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Investment advisers, private equity managers, private fund managers, and other businesses that are engaged in making loans should be aware of whether their activities fall under the purview of the lending laws of any state such that they would be required to obtain a license and comply with certain ongoing regulatory requirements.
Under California law, finance lenders (defined as “any persons who are engaged in the business of making consumer loans or making commercial loans”) and finance brokers (defined as “any persons engaged in the business of negotiating or performing any act as brokers in connection with loans made by a finance lender”) are required to obtain a California Finance Lenders License. Private investment funds, such as hedge funds and private equity funds, that engage in such activities are no exception.
Notwithstanding the foregoing, the California Finance Lenders Law (“CFLL”) exempts certain transactions from its licensing requirements. Lenders relying on these exemptions will be able to avoid a lengthy application process with the California Department of Business Oversight and its associated requirements and costs.
New and Existing Exemptions under the California Finance Lenders Law
Effective January 1, 2014, section 22050(e) of the California Financial Code was amended to exempt persons who make five or fewer commercial loans in a 12-month period, provided that the loans are incidental to the business of the person relying upon the exemption. This amendment expanded the previous de minimis exemption for any person making just one commercial loan in a 12-month period. As such, investment advisers, private fund managers, and other members of the investment management industry that occasionally provide commercial loans may take advantage of this expanded safe harbor as long as such loans are incidental to their primary business.
A full list of exemptions is set forth under Sections 22050 – 22065 of the California Financial Code, providing relief from CFLL regulation for other types of transactions and specific entities licensed by other regulatory agencies. Among those exempt are the following:
• Banks, trust companies, savings and loan associations, insurance premium finance agencies, credit unions, small business investment companies, community advantage lenders, California business and industrial development corporations, or licensed pawnbrokers;
• Loans made or arranged by persons licensed as a real estate broker by the state and secured by a lien on real property, or to any licensed real estate broker when making such loan;
• Commercial bridge loans made by a venture capital company to an operating company, subject to certain requirements.
If you are engaged in lending transactions, we encourage you to contact your legal counsel to determine if you are eligible for one of the exemptions under the CFLL.
Licensing and Regulation under the California Finance Lenders Law
Finance lenders unable to avail themselves of an exemption from CFLL regulation will need to submit an application to the California Department of Business Oversight. Currently, the application must include the following attached items:
• Balance sheet
• Surety bond in the amount of $25,000
• Proof of Legal Presence (for sole proprietor applicants)
• California Customer Authorization for Disclosure of Financial Records Form
• Fictitious Business Name Statement (if applicable)
• Certificate of Status or Good Standing in the applicant’s state of formation and in CA
• Partnership Agreement (for general partnership applicants)
• Federal Taxpayer Identification Number or Social Security Number (for sole proprietors)
• Organization Chart for the Applicant
In addition, each individual responsible for the applicant’s lending activities must complete a “Statement of Identity and Questionnaire” and provide fingerprints. The application fee is currently $200 (nonrefundable), plus an investigation fee of $100 and fingerprint processing fees ($20 per California resident; $80 per non-California resident).
It should be noted that the licensing process for residential mortgage providers (mortgage lenders and brokers) is a separate application, filed through the Nationwide Mortgage Licensing System.
Once approved, licensees are subject to periodic regulatory examinations for which they must pay; pay an annual assessment each year; file an Annual Report by March 15 of each year; are subject to statutory books and record requirements; and must maintain a $25,000 surety bond at all times.
If you are subject to licensing would like our assistance with obtaining a California Finance Lenders License, please contact us.
Cole-Frieman & Mallon LLP provides legal services to hedge fund and private equity funds. Bart Mallon can be reached directly at 415-868-5345.]]>
The NFA recently issued a Notice to Members that included a Request for Comments on a proposal to subject CPOs and CTAs to new rules. These rules, which include a minimum capital requirement for CPOs and CTAs, would be intended to protect customer funds and ensure that CPOs and CTAs have sufficient assets to operate as a going concern.
The NFA justified the need for these rules by citing 26 Member Responsibility Actions that were taken over the past 3 years, mostly against CPOs and CTAs for misuse of customer funds and/or misstatements of net asset values and performance information. Comments are due to the NFA by April 15, 2014.
Rules Under Consideration
The NFA did not propose any language for the rules in its Request for Comments, nor did the NFA suggest any details on how the rules might be drafted. Instead, the NFA implied what rules are under consideration by posing questions to CPOs and CTAs on the utility of certain rules, and on what standards should be applied to implement them.
CPOs and CTAs
• Capital Requirements. CPOs and CTAs may be required to maintain a minimum amount of capital, and to file periodic reports with the NFA to demonstrate compliance. However, the NFA’s Request for Comments indicates a degree of flexibility. For example, the NFA asked for members who oppose a capital requirement to suggest alternatives for ensuring that CPOs and CTAs have sufficient funds to operate as a going concern.
• Inactive NFA Members. NFA members that are not actively trading futures or commodity interests may have their NFA membership withdrawn, so that the NFA can stop expending regulatory resources on these firms.
• Gatekeeper for Pool Disbursements. CPOs may need to retain an independent third party to approve pool disbursements (a “gatekeeper”).
• NAV Valuation and Reporting. An independent third party may be required to prepare or verify a CPO’s pool NAV valuations, and such valuations may need to be submitted periodically to the NFA.
• Performance Results. An independent third party may have to prepare or verify a CPO’s pool performance results.
• Verification of Pool Assets. CPOs and the entities actually holding pool assets may both be required to report pool asset amounts to the NFA, so that the NFA can cross-reference the reports for consistency. This could be similar to rules currently in place for futures commission merchants.
The new rules being considered are in the earliest stages of development, but it is clear that the NFA is concerned about the misuse of customer funds and the risks posed by undercapitalized CPOs and CTAs. Any CPOs or CTAs interested in commenting on the rules under consideration should submit their comments to the NFA via email to CPOandCTAfeedback@nfa.futures.org by April 15, 2014.
Cole-Frieman & Mallon LLP provides legal advice to the managed futures industry and works with FCMs, IBs, CPOs, and CTAs. Bart Mallon can be reached directly at 415-868-5345.]]>
It is that time of year that registered investment advisers are focusing on the ADV annual updating process. Occasionally the SEC will provide guidance to managers on common questions applicable to the application or updating process. Below is a note the SEC sent out to all registered investment advisers regarding the custody issue. If you have questions on the application of the custody rules to your particular situation, you should discuss with your law firm or compliance consultant.
To: SEC-Registered Investment Advisers,
This email is a reminder that all SEC-registered advisers that have custody of client assets should answer all questions in Item 9 of Part 1A of Form ADV. Each adviser’s answers will vary depending on facts and circumstances.
For example, advisers that have custody solely because they deduct fees from client accounts would respond “no” in Item 9.A. Additionally, these advisers would likely respond “no” in Items 9.B., and 9.D., and they likely would not need to provide information in Items 9.C. or 9.E. However, in Item 9.F., these advisers likely would need to indicate that there is at least one person acting as qualified custodian for their clients in connection with advisory services they provide to clients.
If you have questions, you may reply to this email.
U.S. Securities and Exchange Commission
Division of Investment Management
100 F Street, N.E.
Washington, DC 20549-8549
Phone | 202.551.6999
Cole-Frieman & Mallon is a boutique law firm which provides regulatory compliance and consulting services to the investment management industry. Bart Mallon can be reached directly at 415-868-5345.]]>
March 31-April 2
March 31- April 1
Cole-Frieman & Mallon provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.
Please sign up now to attend SAIA’s next panel discussion, which is scheduled for Thursday, March 6, 2014.
This event is called: “The New Investment Regime: Opportunities Arising from the Shake-Up of Wall Street and Regulatory Reform.” The discussion will focus on recent SEC regulatory changes, with a particular emphasis on how investment funds and allocators are adapting to the new landscape.
The panelists will include Gabe Poggi, Portfolio Analyst at EJF Capital LLC and Sanjai Bohnsle, Managing Director at Arrowpoint Partners. The discussion will be moderated by Elli Kavros, Executive Director at Morgan Stanley.
It will be held in the Puget Sound Conference Room at 1918 8th Avenue in downtown Seattle (at the corner of 8th and Virginia). Registration begins at 5:30 and the event begins at 6:15 PM and will run until 7:30-7:45 PM.
Seating is limited, so please register to confirm your attendance. To register, go to www.nwhfs.com and click on “News and Events.” At the Events page, click on “register for this event.” This event is free for SAIA members. Otherwise the single event fee is $75 (paid via PayPal, or collected at the door).
If you have any problems with registration or questions, please send an email to (email@example.com). Thank you for your time and interest in SAIA and we look forward to seeing you on Thursday, March 6th.
Cole-Frieman & Mallon LLP is a boutique investment management law firm. Bart Mallon serves on the SAIA board and he can be reached directly at 415-868-5345.]]>
Cole-Frieman & Mallon provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345]]>
Cole-Frieman & Mallon provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.]]>
December 4, 2013
Clients, Friends, Associates:
December is the busiest month of the year for most private fund managers. In addition to end of year administrative upkeep, the regulatory landscape has shifted dramatically over the past twelve months. As a result, year-end processes and 2014 planning are particularly important, especially for General Counsels, CCOs and key operations personnel. As we head into 2014, we have put together this checklist to help managers stay on top of the business and regulatory landscape for the coming year.
This overview includes the following:
* Regulatory & Other Changes in 2013
* Adviser Registration & Compliance
* CFTC Regulation
* Annual Compliance & Other Items
* Annual Fund Matters
* Annual Management Company Matters
* Compliance Calendar
Regulatory & Other Changes in 2013:
Foreign Account Tax Compliance Act (“FATCA”). FATCA will require certain financial institutions to identify and disclose direct and indirect U.S. investors and withhold U.S. income tax on nonresident aliens and foreign corporations, or be subject to a 30% U.S. withholding tax on payments they receive from U.S. sources (the “FATCA Tax”). FATCA’s implementation deadline was delayed by six months, such that foreign financial institutions (including offshore funds), now have until April 25, 2014 to complete certain steps in order to avoid being subject to the FATCA Tax. Offshore fund managers should contact their tax advisers and compliance counsel to prepare for FATCA compliance and, if required, to register with the IRS before April 25, 2014. In addition, domestic fund managers should work with their tax advisers, administrators and legal counsel to properly address the new account onboarding and due diligence procedures required under FATCA, including updating their offering documents and subscription materials.
General Solicitation Ban Lifted. Earlier this year, the SEC issued long-awaited implementing regulations and other proposed rules relating to the Jumpstart Our Business Startups Act (“JOBS Act”), including most famously (and potentially least well understood), the New Rule 506(c) under Regulation D. New Rule 506(c) became effective on September 23, 2013, and it permits private investment funds to engage in general solicitation and advertising to the public, provided that the funds take “reasonable steps” to verify that all investors are “accredited investors.” Mere reliance on investors’ representations in a questionnaire or subscription agreement (the most common means of establishing accredited status among private investment funds that do not generally solicit) is insufficient. In addition, to rely on the New Rule 506(c), funds must amend their current Form Ds filed with the SEC to indicate that going forward they will rely on Rule 506(c).
Additional Proposed Rules. Beyond the accredited investor verification requirements noted above, the SEC has proposed several additional new rules in connection with Rule 506(c) offerings, including (i) requiring an “advance” Form D filing at least 15 days before generally soliciting; (ii) requiring a “closing amendment” to Form D at the conclusion of the offering; (iii) temporarily requiring funds to submit all general solicitation materials to the SEC in advance of their use; (iv) mandating that certain legends be included on all general solicitation materials; (v) automatically disqualifying an issuer from using Regulation D for one year if it fails to file a Form D; and (vi) increasing the information disclosed on Form D.
CFTC Issues. While the SEC’s New Rule 506(c) permits general solicitation under the conditions set forth above, the CFTC has yet to revise its rules to reflect this change. As such, managers that rely on the CFTC’s Rule 4.13(a)(3) exemption from registration as a CPO, and managers that are registered CPOs operating under the CFTC Rule 4.7 exemption, remain prohibited from marketing to the public in the United States.
Identity Theft “Red Flag” Rules. This year the SEC and CFTC jointly issued final rules (the “Rules”) that went into effect on November 20, 2013 requiring certain investment advisers and other regulated entities to develop and implement written identity theft prevention programs. The Rules stipulate that such programs should seek to detect, prevent and mitigate potential identity theft associated with accounts the advisers manage.
Application to Investment Advisers. The Rules are detailed and nuanced in nature, but they should generally only apply to investment advisers to the extent the advisers, pursuant to powers of attorney or other arrangements, are authorized by individual clients to direct payment of such clients’ redemption monies to third parties. For this reason, certain investment advisers are revising their offering documents to narrow the scope of the powers of attorney granted thereunder.
What is Included in a Program? To be compliant with the Rules, any program developed and implemented thereunder must include reasonable policies and procedures to identify relevant “red flags” (any activity indicating the possible existence of identity theft), and detect and respond appropriately to any red flags to prevent and mitigate identity theft. Further, the entity must train its staff to properly implement the program, and oversee service providers’ compliance therewith (by, for example, obtaining certifications from their administrators that the administrator understands, and is complying with, the program).
European Union’s Alternative Investment Fund Managers Directive (“AIFMD”). The AIFMD went into effect in July of this year, and generally subjects managers marketing alternative investment funds in the EU to heightened reporting and disclosure obligations. These obligations consist of providing pre-investment and ongoing disclosures to investors, complying with requirements affecting manager remuneration, and preparing annual and regular reports to an EU national regulator. In addition, managers may need to comply with the domestic implementing legislation of the jurisdiction where specifically targeted investors are located.
Certain countries, including the UK, Sweden and Germany (for existing funds as of July 22, 2013), are allowing a one-year transitional period delaying the application of the AIMFD to non-EU managers. Other jurisdictions have adopted much more stringent requirements to restrict marketing efforts by non-EU managers. If you are marketing to EU investors, you should carefully review the directive’s provisions as well as applicable national laws to make sure you comply with all requirements.
Dodd-Frank Protocols. The International Swaps and Derivatives Association’s Dodd-Frank Documentation Initiative aims to facilitate compliance with the Dodd-Frank Act. The Documentation Initiative minimizes the need for bilateral negotiations and reduces disruptions to trading by providing a standard set of amendments, referred to as protocols, to update existing swap documentation. 2013 brought compliance deadlines for two such protocols: the ISDA August 2012 Dodd-Frank Protocol (the “Protocol 1.0″), which had an effective compliance date of May 1, 2013, and the ISDA March 2013 Dodd-Frank Protocol (the “Protocol 2.0″) which had an effective compliance date of July 1, 2013. To indicate participation in Protocol 1.0 and Protocol 2.0, market participants must respond to each Protocol’s questionnaire, submit an adherence letter and pay an adherence fee of $500.00 per Protocol through the online ISDA Amend system. Detailed instructions for (i) Protocol 1.0 can be found here, and (ii) Protocol 2.0 can be found here.
Medicare Tax. As of the beginning of 2013, individuals, estates and trusts are subject to a Medicare tax of 3.8% on “net investment income” (or undistributed “net investment income”, in the case of estates and trusts) for each taxable year. For individuals, the 3.8% tax applies to the lesser of such “net investment income” or the excess of such person’s adjusted gross income (with certain adjustments) over a specified threshold amount. For estates and trusts, the 3.8% tax applies if such entities have undistributed “net investment income” above a certain threshold. Net income and gain attributable to an investment in private investment funds will likely be included in investors’ “net investment income” subject to this Medicare tax. Fund managers should contact their tax advisers and legal counsel to assess whether their corporate structure is ideally configured to reduce the impact of this 3.8% tax.
Adviser Registration & Compliance:
Form ADV Annual Amendment. Registered investment advisers (“RIAs”), or managers filing as exempt reporting advisers (“ERAs”), with the SEC or a state securities authority must file an annual amendment to Form ADV within 90 days of the end of their fiscal year. RIAs must provide a copy of the updated Form ADV Part 2A brochure and Part 2B brochure supplement (or a summary of changes with an offer to provide the complete brochure) to each “client”. Note that for SEC-registered advisers to private investment vehicles, a “client” for purposes of this rule is the vehicle(s) managed by the adviser. State-registered advisers need to examine their state’s rules to determine who constitutes the “client.
Switching to/from SEC Regulation.
SEC Registration. Managers who no longer qualify for SEC registration as of the time of filing the annual amendment must withdraw from SEC registration within 180 days after the end of their fiscal year by filing Form ADV-W. Managers should consult their state securities authorities to determine whether they are required to register in their home states. Managers who are required to register with the SEC as of the date of their annual amendment must register with the SEC within 90 days of filing the annual amendment.
Exempt Reporting Advisers. Managers who no longer meet the definition of an ERA will need to submit a final report as an ERA and apply for registration with the SEC or the relevant state securities authority, if necessary, generally within 90 days after the filing of the annual amendment.
Annual Re-Certification of CFTC Exemptions. CPOs and CTAs currently relying on certain exemptions from registration with the CFTC will be required to re-certify their eligibility within 60 days of the calendar year end. CPOs currently relying on CFTC Regulation 4.13(a)(3) will need to evaluate whether the commodity pool is still eligible for the exemption when taking into account the new CFTC regulated products.
CPO and CTA Annual Updates. Registered CPOs and CTAs must prepare and file Annual Questionnaires and Annual Registration Updates with the NFA, as well as submit payment for annual maintenance fees and NFA membership dues. Registered CPOs must also prepare and file their fourth quarter report for each commodity pool (Form CPO-PQR). Further, 2013 saw certain changes in CTA reporting, as the NFA now requires CTAs to file a quarterly Form CTA-PR within 45 days of the end of the quarter (the fourth quarter CTA-PR will be due on February 14, 2014). Unless eligible to claim relief under Regulation 4.7, registered CPOs and CTAs must update their disclosure documents periodically, as they may not use any document dated more than 12 months prior to the date of its intended use. Disclosure documents that are materially inaccurate or incomplete must be promptly corrected and the corrected version must be promptly distributed to pool participants.
Annual Compliance & Other Items:
New Issue Status. On an annual basis, managers need to confirm or reconfirm the eligibility of investors that participate in initial public offerings or new issues, pursuant to both FINRA Rules 5130 and 5131. Most managers reconfirm investors’ eligibility via negative consent, i.e., investors are informed of their status as on file with the manager and are asked to inform the manager of any changes. No response operates as consent to the current status.
ERISA Status. Given the significant problems that can occur from not properly tracking ERISA investors, we recommend that managers also confirm or reconfirm on an annual basis the ERISA status of their investors. This is particularly important for managers that track the underlying percentage of ERISA funds for each investor. This reconfirmation can also be obtained through a negative consent.
Annual Compliance Review. On an annual basis, the CCO of a registered investment adviser must conduct a review of the adviser’s compliance policies and procedures. This annual compliance review should be in writing and presented to senior management. We recommend that you discuss the annual review with your outside counsel or compliance firm, who can provide guidance about the review process as well as a template for the assessment and documentation. Advisers should be careful that sensitive conversations regarding the annual review are protected by attorney-client privilege. CCOs may also want to consider additions to the compliance program. Advisers that are not registered may still wish to review their procedures and/or implement a compliance program as a best practice.
Trade Errors. Managers should make sure that all trade errors are properly addressed pursuant to the manager’s trade errors polices by the end of the year. Documentation of trade errors should be finalized, and if the manager is required to reimburse any of its funds, it should do so by year-end.
Soft Dollars. Managers that participate in soft dollar programs should make sure that they have addressed any commission balances from the previous year.
Custody Rule Annual Audit. SEC registered advisers must comply with certain custody procedures, including (i) maintaining client funds and securities with a qualified custodian; (ii) having a reasonable basis to believe that the qualified custodian sends an account statement to each advisory client at least quarterly; and (iii) undergoing an annual surprise examination conducted by an independent public accountant.
Advisers to pooled investment vehicles may avoid both the quarterly statements and surprise examination requirements by having audited financial statements prepared in accordance with GAAP by an independent public accountant registered with the Public Company Accounting Oversight Board. Statements must be sent to the fund or, in certain cases, investors in the fund, within 120 days after the fund’s fiscal year end. Managers should review their custody procedures to ensure compliance with the rules. Requirements for state-registrants may differ, and we encourage you to contact us if you have any questions or concerns about your custody arrangements.
Schedule 13G/D and Section 16 Filings. Managers who exercise investment discretion over accounts (including funds and separately managed accounts) that are beneficial owners of 5% or more of a registered voting equity security must report these positions on Schedule 13G. Schedule 13G filings are updated annually within 45 days of the end of the year. For managers who are also filing Schedule 13D and/or Section 16 filings, this is an opportune time to review your filings to confirm compliance and anticipate needs for Q1.
Form 13F. A manager must also file a Form 13F if it exercises investment discretion with respect to $100 million or more in certain securities within 45 days after the end of the year in which the manager reaches the $100 million filing threshold. The SEC lists the securities subject to 13F reporting on its website.
Form 13H. Managers who meet the SEC’s large trader thresholds (in general, managers whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month) are required to file an initial Form 13H with the SEC within 10 days of crossing the threshold. Large traders also need to amend Form 13H annually within 45 days of the end of the year. In addition, changes to the information on Form 13H will require interim amendments following the calendar quarter in which the change occurred.
SEC Form D. Form D filings for most funds need to be amended on an annual basis, on or before the anniversary of the initial SEC Form D filing. Form D has changed slightly this year in connection with the lifted ban on general solicitation discussed above. Instead of checking a box to indicate reliance on “Rule 506″ there are now separate boxes to indicate reliance on either Rule 506(b) or Rule 506(c). Funds that previously selected “Rule 506″ and do not wish to generally solicit will now check the “Rule 506(b)” box. Funds wishing to take advantage of the relaxed rules surrounding general solicitation will check the Rule 506(c) box. Importantly, the SEC has indicated that one offering cannot simultaneously rely on both Rule 506(b) and 506(c), and that once a general solicitation is made, issuers may no longer rely on Rule 506(b). Copies of Form D can be obtained by potential investors via the SEC’s website.
Blue Sky Filings. On an annual basis, a manager should review its blue sky filings for each state to make sure it has met any renewal requirements. States are increasingly imposing late fees or rejecting late filings altogether. Accordingly, it is critical to stay on top of filing deadlines for both new investors and renewals.
IARD Annual Fees. Preliminary annual renewal fees for state registered and SEC registered investment advisers are due by December 13, 2013 (submit payment by December 10 in order for payment to post prior to the deadline).
Pay-to-Play and Lobbyist Rules. SEC rules disqualify investment advisers, their key personnel and placement agents acting on their behalf, from seeking to be engaged by a governmental client if they have made political contributions. State and local governments are following suit, including California, which requires internal sales professionals who meet the definition of “placement agents” (people who act for compensation as finders, solicitors, marketers, consultants, brokers, or other intermediaries in connection with offering or selling investment advisory services to a state public retirement system in California) to register with the state as lobbyists, and comply with California lobbyist reporting and regulatory requirements. Investment professionals (employees who spend at least one-third of their time managing the assets or securities of the manager) are statutorily excluded from California’s “placement agent” definition, and thus do not have to register as lobbyists. Note that managers offering or selling investment advisory services to local government entities have to register as lobbyists in the applicable cities and counties.
State laws on lobbyist registration differ widely, so we recommend reviewing your reporting requirements in the states in which you operate to make sure you are in compliance with the rules.
Form PF. Managers to private funds that are either registered with the SEC or required to be registered with the SEC and have at least $150 million in regulatory AUM began filing Form PF in 2012. Smaller private advisers (fund managers with fewer than $1.5 billion in regulatory AUM) must file Form PF annually within 120 days of their fiscal year end. Larger private advisers (fund managers with $1.5 billion or more in regulatory AUM) must file Form PF within 60 days of the end of each fiscal quarter.
Electronic Schedule K-1s. This year, the IRS authorized partnerships and limited liability companies taxed as partnerships to issue Schedule K-1s to investors solely by electronic means, provided the partnership has received the investor’s affirmative consent. States may have different rules regarding electronic K-1s and partnerships should check with their counsel whether they may still be required to send state K-1s on paper. Partnerships must also provide each investor with specific disclosures that include a description of the hardware and software necessary to access the electronic K-1s, how long the consent is effective and the procedures for withdrawing the consent. If you would like to send K-1s your investors electronically you should discuss your options with your service providers.
Other Fund Matters:
Wash Sales. Managers should carefully manage wash sales for year end. Failure to do so could result in embarrassing book/tax differences for investors. Certain dealers can provide managers with swap strategies to manage wash sales, including Basket Total Return Swaps and Split Strike Forward Conversion. These strategies should be considered carefully to make sure they are consistent with the investment objectives of the fund.
Redemption Management. Managers with significant redemptions at the end of the year should carefully manage the unwinding positions so as to minimize transaction costs in the current year (that could impact performance), and prevent transaction costs from impacting remaining investors in the next year. When closing funds or managed accounts, managers should pay careful attention to the liquidation procedures in the managed account agreement and the fund constituent documents.
NAV Triggers and Waivers. Managers should promptly seek waivers of any applicable termination events set forth in a fund’s ISDA or other counterparty agreement that may be triggered by redemptions, performance or a combination of both at the end of the year (NAV declines are common counterparty agreement termination events).
Fund Expenses. Managers should wrap up all fund expenses for 2013 if they have not already done so. In particular, managers should contact their outside legal counsel to obtain accurate and up to date information about legal expenses for inclusion in the NAV for year-end performance.
Management Company Issues:
Management Company Expenses. Managers who distribute profits on an annual basis should attempt to address management company expenses in the year they are incurred. If ownership or profit percentages are adjusted at the end of the year, a failure to manage expenses could significantly impact the economics of the partnership or the management company.
Employee Reviews. An effective annual review process is important to reduce employment-related litigation and protect the management company in the event of such litigation. Moreover, it is an opportunity to provide context for bonuses, compensation adjustments, employee goals and other employee-facing matters at the firm. It is not too late to put an annual review process in place.
Compensation Planning. In the fund industry, and the financial services industry in general, the end of the year is the appropriate time to make adjustments to compensation programs. Since much of a manager’s revenue is tied to annual income from incentive fees, any changes to the management company structure, affiliated partnerships, or any shadow equity programs should be effective on the first of the year. Make sure that partnership agreements and operating agreements are appropriately updated to reflect such changes.
Insurance. If a manager carries D&O Insurance or other liability insurance, the policy should be reviewed on an annual basis to make sure that the manager has provided notice to the carrier of all claims and all potential claims. Also, newly launched funds should be added to the policy as appropriate.
As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:
November 20, 2013 ”Red Flag” Rules effective
December 13, 2013 IARD Preliminary Renewal Statement Due (submit payment by Dec. 10 in order for payment to post by deadline)
February 14, 2014 Fourth Quarter CTA-PR Due
February 14, 2014 Schedule 13G Update Due; Form 13F Due (if applicable); Form 13H Amendment Due
March 1, 2014 Deadline for Re-Certification of CFTC Exemptions
March 3, 2014 Quarterly Form PF Due for Larger Private Advisers (if applicable)
March 31, 2014 Annual ADV Amendments Due
Periodic Filings Form D and Blue Sky filings should be current
Please feel free to reach out to us if you have any questions regarding your end-of-the-year compliance. We wish you all the best as 2013 comes to a close.
Karl Cole-Frieman & Bart Mallon
Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP has an international practice that services both start-up investment managers as well as multi-billion dollar firms. The firm provides a full suite of legal services to the investment management community, including: hedge fund, private equity fund, and venture capital fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog which focuses on legal issues that impact the hedge fund community. For more information please visit us at: www.colefrieman.com.
This newsletter is published as a source of information only for clients and friends of the firm and should not be construed as legal advice or opinion on any specific facts or circumstances. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Cole-Frieman & Mallon LLP is a California limited liability partnership and this publication may be considered attorney advertising in some jurisdictions.]]>
Cole-Frieman & Mallon LLP provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.]]>
All CPOs are required to maintain certain books and records, as provided under either CFTC Regulation 4.23 (for non-exempt CPOs) or CFTC Regulation 4.7(b) (for 4.7 Exempt CPOs). Under the new rule, rather than maintain these books and records at the CPO’s main business office, a CPO may maintain them at one or more of the following: the pool’s administrator, distributor or custodian, or a bank or registered broker or dealer acting in a similar capacity with respect to the pool.
Notice Filing with NFA
If a CPO uses such third party service providers to maintain its books and records, it must file a notice of exemption with the NFA, via the NFA Exemption System. The CPO must make a separate notice filing for each of the following:
• The CPO, if any of the CPO’s books and records are maintained by third parties
• Each pool that has books and records maintained by third parties
Notice filings are made through the NFA Exemption System. Each filing must be accompanied by two statements containing certain representations:
1. Statement by CPO
In connection with each notice filing, the CPO will be required to upload via the NFA Exemption System a statement containing the following information and representations from the CPO:
• The name, main business address, and main business telephone number of the third party service provider, and the name and phone number of a contact person at such provider
• The books and records to be maintained by the third party service provider (by reference to the applicable CFTC Regulation sections requiring such books and records)
• A representation that the CPO will promptly amend the statement if the contact information or location of any of the books and records required to be kept changes
• A representation that the CPO remains responsible for ensuring that all required books and records are kept in accordance with CFTC Regulation 1.31
• A representation that, within 48 hours after a request by the CFTC (72 hours if the service provider is outside the U.S.), the CPO will obtain the original books and records from the location at which they are maintained, and provide them for inspection at the CPO’s main business office
• A representation that the CPO will disclose the location of its required books and records in the applicable pool’s disclosure document [note: the CFTC has not provided explicit guidance on how specific this disclosure must be. Please see below for a more detailed discussion.]
2. Statement by Third Party Record Keeper
In connection with each notice filing, the CPO will be required to upload via the NFA Exemption System a statement containing the following acknowledgments and representations from the third party service provider:
• An acknowledgment that the CPO intends for the service provider to keep and maintain the applicable books and records;
• A statement that the service provider agrees to keep and maintain such books and records in accordance with CFTC Regulation 1.31; and,
• A statement that the service provider agrees to keep such books and records open to inspection as required under CFTC regulations.
As described above, a CPO is required to represent that it will disclose in its pool’s disclosure document the location of its required books and records. The new rule does not specify the amount of detail that must be included in the disclosure document. In an informal phone conversation, a representative from the National Futures Association indicated that the disclosure must be sufficient to inform an investor where to go to obtain the books and records.
4.7 Exempt CPOs
Before this new rule was issued, CPOs relying on CFTC Regulation 4.7(b) were relieved from the specific disclosure requirements that applied to the disclosure documents of non-exempt CPOs, as long as their offering memorandum (if any) was not misleading and contained a disclosure statement on the cover page. Now, however, under the plain language of the new rule, even 4.7 exempt CPOs must disclose the location of the pool’s required books and records in a “disclosure document.”
Presumably this new rule was not intended to impose a new CFTC requirement that 4.7 exempt CPOs must have disclosure documents. And in practice, nearly every CPO that offers interests in a pool will have an offering memorandum for such pool, regardless of whether CFTC rules require this. The more relevant question for 4.7 exempt CPOs, then, will be the same as the question for non-exempt CPOs: how much detail must be included in the offering memorandum about the location of the pool’s books and records? We await further guidance from the CFTC to definitively answer this question.
Cole-Frieman & Mallon LLP provides legal advice to CTAs and CPOs and other firms in the investment management space. Please contact us directly or reach out to Bart Mallon at 415-868-5345.]]>