Funds of Funds and FINRA 5131(b)

Posted on February 22, 2012 by Jeff

It appears that certain funds of funds are likely to see an easing up on their due diligence obligations vis-a-vis their investors under Financial Industry Regulatory Authority (“FINRA”) Rule 5131(b), the “anti-spinning” rule governing a fund’s purchase of new issues that was effective September 26, 2011. Spinning is the practice of allocating new issues to executive officers and directors of current or potential investment banking clients in exchange for their investment banking business. For your reference, Rule 5131(b) and the de minimis exception available to funds are reviewed below.

At a meeting last week, the FINRA Board of Governors authorized FINRA staff to submit a proposed rule change to the Securities and Exchange Commission (“SEC”) that would exempt certain funds of funds from the requirement to assess the status of indirect beneficial owners for purposes of purchasing new issues under the anti-spinning provisions of FINRA Rule 5131(b). Continue reading →

Upcoming 2012 SEC Regulatory Deadlines

Posted on February 16, 2012 by Jeff

Congratulations to all newly registering investment advisers that have submitted their Forms ADV Part 1A and Part 2A via the Investment Adviser Registration Depository (“IARD”) in anticipation of the March 30, 2012 deadline! The Securities and Exchange Commission (“SEC”) generally has up to 45 days after receipt of the Form ADV to declare the registration effective and generally will notify an adviser via email once its registration is declared effective. Registrations may be declared effective at any time during that 45-day period. An adviser can also check on IARD under the heading “Registration/Reporting Status” to see if its registration has been declared effective.

Below is a review and reminder of certain of the annual regulatory requirements that may be applicable to investment advisers. This is not intended to be an exhaustive list of SEC regulatory requirements and does not cover state-specific requirements. In particular, it should be noted that the below information does not address any regulatory filings or reports required by the Internal Revenue Service, Department of the Treasury (such as TIC forms) or the Commodity Futures Trading Commission (“CFTC”). We expect to release future articles on other required regulatory filings. The information below is for informational purposes only and is not legal advice. Continue reading →

CFTC Rescinds 4.13(a)(4) Exemption Among Other Amendments to Part 4

Posted on February 12, 2012 by Jeff

The Commodity Futures Trading Commission (the “CFTC”) issued a Final Rule amending registration and compliance obligations for commodity pool operators and commodity trading advisors (“CPOs” and “CTAs”, respectively), in particular rescinding the section 4.13(a)(4) exemption upon which many investment advisers to private funds rely.

The 197-page Final Rule release as well as an explanatory Fact Sheet and Q&A document may be found here.

The Final Rule, first proposed on January 26, 2011, passed 4-1, and:

Rescinds the exemption from registration provided in section 4.13(a)(4);
Removes relief from the certification requirement for annual reports provided to operators of certain pools offered only to qualified eligible persons under section 4.7(b)(3);
Modifies the criteria for claiming relief under section 4.5;
Requires the annual filing of notices claiming exemptive relief under several sections of the CFTC’s regulations;
Adopts amendments that include new risk disclosure requirements for CPOs and CTAs regarding swap transactions; and
Adopts new data collections for CPOs and CTAs consistent with the Form PF data collection required under the Dodd-Frank Act for entities registered with both the CFTC and the Securities and Exchange Commission.

In preparing the Final Rule, the CFTC considered comment letters, including one submitted by HedgeOp Compliance, LLC, requesting that the 4.13(a)(4) exemption be retained for funds that are advised by an SEC-registered investment adviser and invest indirectly in commodity interests through a fund of funds structure. The CFTC has determined to withhold consideration of such an exemption pending receipt of data from the new Forms CPO-PQR and/or CTA-PR. The CFTC will consider requests for exemptive relief for funds of funds on a case by case basis.

The CFTC today also issued a Proposed Rule to harmonize compliance obligations for SEC-registered investment advisers to registered investment companies that would be required to register as commodity pool operators.

HedgeOp will be reviewing the Final Rule release and analyzing its potential ramifications.

Keep a look out for additional post summarizing the details and timing issues.

SEC Provides Guidance on Registration of Advisers Related to Registered Investment Advisers

Posted on January 27, 2012 by Jeff

On January 18, 2012, the Securities and Exchange Commission (the “SEC”) issued a No-Action letter (the “2012 ABA Letter”) to the American Bar Association (the “ABA”), Business Law Section, providing guidance as to when certain entities affiliated with a registered investment adviser would be permitted to rely on the registered investment adviser’s registration, and would not be required to register separately as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”). The 2012 ABA Letter confirms the SEC’s guidance on these issues in Question and Answer G.1. of its December 8, 2005 letter addressed to the ABA’s Subcommittee on Private Investment Entities and responds to additional related questions. Question and Answer G.1. is referred to as the “2005 ABA Letter” and is further described below. The continued applicability of the 2005 ABA Letter had been called into question by the amendments resulting from the repeal of the section 203(b)(3) private adviser exemption under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Continue reading →

Recent SEC Investment Adviser Enforcement Cases – Deficient Compliance Programs and Aberrational Performance

Posted on December 15, 2011 by Jeff

HedgeOp would like to take the opportunity to highlight recent enforcement actions brought by the SEC Enforcement Division’s Asset Management Unit and remind all about the importance of implementing a thorough compliance program and of maintaining a robust culture of compliance.

Continue reading →

Insider Trading Action: Exchange-Traded Funds (“ETFs”)

Posted on November 30, 2011 by Jeff

The SEC appears to be focusing on markets and products not previously investigated in the insider trading context. According to Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit, the SEC is “aggressively working to identify and prosecute illegal insider trading across multiple markets and derivatives products regardless of the complexity of the trading pattern that we have to unravel in our investigations.”
Continue reading →

Final Form PF Approved by CFTC

Posted on November 27, 2011 by Jeff

Recently, the Commodity Futures Trading Commission (the “CFTC”) approved joint final rules under the Commodity Exchange Act (the “CEA”) and the Investment Advisers Act of 1940 (the “Advisers Act”) and the final Form PF (report by private fund advisers). The new rules implement provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Continue reading →

Division of Investment Management Requests Extensions of Deadlines for Mid-Sized Advisers and Private Fund Advisers

Posted on May 9, 2011 by Yonina

IA Watch is reporting that the Division of Investment Management has formally requested that the Securities and Exchange Commission (SEC) move to next year the deadlines for mid-sized advisers (certain advisers with between $25 million and $100 million in assets under management) to switch to state registration and for private fund advisers with more than $150 million in assets under management to register with the SEC. IA Watch states: “The formal request moves this closer to becoming reality, should the Commission act on it.”

Robert E. Plaze, Associate Director of the Division of Investment Management, had suggested that extensions to the first quarter of 2012 were a possibility in his April 8, 2011 letter to David Massey, President, North American Securities Administrators Association, Inc. and Deputy Securities Administrator, North Carolina Securities Division.

“We anticipate that the Commission will complete its implementing rulemaking by July 21,2011 in accordance with the Dodd-Frank Act, but expect in connection therewith that the Commission will consider providing additional time for investment advisers affected by these provisions to come into compliance.”

With respect to the switch of mid-sized advisers to state registration, Mr. Plaze’s letter noted that once the SEC adopts the implementing rulemaking, the Investment Adviser Registration Depository system (lARD) will “require re-programming to accept advisers’ transition filings” and that they “understand that the re-programming process will take until the end of the year to complete.” As a result, under consideration was the possibility that “all SEC-registered advisers would be required to report their eligibility for registration with the Commission in the first quarter of 2012.” He went on to say that, even if the implementing rulemaking is completed prior to July 21, 2011, private fund advisers will need time to register and come fully into compliance with the accompanying obligations, and that they “expect that the Commission will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”

IA Watch‘s report is not surprising given recent reports in industry publications (including a May 2 report by IA Watch) that SEC staff members have indicated the expectation that the delays will go through. One such statement was reported to have been made by Sara Crovitz, a Branch Chief in the Office of Chief Counsel in the Division of Investment Management, as a participant in a DC bar luncheon panel discussion on “Cross Border Issues Affecting Investment Advisers in the World of Dodd-Frank.”

SEC Division of Investment Management Staff Responds to Questions about Form ADV Part 2

Posted on March 22, 2011 by Yonina

On March 18, 2011, the staff of the SEC’s Division of Investment Management issued responses to questions about the amended Part 2 of Form ADV.

The Division answered questions regarding the following topics, generally restating information already known about the compliance dates for delivery questions, but providing guidance not previously offered on the remaining issues:

compliance dates for delivery of Part 2A and Part 2B
Part 2A brochure format, material change and risk disclosure, filing and delivery requirements
“covered persons” for Part 2B brochure supplements
Part 2B brochure supplement delivery requirements

Among the responses offered are the following:

An offshore adviser whose only clients are offshore funds would not have to prepare or file a brochure as part of its Form ADV. (Question II. 6)
An adviser that is not required to deliver a brochure, but nevertheless chooses to prepare and deliver one, is not required to file the brochure with the SEC. (Question III. 1)
An adviser to a hedge or other private fund could meet its delivery obligation to the fund client by delivering the brochure to a “legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity.” In its response, the staff cites the U.S. Court of Appeals D.C. Circuit 2006 decision in Goldstein v. Securities and Exchange Commission (“Goldstein”) that the “client” of an investment adviser managing a hedge fund is the fund itself and not any of the investors in the fund. (Question III. 2)

Despite the Goldstein decision, many advisers provide copies of their brochures to all investors in their funds, as a matter of best business practice. It is expected that many advisers will continue to do so, as a matter of best business practice, despite the staff’s response to Question III. 2.

In their introduction to these responses, the staff of the Division of Investment Management state that they expect to update the site with their responses to additional questions “from time to time.” Investment advisers will continue to look for further guidance from the staff.

The full text of the Division of Investment Management staff responses may be found here and the final rule adopting the related amendments to Part 2 may be found here.

FCIC Probes Hedge Funds

Posted on May 18, 2010 by Jeff

As reported on CNBC, The Financial Crisis Inquiry Commission has turned its attention to hedge funds, as it continues to examine the causes of the financial meltdown.

In the last few days, the FCIC sent a detailed survey to the member list of the Managed Funds Association (the main lobbying arm of the hedge fund industry), according to people who have received the survey. Continue reading →

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