Hedge Fund Law Blog http://www.hedgefundlawblog.com Blogging on hedge fund laws, starting a hedge fund, news and events... Thu, 02 Sep 2010 03:36:53 +0000 en hourly 1 http://wordpress.org/?v=3.0 Hedge Fund Events September 2010 http://www.hedgefundlawblog.com/hedge-fund-events-september-2010.html http://www.hedgefundlawblog.com/hedge-fund-events-september-2010.html#comments Thu, 02 Sep 2010 03:36:53 +0000 lsico http://www.hedgefundlawblog.com/?p=3743 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.

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September 1-2

September 7-8

September 8-9

September 10

September 12

September 12

September 13-14

September 13-14

September 13-15

September 13-16

September 14

September 14

September 14

September 14-15

September 15

September 15-16

September 15-16

September 16

September 16

September 16

September 16-17

September 16-17

September 20-22

September 21

September 21

September 21-22

September 21-22

September 21-22

September 21-22

September 22

September 22-24

September 25

September 26-28

September 26-28

September 28-29

September 28

September 28

September 28

September 28-29

September 29

September 29

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

]]> http://www.hedgefundlawblog.com/hedge-fund-events-september-2010.html/feed 0 NFA Provides Guidance on Forex Registration Requirements http://www.hedgefundlawblog.com/nfa-provides-guidance-on-forex-registration-requirements.html http://www.hedgefundlawblog.com/nfa-provides-guidance-on-forex-registration-requirements.html#comments Wed, 01 Sep 2010 17:59:54 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3762 Bart Mallon, Esq. – Mallon P.C.
(www.forexregistration.com)

NFA Releases Notice Regarding Forex Registration

As we discussed in our post yesterday about outstanding issues with retail forex regulations, the NFA posted guidance regarding the final retail forex regulations passed by the CFTC earlier this week.  In general, the notice answers a few of the questions regarding implementation of the regulations, but many questions are left unanswered.

The central take-aways from the notice below include the following:

  • NFA will begin taking registration applications from forex firms on September 2
  • Retail forex firms not registered by October 18, 2010 must cease conducting retail forex business until registration is finalized
  • Forex only FCMs will need to register as an RFED even though they are already registered as a FCM
  • Forex APs will need to pass both the Series 3 and Series 34 exams (with certain exceptions)
  • Forex IBs, if guaranteed, can only have a guarantee agreement with one FCM/RFED

The release below is silent on the following issues:

  • Disclosure documents for Forex CTAs and CPOs - do these need to be reviewed and approved by the NFA prior to use by the registered forex firm?  If so, is the NFA providing expedited review for these forex applications?
  • Currently registered CTAs and CPOs who conduct a small amount of retail forex transactions – do APs at these firms also need to take and pass the Series 34 exam?  Are there additional items in the NFA online registration system which need to be completed?
  • Open positions on October 19, 2010 – what happens if a forex CTA or CPO is not registered by October 19, 2010?

Other questions deal with issues which we will seek clarification from the CFTC – the big open question is whether individuals will be able to open accounts at offshore forex firms.

It is also currently unknown what sort of paperwork or procedures the forex dealers will be requiring from the forex CTAs and CPOs in order to comply with the provisions of the CEA.

The following notice can be found here.

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Notice I-10-17

September 01, 2010

NFA to begin accepting registration applications from forex firms and individuals on September 2

The Commodity Futures Trading Commission has issued final forex rules which become effective on October 18, 2010. NFA will begin accepting registration applications from forex firms and individuals beginning Thursday, September 2.

Any retail forex entity that does not complete the registration process by October 18, 2010 will be unable to conduct retail forex business until registration and all necessary approvals and designations are granted.

As part of the reauthorization of the CFTC in May 2008, Congress amended the Commodity Exchange Act to require, with certain exceptions, including a Futures Commission Merchant (FCM) acting primarily or substantially as a traditional FCM, any firm acting as a counterparty to certain retail forex transactions to register as a Retail Foreign Exchange Dealer (RFED).

Consequently, any existing Forex Dealer Member of NFA that is currently registered as an FCM must register as an RFED unless the firm’s business is primarily or substantially that of a traditional FCM. Moreover, even if the firm’s business is primarily or substantially that of a traditional FCM, the firm must access NFA’s Online Registration System (ORS) and request approval as a Forex Firm and designation as a Forex Dealer Member.

The Commodity Exchange Act was also amended to require any individual acting as a forex solicitor, account manager or pool operator to register with the CFTC as Introducing Brokers (IBs), Commodity Trading Advisors (CTAs) or Commodity Pool Operators (CPOs) and become Members of NFA. Also, any Associated Person (AP) soliciting or supervising persons soliciting business on behalf of a forex firm must request approval as a Forex AP.

If you are not currently registered, you must comply with all registration and forex requirements.

If you are currently registered as an IB, CPO, CTA or AP that is conducting forex business, you must still apply for Forex Firm or Forex AP approval.

All individuals who solicit retail off-exchange forex business or who supervise that activity must take and pass two exams. One is the National Commodity Futures Examination (Series 3) and the other is the Retail Off-Exchange Forex Examination (Series 34), a new exam focusing exclusively on forex-related questions.

Individuals who were registered as APs, sole proprietors or floor brokers (FBs) on May 22, 2008 will not need to take the Series 34 exam unless there has been a two-year gap in their registration since that date.

Every approved Forex Firm (RFED, FCM, IB, CPO or CTA) must have at least one principal who is registered as an AP or FB and who is approved as a Forex AP.

In addition, any RFED branch office must have a branch office manager who has taken the Series 30 exam and is an approved Forex AP.

The Commission’s final forex rules do not require Forex Firm IBs to be guaranteed. However, if a Forex Firm IB is guaranteed, the IB can only have one guarantor. In other words, an IB cannot be guaranteed by an FCM for futures business and a different RFED for forex business.

NFA has prepared a “Registration Overview for Retail Foreign Exchange Dealers and Forex IB, CTA and CPO Applicants” that provides additional registration information. You can also find information and guidance on NFA’s website.

Additionally, NFA’s Information Center (800-621-3570) is available from 8:00 a.m. – 5:00 p.m. CT, Monday through Friday.

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Mallon P.C. is a law firm and provides legal support and forex registration and compliance services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.
]]> http://www.hedgefundlawblog.com/nfa-provides-guidance-on-forex-registration-requirements.html/feed 0 Clarification on CFTC Final Retail Forex Regulations Forthcoming http://www.hedgefundlawblog.com/clarification-on-cftc-final-retail-forex-regulations-forthcoming.html http://www.hedgefundlawblog.com/clarification-on-cftc-final-retail-forex-regulations-forthcoming.html#comments Wed, 01 Sep 2010 04:33:56 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3758 Bart Mallon, Esq.
(www.forexregistration.com)

NFA to Issue Guidance on Regulations

Now that the CFTC has finalized the retail Forex regulations the Forex community will now set forth to figure out exactly what will be happening next.  Today I called the NFA to get clarification on a couple of items with respect to the new regulations and I was surprised to hear that the NFA is planning to release guidance on the new regulations tomorrow.  The representative that I spoke with did not know much about tomorrow’s release.  Below I discuss the issues which were the subject of the conversation as well as some general thoughts and questions that we will be working on over the next 6-8 weeks with respect to the new regulations.

Registration Required by October 18, 2010

The central question I had was whether managers (forex CTAs, CPOs) and introducing brokers would need to be actually registered (i.e. completes fingerprints and forex exams) by the time that the regulations are effective.  The NFA representative that I spoke with said that yes, forex managers would need to be registered by October 18, 2010.  This means that firms who provide investment advice with respect to retail forex will need to cease providing such advice unless the managers are registered with the NFA.  Even if a firm is registered, no APs of the firm may provide advice with respect to retail forex unless such APs have passed the Series 34 exam.  However, APs which were registered as such with the NFA on May 22, 2008 do not have to pass the Series 34.

Logistical Issues

If this is the case — and we will find out tomorrow — the requirement for forex managers and IBs to be registered by October 18 presents a number of logistical issues.

The first issue is that these managers will need to have passed both the Series 3 and Series 34 exams.  As many forex managers are not currently APs of a CFTC registered firm, they will generally not have the Series 3 exam.  The Series 3 exam has nothing to do with retail forex trading so persons without futures/commodities industry experience will need to take special care to prepare accordingly.  Managers will also need to have passed the Series 34 exam.  Studying for and passing both of these exams in the next 6 weeks or so is going to be very difficult.

The second issue will be whether the NFA staff can handle the increased amount of applications from forex managers.  The NFA has previously said that they specifically updated their systems to handle an increase in applications (because of forex registration requirements).  However, when I asked the NFA representative whether the NFA has hired additional staff to deal with the extra registrations, the NFA representative could not answer me – I suspect the answer is “no” the NFA has not hired additional examiners.

A second part of this issue involves the review and approval of disclosure documents.  Both forex CTAs and forex CPOs will need to have their disclosure documents reviewed by the NFA.  While registration can be completed fairly quickly if a manager has completed the forex exams and the fingerprint requirement, the disclosure document review process is not short.  Typically the review process will last anywhere from 4-8 weeks from the time that the disclosure documents are submitted to the NFA for review (which cannot be sooner than the date a firm is registered).  [Note: it is most common for the review process to take around 6-8 weeks depending on the nature of the forex firm.]  This means that even if a manager is able to complete the registration process by October 18, it is likely that the manager would not be able to conduct business if the disclosure documents were not approved, which could probably not happen by October 18 even if the manager completed registration tomorrow!  It is unclear whether the CFTC and NFA recognize this reality or whether they will grant an exception for managers who have made a good faith effort to comply with the registration requirements.

[Note: the NFA takes much longer to approve the applications for forex IBs - genrally it will take anywhere from 4-8 months for a forex IB to become registered.]

Other Issues

There are a number of other questions and issues which have arisen.  The following are some questions we are getting and our current responses:

How long will 100:1 leverage (majors) and 25:1 leverage (non-majors) be applicable? The NFA is now tasked with creating new leverage levels which cannot be exceed 50:1 (majors) or 20:1 (non-majors).  It would make sense if the current leverage levels remain in force until October 18, 2010.  The NFA is likely to propose rules with respect to leverage prior to October 18.

How will the Series 34 exam change? The current Series 34 exam is based on current NFA rules and bylaws which are currently in flux after the CFTC final forex regulations.  Test takers should note that certain questions may be asked on the exam which do not comport with current law and other rulemaking.  The NFA should be addressing this issue shortly.

Can managers manage accounts from the U.S. for only offshore investors at offshore forex dealers without registration? Probably not.  We are still trying to figure out how the final regulations deal with this issue.

Can traders move their forex trading to SEC registered broker dealers to get higher leverage? Probably not.  While the SEC will have jurisdiction over broker-dealers who want to offer retail forex, it is unlikely that the SEC will (under its own rulemaking) allow more leverage than the CFTC.  The SEC would likely defer to the CFTC with respect to the leverage requirements.  Also, FINRA recently proposed a leverage requirement for its member firms which was much lower than the current CFTC regulations.

Can individuals create accounts (either individually or through offshore companies) at offshore forex dealers in order to access higher leverage overseas? Probably not.  The major intent of Dodd-Frank and the final CFTC regulations was to keep U.S. citizens from trading with overseas brokers.  It is likely that the CFTC and NFA are going to take a hard stance on this issue.

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Other related hedge fund law articles:

Mallon P.C. is a law firm and provides legal support and forex registration and compliance services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.
]]> http://www.hedgefundlawblog.com/clarification-on-cftc-final-retail-forex-regulations-forthcoming.html/feed 0 Commissioner Chilton Speaks on Retail Forex Regulations http://www.hedgefundlawblog.com/commissioner-chilton-speaks-on-retail-forex-regulations.html http://www.hedgefundlawblog.com/commissioner-chilton-speaks-on-retail-forex-regulations.html#comments Tue, 31 Aug 2010 21:49:01 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3754 The CFTC just released a statement by Commissioner Chilton regarding the new retail Forex regulations.  The full statement is reprinted below and can also be found here.

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“Rules to Rein in a Racket”

Statement by Commissioner Bart Chilton on the Release of New Retail Forex Rules

In recent years, mini-Madoff ponzi scams have proliferated, targeting unsuspecting investors with good hearts and limited incomes. Many of these fraudulent schemes have involved “forex” trading, that is, derivatives trading foreign currency. Operating in the shadows of the legitimate forex market, regulators have focused on the types of illegal trading in this area that targets unsuspecting consumers, and bilks them out of millions of dollars annually. New rules will rein in this racket.

Toward that end, the CFTC has worked to craft rules that will protect American investors, and at the same time provide for the operation of legitimate business activity. With these new rules, the agency is ensuring that people investing in forex are protected from fraud and abuse. These rules put the sidelines on the field so that traders know the boundaries and investors can be more assured that their money is not being traded out of bounds.

Last Updated: August 31, 2010

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Other related hedge fund law articles:

Mallon P.C. is a forex law firm and provides legal support and forex registration services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

]]> http://www.hedgefundlawblog.com/commissioner-chilton-speaks-on-retail-forex-regulations.html/feed 0 CFTC Releases Final Retail Forex Rules http://www.hedgefundlawblog.com/cftc-releases-final-retail-forex-rules.html http://www.hedgefundlawblog.com/cftc-releases-final-retail-forex-rules.html#comments Tue, 31 Aug 2010 00:56:15 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3751 New Regulations Effective as of October 18, 2010

The final retail Forex regulations (which requires registration for forex CTAs, CPOs and IBs) have been published in the Federal Register.  The final regulations will be effective as of October 18, 2010.  The regulations were adopted essentially as written with the execption of two major issues:

  • Leverage – while the proposed rules called for a maximum leverage of 10:1, the final rules allow the NFA to determine the margin requirements for the currencies within a defined set of CFTC parmeters.  Currently the parameters include 50:1 leverage for major currencies and 20:1 leverage for all other currencies.
  • Forex Introducing Brokers – the proposed rules called for all forex introducing brokers to be guaranteed by a single FCM or RFED.  The final rules allow a forex introducing broker to be either guaranteed or independent, consistent with other regulated futures IBs.

We have not yet had a chance to talk with the NFA or the CFTC about the new rules, but we recommend that all groups who may have to register with the NFA to begin the forex registration process as soon as possible (which includes taking the Series 34 exam) because of the large amount of applications the NFA will receive because of the final regulations.

The full CFTC press release is reprinted below.

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August 30, 2010

CFTC Releases Final Rules Regarding Retail Forex Transactions

Washington, D.C. – The U.S. Commodity Futures Trading Commission (CFTC) today announced the publication in the Federal Register of final regulations concerning off-exchange retail foreign currency transactions. The rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Food, Conservation, and Energy Act of 2008, which, together, provide the CFTC with broad authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail foreign exchange (forex) transactions.

“These rules of the road will help protect the American public in the largest area of retail fraud that the CFTC oversees: retail foreign exchange,” CFTC Chairman Gary Gensler said. “All CFTC registrants involved in soliciting and selling retail forex contracts to consumers will now have to comply with rules to protect the investing public. This is also the first final rule that the Commission has published to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. We look forward to publishing additional rules to protect the American public.”

The final forex rules put in place requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital and other business conduct and operational standards. Specifically, the regulations require the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant. Persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex also will be required to register, either as introducing brokers, commodity trading advisors, commodity pool operators (as appropriate) or as associated persons of such entities. “Otherwise regulated” entities, such as United States financial institutions and SEC-registered brokers or dealers, remain able to serve as counterparties in such transactions under the oversight of their primary regulators.

The final rules include financial requirements designed to ensure the financial integrity of firms engaging in retail forex transactions and robust customer protections. For example, FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries will be required to distribute forex-specific risk disclosure statements to customers and comply with comprehensive recordkeeping and reporting requirements.

The final rules become effective October 18, 2010.

Last Updated: August 30, 2010

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Other related hedge fund law articles:

Mallon P.C. is a forex law firm and provides legal support and forex registration services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

]]> http://www.hedgefundlawblog.com/cftc-releases-final-retail-forex-rules.html/feed 0 Business Continuity Plans (Disaster Recovery Plans) | Investment Adviser Registration http://www.hedgefundlawblog.com/business-continuity-plans-disaster-recovery-plans-investment-adviser-registration.html http://www.hedgefundlawblog.com/business-continuity-plans-disaster-recovery-plans-investment-adviser-registration.html#comments Tue, 24 Aug 2010 09:04:55 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3715 The following post is part of our hedge fund compliance guide for managers who will be required to register as investment advisers with the SEC.  After the Dodd-Frank bill, managers with either $1ooM of AUM (if managing a fund and separate accounts) or $150M of AUM (if managing a fund only) will be required to register and also to implement a compliance program.  Under SEC Rule 206(4)-7 those managers will need to generally institute compliance policies and procedures (subject to annual review) and appoint a chief compliance officer.  Part of that process will be to institute a business continuity or disaster recovery plan.

Rule 206(4)-7

The full rule provides:

Rule 206(4)-7 — Compliance Procedures and Practices

If you are an investment adviser registered or required to be registered under section 203 of the Investment Advisers Act of 1940 it shall be unlawful within the meaning of section 206 of the Act for you to provide investment advice to clients unless you:

a.  Policies and procedures. Adopt and implement written policies and procedures reasonably designed to prevent violation, by you and your supervised persons, of the Act and the rules that the Commission has adopted under the Act;

b.  Annual review. Review, no less frequently than annually, the adequacy of the policies and procedures established pursuant to this section and the effectiveness of their implementation; and

c.  Chief compliance officer. Designate an individual (who is a supervised person) responsible for administering the policies and procedures that you adopt under paragraph (a) of this section

Background on BCP Requirement

While the rule does not specifically mention a “business continuity plan,” the SEC has stated that an adviser has a fiduciary obligation to protect client assets from risks resulting from the adviser being unable to provide advisory services. Thus, an adviser must create and maintain a business continuity plan which is “reasonably designed” to enable the adviser to meet client obligations in the event of a natural disaster, emergency, or significant business disruption.

In the accompanying Adopting Release Report to Rule 206(4)-7,  the SEC specifically noted that, at a minimum, policies and procedures established must address, among a number of other issues, the investment adviser’s or the fund’s business continuity plan.  [HFLB Note: Other issues the adviser’s policies and procedures should address include: (1) portfolio management, (2) trading practices, (3) proprietary trading and personal trading activities, (4) the accuracy of disclosures, (5) safeguarding client assets, (6) the accurate creation and maintenance of required records, (7) marketing advisory services, (8) process to value client holdings and assess fees based on valuations, and (9) safeguards for the privacy protections.]

The SEC did not, however, detail specific requirements for a business continuity plan, other than to state that it must adequately address the procedures necessary for the investment adviser or the fund to fulfill its fiduciary obligation to protect its clients’/investors’ interests from being placed at risk as a result of the investment adviser’s or the fund’s inability to provide investment advisory or related services after a disaster or disruption occurs.

Because the SEC did not provide direct guidance in this respect, we can, among other resources, look toward FINRA rules on this topic.

FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information)

On April 7, 2004, the SEC approved NASD Rules 3510  and 3520  requiring member firms to establish and maintain business continuity plans that meet specified requirements.  FINRA Rule 4370 superseded these rules following the consolidation of NASD and other member regulation, enforcement and arbitration functions of the NYSE regulation into FINRA.   FINRA Rule 4730 is nearly identical to the previous NASD rules.  The following sets forth the rule.

  • Establishing and Maintaining a BCP.  Requires firms to create and maintain a business continuity plan that identifies procedures related to an emergency or other significant business disruption and is “reasonably designed to enable the member [firm] to meet its existing obligations to customers.”  The business continuity plan procedures must address existing relationships with other broker-dealers and counter-parties.  The business continuity plan must be made available upon request by FINRA staff.
  • Updating Requirements.  The firm must update the business continuity plans in the event of any material change to the adviser’s operations, business, structure, or location.  In addition, the business continuity plans must be reviewed at least annually.
  • BCP Details.  The rules do not provide specific detailed requirements.  Instead, they provide a framework for minimum compliance.   The following is a non-exhaustive list of 10 key areas that the business continuity plans should address to the extent applicable and necessary.

1. Data back-up and recovery (hard copy and electronic);
2. All mission critical systems;
3. Financial and operational assessments;
4. Alternate communications between the member and its customers;
5. Alternate communications between the member and its employees;
6. Alternate physical location of employees;
7. Critical business constituent, bank, and counter-party impact;
8. Regulatory reporting;
9. Communications with regulators; and
10. How the member will assure customers’ prompt access to their funds and securities in the event that the member determines that it is unable to continue its business.

If a firm does not include one of the elements addressed above, it must document the reason.  If the firm relies on another entity to perform certain functions, it must document the relationship with that other entity.

  • Plan Approval.  The firm must designate a member of senior management who is also a registered principal to approve the business continuity plan and to conduct the annual review.
  • Disclosure Requirements.  The firm must disclose how the business continuity plan can address and how the firm will respond to future business disruptions of varying scope.   The disclosure must, at a minimum, be made in writing to customers at account opening, posted on the firm’s web site (if one exists), and mailed to customers upon request.
  • Designating Emergency Contacts. The firm must designate two emergency contact persons.   The emergency contact persons must be associated persons.  At least one contact person must be both a member of senior management and a registered principal of the firm.  If the second contact person is not a registered principal, that person must be a member of senior management who has knowledge of the firm’s business operations.  If a firm only has one associated person, then the second contact person must be an individual who has knowledge of the firm’s business operations.
  • Updating Requirements.  The firm must update the emergency contact information in the event of any material change.  In addition, the firm’s Executive Representative or designee must review and if necessary, update the information within 17 business days after the end of each calendar quarter.

Conclusion

Having an appropriately tailored business continuity plan for your business is essential from both a regulatory and best practices perspective.  Managers should have robust programs in place and be ready to show examiners that all statements in the business continuity plan are completely accurate.

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Other related hedge fund law articles:

Mallon P.C. provides comprehensive registration and compliance services for SEC registered investment advisers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

]]> http://www.hedgefundlawblog.com/business-continuity-plans-disaster-recovery-plans-investment-adviser-registration.html/feed 0 Exemptive Relief from CPO Annual Audit Requirement http://www.hedgefundlawblog.com/exemptive-relief-from-cpo-annual-audit-requirement.html http://www.hedgefundlawblog.com/exemptive-relief-from-cpo-annual-audit-requirement.html#comments Mon, 23 Aug 2010 09:12:16 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3702 Managers starting a commodity fund at the end of the year may seek relief from annual audit requirement

CFTC Regulations 4.22(c) and (d) require that each registered CPO file a certified annual report with the CFTC and distribute copies to pool participants within 90 calendar days after the pool’s fiscal year (“audit requirement”).  The principal purpose of these requirements is to ensure that pool participants (fund investors) receive accurate, fair, and timely information on the overall trading performance and financial condition of the pool.  In a situation where a futures/commodities hedge fund was established only a few months or so before the end of the fiscal year, conducting a certified audit at the end of the fiscal year may not be desirable due to costs.  Relief may be available to managers in this situation.  The CPO can request an exemption from the audit requirement from the CFTC.

This article explains how a manager can go about requesting and obtaining an exemption.

Exemptions on a Case-by-Case Basis

The CFTC’s Division of Clearing and Intermediary Oversight (“DCIO”) will grant or deny exemptive relief from the audit requirement on a case-by-case basis, based on each individual CPO’s factual circumstances.  When we spoke informally to a staff member at DCIO, he said that there is no prescriptive list of conditions that will automatically result in exemptive relief but the main factors they seem to take into account are:

  1. the pool has only a handful of participants,
  2. the pool has only a nominal amount of capital contributed and a nominal amount of total net assets, and
  3. each of the participants in the pool has provided a written waiver consenting to the CPO’s exemption from the audit requirement.

In many cases where the exemption was granted, DCIO still placed the following conditions on the CPO:

  1. the CPO must distribute unaudited annual reports to each of the pool’s participants (these unaudited annual reports must otherwise comply with the provisions of CFTC Regulations 4.22(c) and (d)–reprinted in full below), and
  2. at the close of the following fiscal year, the CPO must file an audited annual report that includes the previous unaudited period.

Requesting the Exemption by Email or Letter

DCIO seems to grant exemptions from the audit requirement in response to email or letter  requests from CPOs.  In a 2009 DCIO letter granting exemptive relief, the CPO sent an email to DCIO requesting the exemption.  DCIO found that granting relief in the CPO’s situation was not contrary to Regulation 4.22 nor the public interest.  In particular, it focused on the following facts:

  • the pool began operations in September of 2008,
  • the pool only had 8 participants,
  • the pool had total capital contributions between $300,000-$400,000 as of December of 2008,
  • the pool’s net asset value was between $60,000-$70,000, and
  • the CPO attached waivers from the 8 participants indicating their consent to the exemption.

In a 2010 DCIO letter, DCIO granted the exemption after a CPO sent DCIO a letter requesting the relief and attaching the client waivers.  DCIO reviewed the facts and found granting the exemption was not contrary to Regulation 4.22 nor the public interest.

It is important to note that exemptive letters bind DCIO only with respect to the specific fact situation and persons addressed by the letter and third parties may not rely upon it.  For a full explanation of the CFTC’s exemptive letters, visit the CFTC’s discussion on this topic.  If you are interested in filing for such exemptive relief with respect to your commodity pool, please contact Mallon P.C.

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Other related hedge fund law articles:

Mallon P.C. provides comprehensive hedge fund start up and regulatory support for commodity pool operators.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

]]> http://www.hedgefundlawblog.com/exemptive-relief-from-cpo-annual-audit-requirement.html/feed 0 Important Hedge Fund Articles http://www.hedgefundlawblog.com/important-hedge-fund-articles.html http://www.hedgefundlawblog.com/important-hedge-fund-articles.html#comments Sat, 21 Aug 2010 16:29:03 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3402 As of the date we published this list of important hedge fund articles, the Hedge Fund Law Blog has over 600 posts.  In order to highlight some of the more important items on this website we have created the following list of articles which we think will be useful for most of our readers.  Articles without links will be forthcoming and we look forward to hearing your feedback on what information you would like to see in the future.  The categories include:

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

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

BASICS & STRUCTURE

OFFERING DOCUMENTS

INVESTMENT ADVISER

FUTURES & COMMODITIES

MARKETING & ADVERTISING

OPERATIONAL ISSUES

ERISA

LAWS & REGULATIONS

OTHER ISSUES

FOREX

MALLON P.C. QUARTERLY NEWSLETTERS

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

]]> http://www.hedgefundlawblog.com/important-hedge-fund-articles.html/feed 0 Litigation Statement for CTA and CPO Disclosure Documents http://www.hedgefundlawblog.com/litigation-statement-for-cta-and-cpo-disclosure-documents.html http://www.hedgefundlawblog.com/litigation-statement-for-cta-and-cpo-disclosure-documents.html#comments Fri, 20 Aug 2010 09:14:54 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3663 One of the more important requirements with respect to drafting the CTA and CPO Disclosure Documents is making sure that all appropriate litigation statements are included in the documents.  Under CFTC Regulations 4.24 (CPOs) and 4.34 (CTAs) the manager is required to disclose the litigation history of: (i) the management company, (ii) principals of the management company and (iii) the FCM and IB.  While (i) and (ii) are generally going to be easy to prepare, getting the litigation history for the FCM and IB will be dependent on the FCM and IB providing the manager or the manager’s attorney with a litigation statement.  Some FCMs and IBs do not have a litigation history and a statement to that effect will need to be included in the disclosure documents.

Below we have included more information on this requirement from the NFA Disclosure Document Guide and we have included the text of the CFTC Regulations.

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From the NFA guide to disclosure documents:

Litigation

The Document must disclose any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against the following persons (a concluded action that resulted in adjudication on the merits in favor of such person need not be disclosed):

…

• The pool’s FCM and IBs, if any.

With respect to an FCM or an IB, an action is material if:

• The action would be required to be disclosed in the notes to the FCM’s or IB’s financial statements prepared pursuant to generally accepted accounting principles;

• The action was brought by the Commission (unless the action was concluded, did not result in civil monetary penalties exceeding $50,000, and did not involve allegations of fraud or other willful misconduct); or

• The action was brought by any other federal or state regulatory agency, a non-United States regulatory agency or a self-regulatory organization and involved allegations of fraud or other willful misconduct.

Where a matter is material, its description must include a recital of the nature of the action, the parties involved, the allegations or findings, the status of the action and the size of any fine or settlement.

Source: pages 34 and 35 of the disclosure document guide.

CFTC Regulation 4.24(l)

Litigation.

(1) Subject to the provisions of §4.24(l)(2), any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against any of the following persons; Provided, however, that a concluded action that resulted in an adjudication on the merits in favor of such person need not be disclosed:

(i) The commodity pool operator, the pool’s trading manager, if any, the pool’s major commodity trading advisors, and the operators of the pool’s major investee pools;

(ii) Any principal of the foregoing; and

(iii) The pool’s futures commission merchants and introducing brokers, if any.

CFTC Regulation 4.34(k)

Litigation.

(1) Subject to the provisions of §4.34(k)(2), any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against any of the following persons; Provided, however, that a concluded action that resulted in an adjudication on the merits in favor of such person need not be disclosed:

(i) The commodity trading advisor and any principal thereof:

(ii) Any futures commission merchant with which the client will be required to maintain its commodity interest account; and

(iii) Any introducing broker through which the client will be required to introduce its account to the futures commission merchant.

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Other related hedge fund law articles:

Mallon P.C. provides comprehensive hedge fund start up and regulatory support for commodity pool operators.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

]]> http://www.hedgefundlawblog.com/litigation-statement-for-cta-and-cpo-disclosure-documents.html/feed 0 Bart Mallon Quoted in Wall Street Journal on Hedge Fund Registration http://www.hedgefundlawblog.com/bart-mallon-quoted-in-wall-street-journal-on-hedge-fund-registration.html http://www.hedgefundlawblog.com/bart-mallon-quoted-in-wall-street-journal-on-hedge-fund-registration.html#comments Thu, 19 Aug 2010 16:39:37 +0000 Hedge Fund Lawyer http://www.hedgefundlawblog.com/?p=3693 (www.hedgefundlawblog.com)

In an article published today in the Wall Street Journal, Bart Mallon of Mallon P.C. was quoted discussing the current and future role of the state securities divisions with respect to hedge funds.  After the implementation of the new SEC registration thresholds under Dodd-Frank, previously SEC registered hedge fund managers will be required to de-register from the SEC and register with the states.  Outside of the logistical hurdles involved with this process, the central issue for managers and investors is whether the states have the resources or expertise to deal with an increased workload.  This is an especially important question as more and more states like California face budget shortfalls and institute furlough days.

For more information on this specific topic, please see our survey on state securities divisions which includes information on number of examiners, number of furlough days, and the frequency of audits of investment advisers.

The Wall Street Journal article can be found here.

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Other related hedge fund law articles:

Mallon P.C. provides legal support and hedge fund start up services to all types of investment managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

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