One of the more unusual requests (in my opinion) that we receive on this site is how to write a hedge fund disclaimer.  I think that this is unusual because I would assume that most hedge fund managers would want to make sure that anything with a disclaimer has been reviewed and approved by a hedge fund attorney.  If you are a manager who is looking for an “off the shelf” disclaimer, I recommend that you speak with a hedge fund attorney instead.  Any hedge fund marketing or promotional materials (including hedge fund websites) should be reviewed by an attorney prior to publishing or dissemination.

Legal Background on Hedge Fund Disclaimers

Regulation D

There are a couple of important reasons why hedge fund offering documents, hedge fund marketing materials and hedge fund websites need to have certain disclaimers.  The first set of laws deals with the fact that the interests in a hedge fund are securities and thus need to be registered at the federal level or fall within an exemption from registration.  The Regulation D rules provide an exemption from registration and also require that the interests are not part of a public offering.  Usually a hedge fund disclaimer will include references to certain parts of the Regulation D rules, specifically Rule 502.

Anti-Fraud Provisions

Another set of laws which influence hedge fund disclaimers are the anti-fraud provisions under the various federal securities laws.  These provisions include: (i) Section 206 of the Investment Advisors Act and the rules promulgated thereunder (applicable to both registered and unregistered hedge fund managers); (ii) Rule 10b-5 promulgated under the Securities Exchange Act of 1934 (general anti-fraud provisions); and, Section 17(a) under the Securities Act of 1933.

These anti-fraud provisions provide the SEC with many ways to go after a well-intentioned hedge fund manager.  Because these provisions are broadly worded a hedge fund manager should make sure that an attorney reviews all marketing material for compliance.

Creating the Hedge Fund Disclaimer

The hedge fund attorney will work with the hedge fund manager to understand both the words written in the marketing piece as well as the intent behind the words.  Sometimes this can lead to longer discussions on the investment strategy and what the manager is attempting to show about the strategy.  While at times this process can seem unnecessary or overly-protective, the hedge fund attorney needs to make sure that all of the representations in the marketing piece are accurate.

After a discussion the hedge fund attorney will be able to craft the disclaimer fairly quickly.  The disclaimer may seem to contain a lot of “boilerplate” but the key is knowing which provisions should be included and how those provisions should be modified.

Conclusion

As mentioned above, the hedge fund disclaimer is not something that a manager should take lightly and it is definitely not something that the manager should try to draft himself.  If you have any specific questions on the hedge fund disclaimer or would like help starting a hedge fund, please feel free to contact us directly.

Other related hedge fund law articles include:

• Hedge Fund Performance Reporting
• Hedge Fund Websites
• Securities Act of 1933
• Securities Exchange Act of 1934
• Investment Advisers Act of 1940

Many potential hedge fund investors come to this website for information on how to invest in a hedge fund.  While there are many headlines and resources for hedge fund managers, there are fewer resources out there for hedge fund investors.  This article will provide an overview of how to go about investing in a hedge fund.

Picking a hedge fund to invest in

Deciding to invest in hedge funds

Picking a hedge fund to invest in can be a difficult task.  First, an investor should decide why he wants to invest in a hedge fund.  Like any investment option an investment in a hedge fund involves a number of different factors including the investor’s short term and long term investment objectives, liquidity needs and risk tolerance.  While a hedge fund may have many potential benefits, those benefits should be weighed against any possible drawbacks.

Hedge Funds, Fund of Funds or Separately Managed Accounts

Next, the investor should determine how he wants to invest in hedge funds.  The investor can invest directly with a single manager or through a fund of hedge funds.  Many beginning hedge fund investors use hedge fund of funds because the managers of these vehicles have specific expertise in picking managers and maintaining a portfolio with desirable risk-reward characteristics.  Fund of funds are often a “first step” for many investors into hedge fund investing as the risk of poor performance from any single manager is theoretically minimized.

Another possibility is investing in a hedge fund through a separately managed account program.  In this structure the investor will set up a separate trading account and the manager will trade the account according to its investment program.  These structures allow the investor transparency into the underlying which is normally not available to a traditional hedge fund investors.  Most managers do not provide programs like these unless the investor invests a significant amount of assets with the manager.

Finding Managers

So where does one find these elusive hedge funds to invest in?  Many investors find hedge funds to invest in through friends and family members who have invested.  Other investors will find hedge funds through hedge fund databases.  Still other investors will be courted by hedge fund managers.  All of these are viable ways to be introduced to hedge funds.  Once introduced to a hedge fund the investor should determine whether he is eligible to invest in the fund.

Eligible to invest in a hedge fund?

Most hedge funds will require their investors to be both an accredited investor and a qualified client.  An accredited investor is, generally, an investor with a $1,000,000 net worth; an investor’s equity in a primary residence will count toward the one million dollar mark.  A qualified client is, generally, an investor with a $1,500,000 net worth.  Some hedge funds will allow investors who are not accredited investors or qualified clients.  Generally these slots are allocated to friends and family of the manager.  The investor will be able to find out the investor qualifications through the hedge fund offering documents.

Hedge Fund Documents and Investing

The hedge fund offering documents are the centerpiece of the offering process.  In addition to talking with a manager and reviewing the marketing materials, the investor should very carefully review the offering documents.  Unfortunately hedge fund offering documents are very long (usually around 100-150 pages) and are written with a lot of “legalese.”  Because of this many investors don’t even try to read the whole document. It should be noted that the offering documents are so lengthy because of the various hedge fund laws which managers must follow with regard to the offering of hedge fund interests as well as trading securities.

I recommend that investors go through each page of the offering documents and understand what each paragraph is saying.  Because the investor will be presumably making a large investment, it would seem prudent for the investor to understand all parts of the investment.  Specifically, in my opinion, the investor should focus on the following:

• Develop an understanding the investment program, its risks and limitations
• Fully understand the fee structure
• Fully understand the liquidity structure (including the gate and lock-up periods)
• Fully review and understand the manager’s background and qualifications

If an investor has any questions he should ask the manager for a detailed explanation.  If there manager cannot provide a detailed explanation the manager’s attorney should be able to describe any part of the offering documents and what the provision intends.  If necessary, seek clarification of specific provisions and receive the clarification in writing from the manager (email is fine).  If there is a provision which unpalatable, the investor may be able to enter into a side letter arrangement with the manager to remove or modify the provision with respect to the investor.

Above all, if there are questions, the investor should not hesitate to seek clarification.  Another option is to have the offering documents reviewed by a hedge fund attorney or a due diligence professional.

Hedge fund due diligence

Hedge fund due diligence is extremely important.  The recent Madoff scandal provides no better example of how a little investigation into a manager can protect an investor from a huge or complete loss.   There are many hedge fund due diligence firms which provide comprehensive review of the hedge fund and the manager.

Free due diligence resources

Many government agencies provide searchable databases to get information on hedge fund managers.

1.  IDEA (formerly EDGAR) – the SEC’s IDEA website provides a searchable list of all of the filings with the SEC.  Currently a hedge fund investor can see whether or not the hedge fund has submitted to proper Form D filings with the SEC.  (Note: if the hedge fund is new and has no investors, it will likely not have filed Form D.)

2.  Investment Advisor Search – this is another resource from the SEC which allows a potential investor to see the manager’s registration status and Form ADV filings.  If an investor invests with a manager who is registered (at either the SEC or state level), then the investor should use this resource.

3.  FINRA Broker Check – if a management company is registered as a broker-dealer then their information will be in the searchable FINRA database.  Former brokers will be listed as well.  If a manager’s bio mentions that he was a broker at one point, it is likely that this information can be cross-checked through Broker Check.

4.  NFA Basic – if a management company is registered as a Commodity Trading Advisor or a Commodity Pool Operator then the NFA’s Basic system will provide all information on the registration status of the manager.  Additionally, if the manager filed an exemption from registration (disclosed in the hedge fund offering documents), the exemption can be search as well.  Any NFA disciplinary history of the manager will be disclosed.

5.  Other good websites - NASAA (www.nasaa.org), SEC (www.sec.gov), FINRA (www.finra.org)

Checking with Service Providers

Potential hedge fund investors can also check with a hedge fund’s service providers.  The offering documents will disclose who the service providers are - the investor may want to call these providers to make sure the fund is doing business with these firms.

Disclaimer

We do not make any recommendation whether or not to invest in hedge funds or any specific hedge funds.  It would be smart for first time hedge fund investors to talk about their investment goals with a fee-only financial planner who can help them understand the investment and how that investment fits within their overall financial situation.

If you have any questions on this article, please contact us.  Other related hedge fund law articles include:

• Overview of Hedge Fund Investment Advisors
• Hedge Fund Managers
• Hedge Fund Attorney
• Hedge Fund Service Providers
• Hedge Fund Blue Sky Filings
• Starting a hedge fund

The North Carolina Securities Division has a very good website which provides great information for managers based in North Carolina.  Unlike many securities divisions, it informs the public when new securities rules are proposed and provides links to the proposed rules.  The site also has a very good FAQ section for start up hedge fund managers in North Carolina.  We’ve posted the FAQ section below for your information.  If you have any questions starting a hedge fund in North Carolina, please contact us discuss with a hedge fund attorney.  Other related hedge fund law articles include:

• Idaho Hedge Fund Law
• Starting a Hedge Fund
• Start up Hedge Fund Managers - Recommended Articles
• Start Up Hedge Fund Timeline
• Hedge Fund Managers
• How to register as an Investment Advisor
• Important Information for Registered Investment Advisors

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Frequently Asked Questions

1. How does the Securities Act affect me?

The provisions of the North Carolina Securities Act can be summarized into the following three principles:

(a) Securities Registration: Before a security may be lawfully offered for sale or sold, that security must be either (i) registered with the Securities Division, (ii) eligible for an exemption from the registration requirement, or (iii) a “covered security ” (such as a mutual fund or NYSE-listed security) to which state registration requirements do not apply.

(b) Dealer/ Salesman Registration: Before any person (whether an individual or a company) engages in the business of effecting securities offers, purchases, or sales, that person must be registered with the Securities Division as a securities dealer or securities salesman, unless the person is excluded from the definitions of “dealer” and “salesman”.

(c) Antifraud Provisions: In the course of the offer, sale, or purchase of a security:
(i) it is illegal to make an untrue statement of a material fact, or omit to state a material fact if the omission would be misleading, and

(ii) it is illegal to engage in any act, practice, or scheme which would deceive or defraud any person.
There are statutory exemptions and exclusions from the registration requirements described above, but the legal burden of showing eligibility for an exception or exclusion is on the person claiming it. There are no exceptions or exclusions from the antifraud provisions.

The Securities Act gives persons who suffer damage as a result of a violation of certain provisions of the Act the right to demand repayment from the violator. This right is called a right of “rescission”, and the events giving rise to it and the conditions on the exercise of it are set forth at N.C. Gen. Stat. §78A-56. The victim has a limited time within which to demand rescission, so prompt action is of the greatest importance.

Willful violations of certain provisions of the Securities Act can be prosecuted by the State as felonies. Criminal penalties for violations of the Act are set forth at N.C. Gen. Stat. §78A-57.

2. How can I contact the Securities Division?

The Division’s address and phone numbers are:

North Carolina Securities Division
Department of the Secretary of State
PO Box 29622
Raleigh, NC 27626-0622
(919) 733-3924
(800) 688-4507 (toll-free)

3. What fees are charged under the Securities Act and the Investment Adviser Act?

Registration of a securities dealer - $300 annually

Registration of a securities salesman - $75 annually

Registration of an investment adviser - $300 annually

Registration of an investment adviser representative - $75 annually

Registered public offering of securities - $2000 filing fee

Notice filing for investment company (mutual fund) securities - $2000 filing fee

Notice filing for a Rule 506 transaction - $350 flat fee (Eff. July 15, 2003)

Exemption notice for a limited offering subject to Rule .1205(b) - $150 flat fee

Exemption notice for a Rule 505 transaction - $150 flat fee

Renewal of a notice filing for a mutual fund - $2000 annually

Amendment of mutual fund offering amount - $50

Exemption filing by not-for-profit issuer - no charge

4. What forms are used to apply for registrations/exemptions with the Securities Division?

Securities dealer - Form BD

Securities salesman - Form U-4

Investment adviser - Form ADV

Investment adviser representative - Form U-4

Public securities offering - Form U-1, plus Form U-2 consent to service of process, plus Form U-2A resolution (for corporate issuer)

Small Company Offering Registration (SCOR) - Form U-7, plus Form U-1, plus Form U-2 (and Form U-2A, for corporate issuer)

Notice filing for mutual fund - Form NF

Rule 506 transaction notice filing - Form D, plus Form U-2

Limited offering subject to Rule .1205(b) - Schedule of information in format required by Rule.1205(b)(4), plus Form U-2 (and Form U-2A, for corporate issuer)

Rule 505 transaction - Form D, plus schedule required by Rule .1208(c), plus Form U-2 (and Form U-2A, for corporate issuer)

Exempt not-for-profit offering - Schedule required by Rule.1209(d), plus Form U-2 (and Form U-2A, for corporate issuer)

5. Where can I obtain the forms listed in Question 4 above?

Forms U-1, U-2, U-2A, and NF can be obtained by following the instructions on the North American Securities Administrators Association (NASAA) website at

http://www.nasaa.org/Industry___Regulatory_Resources/Uniform_Forms

Persons wishing to register as securities dealers, securities salesmen, investment advisers, and investment adviser representatives are required to use the electronic registration systems known as the CRD (Central Registration Depository) and the IARD (Investment Adviser Registration Depository). The forms and procedures used for these types of registration are found at:

http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=370 and www.iard.com

The Form U-7 and its Issuer’s Manual are found on the NASAA website at:
http://www.nasaa.org/Industry___Regulatory_Resources/Corporation_Finance

Form D can be found at the Securities and Exchange Commission’s website at:
http://www.sec.gov/divisions/corpfin/forms/formd.htm

6. To whom should I make checks for fees payable?

Checks for filing fees related to the offer and sale of securities, such as registration fees, exemption filing fees, and notice filing fees for investment company securities offerings, should be made payable to “Secretary of State.”

Payments for registration fees of securities dealers, securities salesmen, investment advisers, and investment adviser representatives should be made in accordance with the instructions on the CRD and IARD websites.

7. Does North Carolina permit a securities salesman to be registered with more than one securities dealer, or an investment adviser representative to be registered with more than one investment adviser?

The Securities Act prohibits a securities salesman from becoming registered with more than one securities dealer. The Investment Advisers Act permits an investment adviser representative to be registered with more than one investment adviser only in the two following situations: (a) all of the investment advisers with whom the investment adviser representative wishes to be associated are under common ownership or control, or (b) the investment adviser representative is acting as a “solicitor” for more than one investment adviser firm. A “solicitor” is a person who receives compensation for referring business to an investment adviser firm.

8. Where do I find the state laws that govern stockbrokers and investment advisers?

Securities transactions and the persons who engage in the securities business in North Carolina are regulated by the North Carolina Securities Act, which is Chapter 78A of the North Carolina General Statutes. Persons who do business as investment advisers are regulated by the North Carolina Investment Advisers Act, which is Chapter 78C of the North Carolina General Statutes. Provisions of these two acts are supplemented by requirements found in administrative rules issued by the Securities Division, found in Chapter 6 of Title 18 of the North Carolina Administrative Code. These authorities can be found in most public libraries, and the statutes appear on the N.C. General Assembly’s Homepage at http://www.ncga.state.nc.us/. Copies of the statutes may be purchased from Lexis Law Publishing, whose phone number is 1-800-446-3410.

In addition to the state laws mentioned above, securities offerings, stockbrokers, and investment advisers are also subject to extensive regulation under federal securities laws and regulations, which are administered by the Securities and Exchange Commission.

9. What is the Qualified Business Tax Credit Program, and how does it work?

The Securities Division is responsible for reviewing applications from business enterprises that wish to be registered as “Qualified Business Ventures” or “Qualified Grantee Businesses”. If the Division approves the application submitted by the business, a person who makes an investment in the business during the time its registration is in effect is permitted to make a claim for a credit against his or her North Carolina state income tax liability based on the amount of the investment. The credit is generally 25% of the amount invested, with an annual cap of $50,000 per individual investor.

The business does not get the credit; it is the investor who gets the tax benefit of the credit, and that benefit cannot be applied against tax liability until the year following the year of the investment. Unused credits can be carried forward for another five years before they expire.

Only businesses which meet the conditions specified in the governing statutes may register as Qualified Businesses. The conditions are generally limitations on the nature of business activities and the amount of gross revenues earned by the business in the past. Those statutes are found at N.C. Gen. Stat. §§105-163.010 through 105-163.014.

There is a fee of $100 charged for applying for registration as a Qualified Business.

For the new year we will publish a list of common questions we receive from our readers.  This question involves hedge fund valuation.

Question: Can a hedge fund provide its own valuation?

Answer: Generally yes, provided that the hedge fund offering documents state that the valuation of the hedge fund’s assets will be conducted by the fund – more specifically by the hedge fund’s management company.  In many hedge fund documents a provision which allows a manager flexibility in valuation is standard – although, it is likely that these normally nebulous provisions will become more specific as institutional investors require greater specificity in the offering documents.
For managers who wish to value their fund’s assets (or only certain assets), the best practice is for the manager to develop valuation guidelines with the hedge fund attorney.  By drawing up valuation guidelines (and following those guidelines), the manager will protect himself from potentially capricious valuations.

Whether such valuation policies are included in the offering documents is another question.  We have produced documents which do it both ways.  Some managers will also choose to inform investors that they have a valuation policy and that it is available under certain circumstances.  For the most part I think that most managers choose to keep the exact valuation methods out of the documents, but this is something that could change also if the industry moves toward greater disclosure requirements.

As some managers will not want to provide valuations because of liability concerns, there are alternative methods for making sure that any valuation is appropriate.  Two of the most common are: utilizing a third party for valuation and instituting a side-pocket mechanism.

Third Party Valuation

Many managers don’t want to use outside parties for valuing the assets of the fund as this can be costly (and potentially time consuming).  However, using an outside party for valuation should alleviate any liability concerns the manager may have if the manager valued the assets itself.

Side Pockets

Using a hedge fund side pocket account is a common way for managers to get around having to value their assets.  The side pocket structure is particularly effective in making sure that there is no overpayment or underpayment with regard to the performance fee because the performance fee is not paid until there has been a disposition of the asset.

Other

If the hedge fund has ERISA assets, there may be some issues under the ERISA rules which a manager should be aware of - the lawyer should discuss these issues with the manager.  Please contact us if you have additional questions on this article or if you would like help starting a hedge fund.  Other related hedge fund law articles include:

• Starting a hedge fund
• Articles for Start Up Hedge Fund Managers
• Hedge Fund Due Diligence
• Hedge Fund Due Diligence 2.0
• Hedge Funds and ERISA
• Hedge Fund Auditor
• Hedge Fund Administrator

In addition to Grassley, two more members of Congress are calling on greater oversight in the wake of the Madoff scandal.  Specifically Congressman Paul E. Kanjorski from Pennsylvania and Congressman Spencer Bachus from Alabama are calling on the House Financial Services Committee to hold hearings on the Madoff scanal.  I have reprinted the two notices below.  We will continue to provide information on possible hedge fund registration as it comes forward.  Related hedge fund law and registration articles include:

• Hedge Fund Registration Exemption
• Goldstein v. SEC
• SEC Testimony regarding Hedge Funds
• What licenses do you need to start a hedge fund?

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12/17/08: Kanjorski Announces Examination of $50 Billion Madoff Swindle

Review by Capital Markets Subcommittee Will Inform Efforts to Restructure U.S. Financial Services Regulation
WASHINGTON - Congressman Paul E. Kanjorski (PA-11), the Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today announced that he will convene a congressional inquiry in early January to examine the $50 billion investment swindle allegedly committed by Mr. Bernard L. Madoff.  The proceedings of the Capital Markets Subcommittee will help to guide the work of the House Financial Services Committee in undertaking the most substantial rewrite of the laws governing the U.S. financial markets since the Great Depression.

“The news reports in recent days that Mr. Madoff stands at the center of a $50 billion Ponzi scheme are deeply disturbing.  Unfortunately, these events have only further weakened already-battered investor confidence in our securities markets, and they have raised even more troubling questions about the effectiveness of our regulatory system,” said Chairman Kanjorski.  “These matters therefore demand expeditious and careful review by the Capital Markets Subcommittee.  I have consistently stressed the need for pursuing comprehensive regulatory reform since 2000, and I have held hearings on the need to address this important issue.  But, before we act on legislation in the 111th Congress to restructure the regulatory system for the financial services industry and enhance investor protection, we need to understand how Mr. Madoff organized his many business operations and how he perpetrated these frauds.”

Chairman Kanjorski added, “We must also understand why the U.S. Securities and Exchange Commission, other regulators, and additional participants in the securities markets failed to detect these substantial evasions before innocent investors and charitable organizations were substantially harmed.  The answers to these questions will inform the work of the House Financial Services Committee as it works next year to craft a strong, effective, modern regulatory system for the financial services industry.”

The examination of the Madoff swindle will take place as soon as possible in January, once the 111th Congress begins its work.  The new Congress is scheduled to convene on January 6, 2009.

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http://kanjorski.house.gov/index.php?option=com_content&task=view&id=1390&Itemid=

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CONGRESSMAN BACHUS URGES HEARING ON MADOFF ALEGATIONS

WASHINGTON - Congressman Spencer Bachus (AL-6), Ranking Member of the House Financial Services Committee, urged Chairman Barney Frank in a letter today to convene hearings on the alleged $50 billion Ponzi scheme committed by Bernard Madoff, a former Chairman of the Board of the NASDAQ Stock Market.

Ranking Member Bachus said, “Obviously there was a failure of regulatory oversight.   Every day brings more news as to the devastating impact of this fraud on charities, private foundations, and government entities as well as individual and corporate investors.”

Ranking Member Bachus’ letter requests Committee hearings to “thoroughly investigate Mr. Madoff’s conduct and the broader implications for securities market oversight and enforcement.”

On December 11, 2008, the Federal Bureau of Investigation arrested Mr. Madoff and the Securities and Exchange Commission (SEC) charged him and his investment firm, Bernard L. Madoff Investment Securities LLC, for allegedly perpetrating a massive securities fraud on advisory clients of his firm.  Among the allegations in the complaint are that Mr. Madoff “had for years been paying returns to certain investors out of the principal received from other, different, investors,” and engaged in an elaborate pattern of deception to keep his scheme from investors, the public, and regulators.  On December 16th, SEC Chairman Christopher Cox announced an investigation by the SEC’s Inspector General into the agency’s handling of the Madoff case, which he described as being characterized by “apparent multiple failures over at least a decade to adequately pursue these allegations or at any point to notify the Commission of them.”

Text of the letter follows.

December 17, 2008

The Honorable Barney Frank
Chairman
Committee on Financial Services
U.S. House of Representatives
2129 Rayburn House Office Building
Washington, DC 20515

Dear Chairman Frank:

Last week’s startling revelations about the alleged $50 billion “giant Ponzi scheme” orchestrated by Bernard Madoff, a prominent member of the securities industry for more than 45 years, exposes serious shortcomings in securities regulation and oversight that require the Committee’s immediate attention.

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) were reportedly unaware of Mr. Madoff’s deceptions, which only came to light after Mr. Madoff revealed the scheme to two of his senior employees last week. This episode raises serious questions about the SEC’s ability to fulfill its mission to protect investors and abide by its motto to be the “investor’s advocate,” and prompts concerns about the capabilities of self-regulatory organizations to supplement government oversight.  Every day brings more news of the devastating impact of this alleged fraud on charities, private foundations, banks, broker-dealers and government entities as well as individual and corporate investors.

Accordingly, I am writing to request that the Committee hold hearings, as soon as practicable in the 111th Congress, to thoroughly investigate Mr. Madoff’s conduct and the broader implications for securities market oversight and enforcement.  These hearings should specifically examine the adequacy of the SEC’s and FINRA’s examination programs, as well as the compliance program at Mr. Madoff’s firm, and should include testimony from Mr. Madoff, the SEC, FINRA, the Securities Investor Protection Corporation, Mr. Madoff’s accounting firm and his victims.

Thank you for the consideration of my request.

Sincerely,

Spencer Bachus
Ranking Member
http://bachus.house.gov/HoR/AL06/Press+Room/Press+Releases/2008/121708CONGRESSMAN+BACHUS+URGES+HEARING+ON+MADOFF+ALEGATIONS.htm

As always, your hedge fund attorney will be able to discuss these issues with you when you are starting a hedge fund.  Please also contact us if you would like help setting up an Idaho based hedge fund and management company.  Other related hedge fund law articles include:

• Florida Hedge Funds
• Starting a Hedge Fund
• Start up Hedge Fund Managers - Recommended Articles
• Start Up Hedge Fund Timeline
• Hedge Fund Managers
• How to register as an Investment Advisor
• Important Information for Registered Investment Advisors

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The following information can be found here.

Through the authority of Idaho’s Uniform Securities Act (2004) and the Idaho Commodity Code, the Securities Bureau of the Department of Finance regulates the sale of investment securities (e.g., stocks and bonds) and those individuals and entities that offer investment opportunities to the public.
Uniform Securities Act (2004)

Idaho’s Uniform Securities Act (2004) seeks to preserve and promote legitimate securities markets by assisting companies in their attempts to raise capital and prevent investment fraud. While the Act is designed to protect investors from fraud, it does not protect investors from the possibility of investment loss resulting from securities price movements, market changes or business failures. The Act requires that persons who solicit investments provide complete disclosure of all the important aspects of the investment being promoted. With this information, investors are empowered to make reasoned investment decisions.

Idaho Commodity Code

The Idaho Commodity Code is designed to reduce fraud by outlawing certain commodity investment contracts where the investor never receives delivery of the commodity. The law does not create a separate regulatory system. Rather, the statute provides an enforcement tool that relates to types of investment fraud not covered by Idaho’s Uniform Securities Act (2004).

Corporate Takeover Acts

In addition, the Securities Bureau of the Department of Finance has limited duties under Idaho’s corporate takeover Acts. In 1988, the Idaho Legislature adopted the Control Share Acquisition Act and the Business Combination Act to govern certain corporate mergers in Idaho. The first law gives shareholders more authority to decide the terms of a takeover and the second allows a corporation to limit the effects of a takeover.

Investment Adviser Firms:

1.    Are investment adviser firms required to send annual financials?

Only if the firm is Idaho based and state regulated.

2.    Is there a de minimus exemption from investment adviser firm registration?

Yes. If the firm has no place of business in Idaho and has had 5 or less Idaho clients during the previous 12 months it is exempt from licensing or from having to notice file.

3.    When doing a notice filing through the Investment Adviser Registration Depository (IARD) system, is my firm required to send anything directly to Idaho?

No

4.    What are Idaho’s fees to register or notice file an investment adviser firm?

State Regulated firm-$150; Federally Regulated firm-$30 paid through the IARD system.

5.    How does a State Regulated firm become registered?

Please refer to the “Investment Adviser Application Checklist” at Securities Forms. Refer to #2A or #2B” depending on where your firm is based.

6.    How do I add or delete agents to my firm?

Please refer to Chapter 9 of the IARD User’s Manual at www.iard.com/firm_users_man.asp

Investment Adviser Agents:

1.    What examinations are required for Investment adviser agents to become licensed?

Either the Series 65 or the Series 66 and 7. For more detailed information including waivers and exemptions, please refer to the “Investment Adviser Representative Application Checklist” at Securities Forms

Note: For additional exam questions you may have, please refer to the answers given above under “Broker-Dealer Agents.”

2.    How much does it cost to get licensed?

Idaho’s fee is $30. Please note there may be other costs involved that are not for our Department.

http://finance.idaho.gov/FAQ.aspx#Securities

Please let us know if you have any questions.  Other related start up hedge fund articles include:

• Starting a Hedge Fund
• Start up Hedge Fund Managers - Recommended Articles
• Start Up Hedge Fund Timeline
• Hedge Fund Performance Fee Issues for State Registered Investment Advisors
• Hedge Fund Lawyer
• Hedge Fund Offering Documents
• Securities Act of 1933

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The following release can be found here.

RE: Private Placement Exemption 502.202(14) – Federal Regulation D Rule 504/ Section 4(2)/Federal Regulation D Rule 505
Federally Covered Securities 502.302(3) – Federal Regulation D Rule 506

Dear _______:

The purpose of this letter is to respond to your inquiry concerning the private placement exemption pursuant to Iowa Code Chapter 502.202(14) and/or the Federal Covered Securities notice filing for Regulation D Rule 506 offerings pursuant to Iowa Code Chapter 502.302(3). The applicable Iowa Administrative Code (“IAC”) Rules (IAC Rule 191-50.80, IAC Rule 191-50.81 and IAC Rule 191-50.88) are referenced in this letter and detail the filing requirements, if any.

THE PRIVATE PLACEMENT EXEMPTION

THE BASIC REQUIREMENTS AND FEATURES OF § 502.202(14) ARE AS FOLLOWS:

1. An issuer may not sell its unregistered securities, as part of a single issue, to more than thirty-five (35) purchasers in this state during any twelve (12) consecutive month period. The total number of security holders may ultimately exceed thirty-five (35) so long as the issuer does not sell to more than thirty-five (35) purchasers in this state during any twelve (12) consecutive month period. For example, if “XYZ Company” were to sell its unregistered securities to twenty-five (25) purchasers in this state today and if it were to sell to an additional ten (10) purchasers in this state tomorrow, then it may legally sell its unregistered securities to an additional twenty-five (25) purchasers in this state a year from today and to an additional ten (10) purchasers in this state a year from tomorrow pursuant to the private placement exemption. The 35 purchaser limitation is a “moving target” using a consecutive twelve month period as a parameter.

A purchaser in this state, who purchases an issuer’s private placement securities on multiple
occasions, may be counted as an additional purchaser when each sale occurs.

If a private placement purchaser in this state is a legal entity, such as a trust, partnership or corporation, it is probable that every respective beneficiary, partner and shareholder, thereof, will be counted as separate, additional purchasers if the legal entity was organized for the specific purpose of acquiring the securities being offered.

The Administrator has taken the position that a husband and wife will be counted as one purchaser in this state, even though they may have purchased an issuer’s private placement securities separately.

2. Iowa Code Section § 502.202(13) grants an “exempt transaction” status to an issuer’s sale of securities when they are sold to banks, savings institutions, trust companies, insurance companies, investment companies as defined under the Investment Company Act of 1940, pension or profit sharing trusts, financial institutions, institutional buyers or broker-dealers, so long as the purchaser is acting for itself or in a fiduciary capacity.

The aforesaid § 502.202(13) transactional exemption will exempt entities, including certain “specified investors”, who purchase an issuer’s private placement securities for their own account for investment. “Specified investors” include “accredited investors” and are defined under IAC Rule 191-50.88. Further, please note that such specified investors are not counted towards the thirty-five (35) purchaser limitation imposed under § 502.202(14). Iowa Administrative Rule (IAC) 191-50.88 defines transactions with specified investors as follows:

50.88(1) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer.

50.88(2) Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of the purchase exceeds $1 million.

50.88(3) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

50.88(4) Any venture or seed capital company. For purposes of this subrule, a venture or seed capital corporation is a corporation, partnership or association that’s been in existence for at least five years, or whose net assets exceed $250,000, and whose primary business is investing in developmental stage companies or “eligible small business companies” as that term is defined in the regulations of the Small Business Administration.

This rule is intended to implement Iowa Code section 502.202(13).

3. The sale of an issuer’s exempt securities must be part of a single issue. The phrase, “part of a single issue,” refers to a securities concept known as the “integration” of securities offerings. The following factors are relevant when considering the “single issue” or “integration” question:

a. Are the offerings part of a single plan of financing?

b. Do the offerings involve the issuance of the same class or type of securities?

c. Were the offerings made at, or about, the same time?

d. Was the same type of consideration received?

e. Were the offerings made for the same general purpose?

When two or more securities offerings meet one or more of the integration standards, they may be considered part of a single issue. If so, the securities offerings are deemed to be part of the same securities offering. Therefore, if two or more offerings by an issuer are deemed to be part of a single issue, then all of the purchasers in the offerings, except institutional buyers, will be counted towards the (thirty-five (35) purchasers in this state during any twelve (12) consecutive month period) limitation.

4. The issuer must reasonably believe that all purchasers in this state are purchasing the securities with investment intent and not with intent to resell. Resale of private placement securities may occur if the security holder has met the investment intent requirement. For example, if a resale of private placement securities is made pursuant to a bona fide unforeseen change of circumstances, or if the securities have been held for a sufficient length of time to evidence the fact that the original purchase was for investment rather than for resale, then it may be presumed that the investment intent requirement of the statute has been met. A twelve (12) month, or longer, holding period is usually deemed to be a “safeharbor” in determining investment intent. All resale of private placement securities must be pursuant to an available exemption or the securities must be registered.

Issuers, who use the § 502.202(14) exemption, are urged to obtain a letter evidencing investment intent from each purchaser in this state. This cautionary step should also be taken in with institutional buyers, even though they are not counted towards the thirty-five (35) purchaser limitation.

5. No commissions or other remuneration may be paid or given, directly or indirectly, for or on account of the private placement sale of securities unless they are permitted by rule or by an administrative order. The “commissions or other remuneration” language is interpreted broadly and includes, but is not limited to, sales commissions, finders’ fees, discounts, options or warrants, some management fees, and acquisition fees.

6. If the private placement exemption is available, it may be otherwise self-executing in that the issuer will not be required to file any documents or fees with the Bureau. A filing will be required when commissions (or other remuneration) are paid. A post sale filing for Rule 506 Regulation D will be required if the issuer chooses this federally covered exemption. In this situation, please refer to IAC 191-50.81 for the filing requirements.

7. The Bureau requires that written information concerning the issuer be made available to all prospective purchasers prior to their purchase. This information should be in the form of a disclosure document similar to a prospectus. Failure to provide the investor with material information sufficient to make an informed investment may result in violation of anti-fraud and civil liability provisions of the Act. Disclosure must include a discussion of risk factors and current financial statements. A private placement memorandum should disclose the types of information set forth under Iowa Code section 502.304, if applicable. In addition, the Bureau provides a disclosure format, referred to as Form U-7, and an Issuer’s manual that discusses content to be included in the Form U-7, on its website. The Form U-7 is designed to provide the type of information an investor would normally need in order to make an informed investment decision. The Bureau suggests Issuers consider using Form U-7 with private offering of securities in order to insure adequate information is provided to the investor.

8. The issuer and/or broker-dealer must refrain from any form of general solicitation or advertising. The prohibition relating to general solicitation or advertising, is interpreted broadly.  In addition to what is normally viewed as public advertising, this may also include mass mailings, feature stories on the issuer by the news media, meetings that are held for the purpose of soliciting potential purchasers, etc.

9. Issuers who intend to make private placement securities sales to purchasers outside of this state, should check with the respective state securities regulatory agency where the offers and sales are to occur, as well as with the Securities and Exchange Commission, in order to comply with the applicable securities laws and regulations.

10. The issuers and broker-dealers associated with the private placement exemption remain subject to the anti-fraud and civil liability provisions of Iowa Code §§ 502.501 et seq.

11. In conjunction with § 230.505 of Regulation D of the Securities Act of 1933, Iowa has adopted Iowa Administrative Rule 191-50.80. The basic requirements and provisions of Rule 191-50.80 are as follows:

a. A securities transaction is exempt from the registration provisions of the Iowa Uniform Securities Act if the securities are offered or sold in compliance with § 230.505 of Regulation D of the Securities Act of 1933. This securities transaction exemption also applies to any offer or sale of securities that is made exempt by the application of § 230.508(a) of Regulation D, as made effective in Release No. 33-6389, as amended by Release Nos. 33-6437, 33-6663, 33-6758, and 33-6825.

b. The issuer must file a notice on Form D (17 CFR 239.500) with the Administrator within fifteen (15) days following the date of the first ULOE sale in Iowa. The notice must be accompanied by:

a. A copy of any written information that has been, or is to be, furnished to investors;
b. A consent to service of process on Form U-2; and
c. A filing fee of one hundred ($100.00) dollars. Checks should be made out to the
Iowa Securities and Regulated Industries Bureau.

c. Code § 230.505 of Regulation D permits sales to a total of thirty-five (35) non-accredited investors and an unlimited number of accredited investors, as defined by § 230.501(a) of Regulation D. The aggregate offering price of the limited offering made pursuant to § 230.505 of Regulation D shall not exceed five million ($5,000,000) dollars during any twelve (12) consecutive month period.

d. The issuer, or any person who acts on its behalf, when making sales to non-accredited investors, must reasonably believe that either:

1. The investment is suitable for the purchaser (if the investment does not exceed ten (10%) percent of the investor’s net worth, it is presumed to be suitable); or
2. The purchaser has sufficient knowledge and experience in financial and business matters to make a capable evaluation of the prospective investment’s risks and merits.

e. Neither the issuer, nor any person who acts on its behalf, may offer or sell the securities through any form of general solicitation or advertising.

f. Rule 50.80(2)”a”(1) prohibits the payment of commissions or other remuneration for the sale of Regulation D Rule 505 securities to any Iowa purchaser, unless the salesperson is registered pursuant to Iowa Code § 502.401.

g. The exemption is not available to an issuer if any of the parties described in § 230.252(c), (d), (e), or (f), Regulation A, Securities Act of 1933:

1. Has filed a registration statement that is subject to a currently effective stop order entered pursuant to any state’s securities law within five (5) years prior to the ULOE notice filing;

2. Has been convicted, within the last five (5) years, of any felony or misdemeanor in connection with the offer, purchase or sale of any security or any felony involving fraud or deceit;

3. Is currently subject to any state administrative enforcement order or judgment entered by that state’s securities administrator within the last five (5) years;

4. Is subject to any state’s administrative enforcement order or judgment that prohibits, denies or revokes the use of any exemption from securities registration; or

5. Is currently subject to any order, judgment, or decree, of any court of competent jurisdiction, that restrains or enjoins the party from engaging in any conduct or practice in connection with the purchase or sale of securities or from making any false filing with the state entered within five (5) years of the required notice filing.

FEDERAL COVERED SECURITY

To coordinate with requirements set forth in Securities Improvement Act, the Iowa Securities Bureau has adopted a notice filing procedures for § 230.506 of Regulation D of the Securities Act of 1933 (“Reg D”).

The basic requirements and provisions of Rule 191-50.81 (IAC) are as follows:

1. An issuer offering a security that is a covered security under Section 18(b)(4)(D) of the Securities Act of 1933 shall file a notice on SEC Form D, including the Appendix, a consent to service of process on a form U-2 as prescribed by rule 50.51(502), and pay a fee of $100 to the Iowa Securities Bureau no later than 15 days after the first sale of the federally covered security in this state. If the sale occurred beyond 15 days, a late filing fee

2. For purposes of this rule, the Securities and Exchange Commission’s “Form D” is defined as the document, as adopted by the Securities and Exchange Commission and in effect on September 1, 1996, and as may be further amended by the Securities and Exchange Commission from that time, entitled “FORM D: Notice of Sale of Securities pursuant to Regulation D, Section 4(6), and/or Uniform Limited Offering Exemption.” The filing of this form with the state of Iowa shall include Part E (the state signature page) and the Appendix.

CONCLUSION

Nothing in Rule 191-50.80, Rule 191-50.81 and Rule 191-50.88, or in the exemptions pursuant to § 502.202(13) and 502.202(14), shall relieve anyone from providing sufficient disclosure to prospective investor adequate to satisfy civil liability and anti-fraud provisions of Iowa Code Section 502.501 Nothing in the aforesaid exemptions relieves anyone from due diligence, suitability or “know your customer” standards.

In view of the objectives of § 502.202(13), § 502.202(14), Rule 191-50.80, Rule 191-50.81 ,Rule
191-50.88 and the purposes and policies underlying Iowa Code Chapter 502, these exemptions are not available to any issuer with respect to any transaction that is part of a plan or scheme to evade the registration provisions or the conditions and limitations explicitly stated in Iowa Code Chapter 502 and the Iowa Administrative Rules pertaining thereto.

This letter is only a summary. Reference should be made to Iowa Code Chapter 502, the Iowa Administrative Code, and Federal Regulation D of the Securities Act of 1933. The Bureau encourages individuals to seek legal counsel and to contact their respective state securities regulatory agency and the regional Securities and Exchange Commission office when they are dealing with any securities matter.  The U.S. Securities and Exchange Commission web site may be found at www.sec.gov

If you have any questions concerning the applicability of Iowa Code Chapter 502 or Iowa Administrative Code Rules cited in this letter, please do not hesitate to contact the undersigned.

Thomas E. Alberts, Attorney
Iowa Securities and Regulated Industries Bureau
(515) 281-8815

Many future hedge fund managers have misconceptions about how to start a hedge fund – either they think it is a very basic process that takes no time or resources, or they think that it will take too much time and will be cost prohibitive.  For most start up hedge funds, the manager can be up and running within a month depending on whether the manager will need to be registered with the state securities commission (please see our article on start up hedge fund timelines).  This article will detail the steps the manager will need to take to start the hedge fund.

Starting a Hedge Fund – First Steps

First, the manager should have an understanding of the expected hedge fund investment program and the potential seed investors.  At this point the manager will want to soft circle assets – asking friends and family if they would be interested in investing in a potential hedge fund.

Second, the hedge fund manager should begin to choose his service providers.  The most important is the hedge fund attorney.  The hedge fund attorney will help the manager with both the legal and logistical aspects of establishing the hedge fund.  The lawyer will also be able to suggest other service providers to the manager.  After discussions with potential attorneys and service providers, the manager will probably sign some sort of engagement letter and submit appropriate retainers or fees for services.  Then the manager will go through the document formation and account opening process.

Hedge Fund Documents – Private Placement Memorandum, LP Agreement, Subscription Documents

The central part of the hedge fund start up process is creating the hedge fund offering documents.  The offering documents (the PPM, LPA, and subscription documents) are important because they actually creating a legal agreement between the hedge fund manager and the hedge fund investors.  That legal agreement will need to detail the rights and responsibilities for both the manager and the investors.  The lawyer will draft these documents with input from the manager as well as the service providers.

Hedge Fund Administration and Primer Brokerage

Once the offering documents have been finalized the hedge fund administrator will begin to create the back end items for the hedge fund.  These back end items allow the administrator to calculate the NAV for the fund and prepare statements for the hedge fund investors.

After the documents have been completed, the brokerage account can be established with the prime broker (or mini-prime broker).  This is generally an easy process but there can be some snags during this time.  If a manager is faced with a question on the account opening process, he should contact his attorney who will be able to help sort things out.

Raising Capital and Trading

When the trading account has been established, the manager will ask potential investors to invest in the fund through the offering documents.  The hedge fund attorney will provide the manager with information on how the offering process should be conducted.  Once money has been transferred to the fund’s brokerage account the manager can begin trading the account.

After the manager has developed a track record of good returns, the manager may want to think about other capital raising avenues such as capital introduction services and third party marketers.

Please contact us if you are interested in starting a hedge fund.  We’ve compiled hedge fund start up articles which will help to answer some of the most common issues for start up managers.

We have discussed the SEC hedge fund registration exemption many times before, but we have not addressed it directly.For most management companies with a single hedge fund client, registration is actually a relatively easy and straightforward process.  Once hedge fund managers are registered as investment advisors with the SEC there are certain recordkeeping requirements for the hedge fund manager, but the requirements are not onerous (for more information, please see ).

Notwithstanding the above, many managers will choose to remain unregistered for a variety of different reasons and those managers will typically rely on the hedge fund registration exemption found in Section 203(b)(3) of the Investment Advisors Act of 1940.  The exemption and the rule underlying the exemption is detailed in full below.

Investment Advisors Act Section 203(b)(3)

Section 203(b)(3) provides that:

The provisions of subsection (a) [the general investment advisor registration requirement] shall not apply to … any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under title I of this Act, or a company which has elected to be a business development company pursuant to section 54 of title I of this Act and has not withdrawn its election. For purposes of determining the number of clients of an investment adviser under this paragraph, no shareholder, partner, or beneficial owner of a business development company, as defined in this title, shall be deemed to be a client of such investment adviser unless such person is a client of such investment adviser separate and apart from his status as a shareholder, partner, or beneficial owner;

Investment Advisors Act Rule 203(b)(3)-1

Rule 203(b)(3)-1 — Definition of “client” of an Investment Adviser

Preliminary Note to Rule 203(b)(3)-1: This section is a safe harbor and is not intended to specify the exclusive method for determining who may be deemed a single client for purposes of section 203(b)(3) of the Act.

(a)    General. You may deem the following to be a single client for purposes of section 203(b)(3) of the Act:

(1)   A natural person, and:

i. Any minor child of the natural person;

ii. Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence;

iii. All accounts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries; and

iv. All trusts of which the natural person and/or the persons referred to in this paragraph (a)(1) are the only primary beneficiaries;

(2)

i. A corporation, general partnership, limited partnership, limited liability company, trust (other than a trust referred to in paragraph (a)(1)(iv) of this section), or other legal organization (any of which are referred to hereinafter as a “legal organization”) to which you provide investment advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries (any of which are referred to hereinafter as an “owner”); and

ii. Two or more legal organizations referred to in paragraph (a)(2)(i) of this section that have identical owners.

(b) Special Rules. For purposes of this section:

(1) You must count an owner as a client if you provide investment advisory services to the owner separate and apart from the investment advisory services you provide to the legal organization, provided, however, that the determination that an owner is a client will not affect the applicability of this section with regard to any other owner;

(2) You are not required to count an owner as a client solely because you, on behalf of the legal organization, offer, promote, or sell interests in the legal organization to the owner, or report periodically to the owners as a group solely with respect to the performance of or plans for the legal organization’s assets or similar matters;

(3) A limited partnership or limited liability company is a client of any general partner, managing member or other person acting as investment adviser to the partnership or limited liability company;

(4) Any person for whom an investment adviser provides investment advisory services without compensation need not be counted as a client; and

(5) If you have your principal office and place of business outside the United States, you are not required to count clients that are not United States residents, but if your principal office and place of business is in the United States, you must count all clients;

(c) Holding out. If you are relying on this section, you shall not be deemed to be holding yourself out generally to the public as an investment adviser, within the meaning of section 203(b)(3) of the Act, solely because you participate in a non-public offering of interests in a limited partnership under the Securities Act of 1933.

Discussion of the Hedge Fund Registration Exemption

There are two important items to note here.  First, the investment adviser cannot have more than 15 clients over a 12 month rolling period.  Second, according to Rule 203(b)(3)-1(a)(2)(i) a hedge fund counts as a single client for these purposes. For hedge fund managers to avail themselves to this exemption from the registration provisions, they must make sure that they are not holding themselves out generally to the public as investment advisors.

If you have any questions on whether your hedge fund falls within the exemption provisions of Section 203(b)(3) or if you have any other hedge fund questions, please contact us for a free consultation.  Other related hedge fund law articles include:

• Goldstein v. SEC - End of the Hedge Fund Registration Rule
• Grassley Renews Effors to Register Hedge Funds
• Overview of Hedge Fund Investment Advisors
• How to register as an Investment Advisor
• Important Information for Registered Investment Advisors

The NFA released seven different interpretive notices dealing with certain items related to NFA Compliance Rule 2-29.  Many of the comments were re-iterations of what commodity pool operators or commodity trading advisors should not do when they market their investment programs.  Some of the information presented was new and informative. We believe the following interpretive notices are important for CPOs and CTAs to read and understand as well as future forex registrants.

NFA Interpretive Notices on Compliance Rule 2-29

(links to articles at www.forexlawblog.com)

Filing of promotional material with the NFA - In this interpretive notice the NFA outlines its review program for promotional materials submitted by NFA members prior to the first use of the promotional materials.  Generally the NFA will review the promotional materials and get back to the member within 21 calendar days.

NFA release on hypothetical performance results - The release below presents a non-exclusive list of practices which the NFA believes deserve special attention when drafting marketing materials which contain hypothetical performance results.

NFA on Deceptive Advertising - Here the NFA provides specific examples of advertising which it believes misleads potential investors.

NFA on Deceptive Advertising II - This notice goes further than the first notice and defines more practices which the NFA believes are deceptive.  These practices include: certain marketing practices which discuss leverage and providing historical pricing information on products which the advisory is not soliciting.   This notice makes clear that it will be wise to have your attorney review all marketing material before it goes out to potential investors.

NFA on High Pressure Sales Tactics - The NFA interpretive notice provides a few non-exclusive examples of conduct which would fall under the “high pressure sales tactics” category.  These include: creating a sense of undue emergency for the customer, dissuading customers from seeking outside advice, threatening customers, and making phone calls to potential customers at unusual times or with unusual frequency.

NFA on Radio and TV ads - the interpretive notice below the requirement for Members to submit all radio and television ads to the NFA for review within 10 days of the anticipated distribution date.  Additionally, the notice reminds members that their advertising cannot contain a variety of misleading information as detailed in other interpretive notices.  These prohibited practices include certain claims involving: seasonal trades, historic price moves, certain profit projections, and “cherry picked” trades.  Additional, the NFA discusses its view on “blind ads.”

NFA on Past or Projected Performance – This interpretive notice is generally directed at those NFA Members who are also registered as broker-dealers with the SEC.  The notice is designed to give these Members an overview of the requirements for past and projected performance.

If you have any questions on this interpretive notice or if it applies to your firm, please contact us to discuss your situation.  Other related forex law articles include (many from our sister site, Forex Law Blog):

• NFA Compliance Rule 2-29
• Discussion of NFA Compliance Rule 2-29
• Forex Registration Requirements (please also see our other website on Forex Registration)
• Forex Disclosure Documents Part I
• Forex Disclosure Documents Part II
  
• Submitting Forex Disclosure Documents to the NFA