yet completed this filing.  If you have questions on the filing, please feel free to contact us.

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November 7, 2011

Reminder to CPOs regarding upcoming due date for quarterly pool report

This is a reminder that the September 30th quarterly pool report required by NFA Compliance Rule 2-46 is due to NFA on November 14, 2011. You are receiving this message because NFA’s records indicate that you have not yet completed the filing requirement for one or more of your pools. Please note that each Member CPO is required to file a quarterly report for each active pool that it operates as long as the pool has a reporting requirement under CFTC Regulation 4.22.

The report itself covers the three-month calendar quarter ending September 30, 2011 and it must be filed electronically through NFA’s EasyFile System. You can view a list of your pools and the applicable report due dates by logging onto EasyFile using this link: https://www.nfa.futures.org/appentry/Redirect.aspx?app=EASYFILEPOOL. PLEASE NOTE THAT IF YOU HAVE A QUALIFYING POOL THAT DID NOT OPERATE BEFORE OR DURING THE QUARTER ENDING SEPTEMBER 30, 2011, YOU MUST STILL ACCESS THE EASYFILE SYSTEM AND DELETE THE POOL’S QUARTERLY STATEMENT CALL USING THE DELETE ICON ON THE MAIN POOL INDEX LISTING.

Please ensure that the September quarterly reports are filed by the due date. Failure to file this report, and/or previous quarterly reports timely, is an apparent violation of NFA Rules, that could subject your firm to disciplinary action. Questions concerning the reporting requirements should be directed to NFA’s Information Center at 312-781-1410 or 800-621-3570.***

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Cole-Frieman & Mallon LLP is a boutique law firm focused on the investment management industry.  The firm provides legal advice to CPOs and CTAs.  Bart Mallon can be reached directly at 415-868-5345.

The MF Global bankruptcy is creating a number of problems for managers with accounts at the firm. One question we have received from some managers is whether their client accounts are insured either through the Securities Investor Protection Corporation (“SIPC”) or through some sort of similar company.  Unfortunately there is no SIPC coverage for futures accounts and it is currently unclear how and when clients will find out whether they wil be made whole.  It is curious that there is no insurance for futures accounts given the Refco collapse in 2005, but with this bankruptcy, we are probably more likely to see calls for the creation some sort of SIPC-like insurance.

SIPC & What Losses are Insured

The following is a description of the SIPC from FINRA:

SIPC is a non-profit organization created in 1970 under the Securities Investor Protection Act (SIPA) that provides limited coverage to investors on their brokerage accounts if their brokerage firm becomes insolvent. All brokerage firms that do business with the investing public are required to be members of SIPC. SIPC protection is limited. It covers the replacement of missing stocks and other securities up to $500,000, including $250,000 in cash claims. However, it does so only when a firm shuts down due to financial circumstances in which customer assets are missing—because of theft, conversion, or unauthorized trading—or are otherwise at risk because of the firm’s failure.

SIPC does not cover the following:

• Ordinary market loss;
• Investments in commodity futures, fixed annuities, currency, hedge funds or investment contracts (such as limited partnerships) that are not registered with the SEC; and
• Accounts of partners, directors, officers or anyone with a significant beneficial ownership in the failed firm.

SIPC Moves Quickly & Makes Statement

The following was posted on the SIPC website on Monday:

WASHINGTON, D.C. – October 31, 2011 – The Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, announced today that it is initiating the liquidation of MF Global Inc., under the Securities Investor Protection Act (SIPA).

SIPC today filed an application with the United States District Court for the Southern District of New York for a declaration that the customers of MF Global Inc. are in need of the protections available under the SIPA.

The United States District Court for the Southern District of New York granted the application and appointed James W. Giddens as trustee for the liquidation, and further appointed the law firm of Hughes Hubbard & Reed as counsel to Mr. Giddens.

Orlan Johnson, board chairman of the Securities Investor Protection Corporation (SIPC), said: “When the customers of a failed SIPC member brokerage firm have left their securities in the custody of that firm, SIPC acts as quickly as possible to protect those customers. In this case, SIPC initiated the liquidation proceeding within hours of being notified by the SEC that a SIPC case was necessary to protect the investing public.”

While the SIPC is not insuring the accounts, they are involved with helping investors.  The following press release discusses the SIPC’s involvement in helping investors to transfer accounts:

U.S. Bankruptcy Judge Martin Glenn approved a request to allow the transfer of certain segregated customer commodity positions from MF Global Inc. to one or more futures commission merchants (FCMs). The request was made by the trustee appointed by the Securities Investor Protection Corporation and oversee- ing the liquidation of MF Global Inc.

This action will allow for the transfer of approximately 50,000 client accounts, the substantial majority of which were cleared through the Chicago Mercantile Ex- change (CME). These transfers will unfreeze commodity positions with a notional value of $100 billion and represent a substantial position of all existing commod- ity accounts at MF Global Inc.

The notice above can be found on MF Global’s regulatory notices webpage.

Next Moves & Conclusion

Commodity pool operators who advise funds with accounts at MF Global should have already alerted investors in such funds.  For more information on this please see our post on the NFA Guidance re: MF Global.

Other persons who are interested in receiving more information about the liquidation and account transfer process should find the following websites helpful:

• CFTC MF Global Information Page
• MF Global Regulatory Page
• MF Global Case Information
• CME MF Global Page (note: the CME and not the NFA is the regulatory agency which was in charge of monitoring MF Global)
• SIPA MF Global Documents

We will continue to provide updates on MF Global which we think will be helpful to our readers.  If you have specific questions, please feel free to send us questions and we will do our best to provide appropriate information through the blog.  As we mentioned above, we think that there is likely to some sort of regulatory fall-out from this and we believe that law makers will call for insurance for customer accounts.

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Cole-Frieman & Mallon provides legal advice to FCMs, IBs, CTAs and CPOs.  Bart Mallon can be reached directly at 415-868-5345.

Below is guidance just provided by the NFA regarding MF Global.  Commodity Pool Operators must provide investors with a disclosure regarding the fund’s assets held at MF Global.  Additionally, if the CPO is soliciting new investors for the fund, the CPO will need to amend their disclosure document and have the disclosure document reviewed by the NFA prior to first use.

Please contact us if you need help with respect to any of the items discussed in the NFA memo below.

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November 1, 2011

Proposed Guidance for CPOs with Pool Funds Held at MF Global, Inc.

NFA recognizes the need for our CPO Members to keep their pool participants informed as to what has occurred with MF Global, Inc. (MF Global) and how it may affect future operations. In this regard, NFA, in consultation with the CFTC, is providing guidance on disclosures that CPO Members with pool funds held at MF Global must make to their participants. At a minimum, CPO Members must provide their pool participants with a disclosure statement that includes the disclosures summarized below. Members are also encouraged to provide any additional disclosures that are necessary given their specific business operations.

If you are a Member operating a pool that has pool funds held at MF Global, you must make the following disclosures:

• On October 31, 2011, MF Global reported to the SEC and CFTC possible deficiencies in customer segregated accounts held at the firm. As a result, the SEC and CFTC determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets, and SIPC initiated the liquidation of MF Global under the Securities Investor Protection Act.
• As of (insert date) approximately $XXX of (Name of Pool)’s assets were on deposit in an account(s) at MF Global. These assets represent XX% of the (Name of Pool)’s net asset value of $XXX.
• The General Partner does/does not believe that these actions will have a material impact upon the operations of (Name of Pool) and its ability to:
• Satisfy redemptions requests;
• Adequately value redemption requests and the manner in which they will be handled;
• Accept new subscriptions in (Name of Pool) and properly value the net asset value for new subscribers; and
• Provide for accurate valuation in the (Name of Pool)’s account statements provided to participants.
• Participants are cautioned that there can be no assurances:
• That (Name of Pool) will have immediate access to any or all of its assets in accounts held at MF Global; and
• As to the amount or value of those assets in the context of the bankruptcy.
• Participants should also be aware that future actions involving MF Global may impact (Name of Pool)’s ability to value the portion of its assets held at MF Global and/or delay the payment of a participant’s pro-rata share of such assets upon redemption.

The above disclosures must be provided to current pool participants through a separate written communication. In addition, Members who have a current disclosure document and plan to solicit new participants must ensure that they have updated their disclosure document to include these disclosures. In this regard, please remember that all amended disclosure documents must be submitted to NFA for review prior to use.

Further, with respect to the valuation of pool assets and redemptions, each Member is urged to consult with its CPA to ensure these items are reported in accordance with generally accepted accounting principles or international financial reporting standards, as applicable.

If you have any questions, please do not hesitate to contact the following individuals:

Mary McHenry at (312)781-1420 or at mmchenry@nfa.futures.org

Tracey Hunt at (312)781-1284 or thunt@nfa.futures.org

Todd Maines at (312)781-1560 or at tmaines@nfa.futures.org

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Cole-Frieman & Mallon LLP is an investment management law firm which provides CPO registration and compliance services.  Bart Mallon can be reached directly at 415-868-5345.

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

- Karl Cole-Frieman & Bart Mallon

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COLE-FRIEMAN & MALLON LLP LAUNCHES ALTERNATIVE MUTUAL FUND PRACTICE

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

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

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

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

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

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

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

About Cole-Frieman & Mallon LLP

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

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

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

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

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

SEC has chosen FINRA to accept Form PF filings on its behalf when and if Form PF is adopted.  As background, on January 26, 2011 the SEC issued a proposed Rule 204(b)-1 under the Investment Advisers Act of 1940 which would require SEC registered investment advisers to file a new Form PF with the SEC on either a quarterly or annual basis.  Although the rest of the proposed rule is still under consideration, the SEC has determined that if Form PF is adopted, investment advisers would file Form PF electronically through FINRA.  FINRA currently is the operator of IARD, the system through which investment advisers electronically file their Form ADV and make necessary notice filings to states.  If the rule is passed, FINRA will develop and maintain the filing system for Form PF as well.

The SEC initially anticipated that the proposed rule implementing Form PF would have an initial compliance date of December 15, 2011 – this appears less likely as we get closer to that date and plan to provide updates as appropriate.

Form PF Filing Process and Filing Fees

Because the filing system for Form PF will likely be an extension of the current IARD filing system, we expect the process will be substantially similar to the current process of filing Form ADV.  Investment advisers filing Form PF will likely have to go through the entitlement process and then fund their accounts with the fees necessary to submit the filing through the system.  Managers will have to make quarterly annual filing based on their assets under management. Regardless of assets under management, the filing fees shall be as the same for each filing:

• $150 for each Form PF annual update
• $150 for each Form PF quarterly update

Conclusion

FINRA is the logical choice to accept and manage the filing of Form PF because, as the current operator of the IARD system, they are uniquely situated to develop and deploy the Form PF filing system in a timely manner.  The SEC believes that having FINRA expand its existing platform to accommodate this additional filing would be result in greater efficiency for both the advisers and the SEC.  However, managers should be wary of the continued consolidation of filing platforms as FINRA continues to move towards becoming the SRO for hedge fund managers and other investment advisers.

The text of FINRA’s letter regarding Form PF can be found here: FINRA Form PF Letter

The text of SEC’s notice of intent to have Form PF filed through FINRA can be found here: SEC Form PF Announcement – IA-3297

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Cole-Frieman & Mallon LLP provides comprehensive registration and compliance services to hedge fund managers, including help with filing Form PF.  Bart Mallon can be contacted directly at 415-868-5345.

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

What is an Alternative Mutual Fund?

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

Starting an Alternative Mutual Fund – Legal Considerations

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

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

Other Considerations

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

Conclusion

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

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