The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Commodities

  • From Vol. 11 No.7 (Feb. 15, 2018)

    Settlements With Three Major Banks and Five Individual Enforcement Actions Follow CFTC Anti-Spoofing Initiative

    The CFTC’s Spoofing Task Force has been aggressive in combating spoofing – placing orders that a trader has no intention of filling in order to move the price of a futures contract in a desired direction – as well as other forms of market manipulation. It recently announced eight separate actions involving spoofing and other manipulation. The CFTC entered into settlement orders with three major banks: Deutsche Bank AG and Deutsche Bank Securities Inc.; UBS AG; and HSBC Securities (USA) Inc. The regulator also commenced five civil enforcement actions against individual traders and a software developer. This article examines the details and terms of the bank settlements, as well as the complaints filed by the CFTC against the individuals. For more on spoofing, see “Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing” (Oct. 12, 2017); “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017); and “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

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  • From Vol. 11 No.6 (Feb. 8, 2018)

    Virtual Currencies Present Significant Risk and Opportunity, Demanding Focus From Regulators, According to CFTC Chair

    The meteoric rise of the value of cryptocurrencies like bitcoin demands a special focus from regulators, CFTC Chairman J. Christopher Giancarlo stated in recent remarks to the ABA Derivatives and Futures Section Conference in Naples, Florida. The Chairman noted that virtual currencies represent both significant risk and opportunity for investors, discussed the role of the CFTC and other regulators in overseeing virtual currencies and outlined the CFTC staff review checklist of virtual currency futures markets. In addition, Giancarlo examined the importance of mutual cross-border regulatory deference, using the E.U.’s and CFTC’s approach to margin rules to illustrate the benefits of global regulatory cooperation. This article summarizes the portions of the speech most relevant to fund managers. For more from Giancarlo, see “New CFTC Chair Outlines Enforcement Priorities and Approaches to FinTech, Cybersecurity and Swaps Reform” (Nov. 9, 2017).

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  • From Vol. 10 No.40 (Oct. 12, 2017)

    Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing

    Preventing and responding to market manipulation is one of the primary mandates of the SEC and CFTC, the latter of which recently entered into settlement orders with a bank and a day trader, alleging in each case that the respondents had engaged in spoofing – a manipulative practice by which a trader enters multiple orders for a given commodity or futures contract with no intention of executing them in order to move the price of that contract in a desired direction. This article analyzes the terms of the settlement orders, which were issued around the same time as the decision by the U.S. Court of Appeals for the Seventh Circuit in U.S. v. Coscia, which upheld the constitutionality of the anti-spoofing provision of the Commodity Exchange Act. See “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017). For more on spoofing, see “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017); “Managing the Machine: How Hedge Fund Managers Can Examine and Document Their Automated Trading Strategies (Part One of Two)” (Jan. 7, 2016); and “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015).

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  • From Vol. 10 No.35 (Sep. 7, 2017)

    Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing

    On August 7, 2017, the U.S. Court of Appeals for the Seventh Circuit (Court) issued a ruling in a long-running case of a high-frequency trader charged with violating the anti-spoofing provision of the Commodity Exchange Act (CE Act) along with commodities fraud. The Court dismissed the defendant’s argument that the anti-spoofing provision of the CE Act was unconstitutionally vague and that a conviction based on the provision was therefore invalid. The case is of monumental significance for the financial sector because it is likely to embolden the government to pursue and prosecute traders it deems to have fallen afoul of the anti-spoofing provision. The implications of the case may be troubling for some traders who feel that, despite the Court’s finding, the legal definition of spoofing may need further clarification. Just as importantly, there are instances where traders, acting with no scienter or illegal intent, will legitimately cancel orders. Given the centrality of the cancellation of orders to regulators’ view of spoofing, traders need to take the utmost care to ensure that they can prove their normal market activities did not amount to illegal market manipulation and fraud. To help readers understand the issues that came to light in the Court’s ruling, and to inform them about steps they can take to insulate legitimate trading activities from suspicions of spoofing and disastrous legal consequences, this article summarizes the ruling and presents insights from attorneys with expertise in anti-spoofing enforcement. For more on spoofing, see “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

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  • From Vol. 10 No.19 (May 11, 2017)

    How Emerging Manager CTAs May Deploy UCITS and ETF Fund Structures to Access Foreign Capital

    Commodity trading advisors (CTAs) reeling from heavy outflows in 2016 may be looking for ways to begin making inroads into foreign markets in 2017. A wide array of options for doing so are available to CTAs, particularly via Undertakings for Collective Investments in Transferable Securities (UCITS) structures and exchange-traded funds (ETFs). For all their advantages, however, these vehicles’ complexity and cost may render them infeasible for a given CTA. Moreover, it is a mistake to assume that foreign jurisdictions share the pro-business stance of the new U.S. administration. Consequently, CTAs need to be exceedingly careful when choosing these vehicles, and an informed approach to these options can help CTAs flourish in foreign markets. All these points came across in a panel discussion during the recent CTAExpo/Emerging Manager Forum. Moderated by Stephen Klein, a portfolio manager at Abingdon Capital Management LLC, the panel featured Alex Lenhart, senior vice president of Singapore Exchange Ltd.; Bob Swarup, principal of Camdor Global Advisors Ltd.; Lynette Lim, co-chief executive officer of Phillip Capital Inc.; and Scott Brusso, senior director for foreign exchange and metals sales for Intercontinental Exchange, Inc. This article presents the key takeaways from the panel discussion. For more on the UCITS market and prospects for fund managers looking for opportunities abroad, see our two-part series, “Dechert Partners Outline Post-Brexit Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg” (Nov. 10, 2016); and “Dechert Partners Discuss Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures” (Nov. 17, 2016).

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  • From Vol. 9 No.34 (Sep. 1, 2016)

    CFTC Proposes Rule to Clarify Registration Obligations of Foreign CPOs and CTAs

    The Commodity Futures Trading Commission (CFTC) recently proposed to amend its rules to resolve ambiguity regarding whether certain commodity pool operators (CPOs) and commodity trading advisors (CTAs) located outside the United States are required to register. In a guest article, Nathan A. Howell and Joseph E. Schwartz, partner and associate, respectively, at Sidley Austin, review the recent rule proposal by the CFTC, along with the legislative history preceding it, and examine how the proposal would clarify the regulation requirements of foreign CPOs and CTAs. For additional insight from Sidley Austin partners, see “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015); “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015); and coverage of Sidley Austin’s private funds event in New York City: Part One (Sep. 25, 2014); and Part Two (Oct. 2, 2014). For discussion of other CFTC regulatory matters, see “Hedge Fund Managers Face Imminent NFA Cybersecurity Deadline” (Feb. 25, 2016); and “CFTC Allows Hedge Fund Managers to Advertise” (Sep. 18, 2014).

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  • From Vol. 9 No.10 (Mar. 10, 2016)

    Practical Steps That Commodity-Focused Hedge Fund Managers Can Take to Combat Cybersecurity Threats

    Cybersecurity threats against hedge fund managers grow ever more sophisticated. Accordingly, the NFA’s Interpretive Notice on cybersecurity, which became effective on March 1, 2016, calls for NFA members, including hedge fund managers registered with the NFA as commodity pool operators or commodity trading advisers, to adopt an Information Systems Security Program robust enough to guard against these increasing threats. See “PLI Panel Addresses Cybersecurity and Swaps Regulation” (Nov. 5, 2015). To assist members with those preparations, the NFA recently held a “Cybersecurity Workshop” featuring senior NFA personnel and industry experts. Among other topics, panelists discussed critical cybersecurity threats, response plans, training and other practical cybersecurity measures. This article summarizes the panelists’ discussion of these issues. For additional coverage of the NFA’s Cybersecurity Workshop, see “Hedge Fund Managers Face Imminent NFA Cybersecurity Deadline” (Feb. 25, 2016).

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  • From Vol. 9 No.1 (Jan. 7, 2016)

    CFTC Resolves Its First Insider Trading Case

    The CFTC recently settled its first enforcement proceeding involving alleged insider trading in commodities futures. Although there have been previous cases alleging insider trading of products traditionally thought of as futures or commodities, such as credit default swaps, these actions have been brought by the SEC. See, e.g., “After Bench Trial of First-Ever Credit Default Swap Insider Trading Action, U.S. District Court Rules That Swaps Referencing Bonds Are Securities-Based Swap Agreements Under Antifraud Provisions of Securities Exchange Act, but Holds That SEC Failed to Prove Insider Trading” (Jul. 8, 2010). A proprietary trader employed by a large public company surreptitiously, and in violation of company policy, matched company trades in oil and gas futures with trades in two accounts that he personally controlled. He also traded for his own account ahead of his trades for the company. The CFTC accused the trader of violating the antifraud and anti-manipulation provisions of the Commodity Exchange Act and its rules. Of particular note to any hedge fund manager engaging in transactions involving commodity interests (including futures, options on futures and related swaps), the CFTC has firmly asserted that its Regulation 180.1 – which closely tracks Rule 10b-5 under the Securities Exchange Act of 1934 – permits the CFTC to prosecute commodities industry participants for insider trading. This article summarizes the CFTC’s allegations; the relevant laws and regulations; and the outcome of the settlement. For more on CFTC enforcement priorities, see “Regulators From the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part Two of Four)” (Dec. 18, 2014).

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  • From Vol. 8 No.45 (Nov. 19, 2015)

    NFA Notice Provides Cybersecurity Guidance to Hedge Fund Managers Registered as CPOs and CTAs

    Cybersecurity in the futures and derivatives market is “perhaps the single most important new risk to market integrity and financial stability,” Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad stated in a keynote address.  The National Futures Association (NFA) recently received CFTC approval of its Interpretive Notice to several existing NFA compliance rules related to supervision, titled “Information Systems Security Programs [ISSPs].”  The new guidance will provide more specific standards for supervisory procedures and will require hedge fund managers and other entities that are NFA members to adopt and enforce written policies and procedures to protect customer data and electronic systems.  “The approach of the Interpretive Notice is to tie cybersecurity best practices to a firm’s supervisory obligations,” Covington & Burling partner Stephen Humenik said.  This article summarizes the guidance.  See also “PLI ‘Hot Topics’ Panel Addresses Cybersecurity and Swaps Regulation,” The Hedge Fund Law Report, Vol. 8, No. 43 (Nov. 5, 2015).  For more on CFTC and NFA requirements applicable to hedge fund managers, see our three-part CPO Compliance Series: “Conducting Business with Non-NFA Members (NFA Bylaw 1101),” Vol. 5, No. 34 (Sep. 6, 2012); “Marketing and Promotional Materials,” Vol. 5, No. 38 (Oct. 4, 2012); and “Registration Obligations of Principals and Associated Persons,” Vol. 6, No. 6 (Feb. 7, 2013).

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  • From Vol. 8 No.25 (Jun. 25, 2015)

    Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II (Part Two of Two)

    As the Markets in Financial Instruments Directive is recast under the new directive (MiFID II) and related regulations (MiFIR), it is important for hedge fund managers and other firms to prepare for the changes taking effect in January 2017.  To assist in that effort, a recent program presented by The Hedge Fund Law Report and Advise Technologies offered a comprehensive overview of the proposed changes under MiFID II and MiFIR.  Moderated by William V. de Cordova, editor-in-chief of the HFLR, the program featured Jeanette Turner, a managing director at Advise Technologies, and Simon Whiteside, a partner at Simmons & Simmons.  This article, the second in a two-part series, addresses access to E.U. markets by non-E.U. firms; direct electronic access; investment advice; transaction reporting; transparency reporting; commodities; trading venues; and preparation for MiFID II.  The first article conveyed insight from the panel on the impact of MiFID II on private funds; the legislative and regulatory status of MiFID II; inducements, soft dollars and research; conflicts of interest; information and reporting; best execution; recordkeeping; and product governance.  For more on MiFID II, see “Changing Regulations May Restrict Hedge Fund Managers’ Use of Soft Dollars in Europe,” The Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015).  For a discussion by Turner of the MiFID II implementation process and new transaction reporting requirements, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).  For other collaborations between the HFLR and Advise Technologies, see also “Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filing (Part One of Two),” The Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015).

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  • From Vol. 8 No.11 (Mar. 19, 2015)

    Structuring Private Funds to Profit from the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options

    Energy companies directly or indirectly reliant on reserve based lending and public equity markets are feeling pressure as markets have tightened, as evidenced by recent significant stock declines, IPO delays, dividend and distribution cuts and missed interest payments leading to bankruptcy filings.  If lower prices are sustained, this financial pressure will continue over time as reserves are increasingly valued at lower prices, interest rates move upward and poorly hedged exploration and production companies and counterparties face unfavorable positions.  In such a market, leveraged and shale focused high-yield exploration and production companies, shale-reliant and undiversified oil field services companies and small- to medium-sized financial institutions with significant exposure to such companies and the boom oil patch areas generally will present distressed investors with plenty of opportunities to extract value from current market conditions.  Along with the financial considerations, investment funds looking to take advantage of distressed energy opportunities will have to consider various legal matters including structuring the investments, due diligence and dealing with potentially illiquid positions.  This guest article describes the market context, focusing on opportunities for hedge funds and other players arising out of the oil price plunge; the palette of investment options available to managers looking to invest in or around oil price movements; the balance between speed and comprehensiveness in due diligence; and tax, liquidity and other fund structuring considerations.  The authors of this article are James Deeken and Shubi Arora, both partners at Akin Gump Strauss Hauer & Feld; Jhett Nelson, counsel at Akin; and Stephen Harrington, an Akin associate.

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  • From Vol. 8 No.7 (Feb. 19, 2015)

    RCA Compliance, Risk and Enforcement 2014 Symposium Highlights SEC Exam Priorities and Focus Areas, Mitigating Regulatory Filing Risk and Key AIFMD Issues for Non-E.U. Managers (Part One of Two)

    Hedge funds are subject to regulatory scrutiny, and enforcement actions against managers have been increasing in frequency and sophistication.  Hedge fund managers therefore need to ensure compliance with the ever-growing panoply of regulations to which they are subject; and registered managers need to prepare for routine and other examinations by regulators.  In order to assist managers with these aims, the Regulatory Compliance Association held its Compliance, Risk and Enforcement 2014 Symposium in New York City.  This article, the first in a two-part series, summarizes the panelists’ discussion on the NFA’s and SEC’s risk-focused tools and technologies; the SEC’s 2015 examination and enforcement priorities; and preparing for SEC examinations.  The second article in the series will cover risks associated with regulatory reporting and emerging AIFMD issues.  See also “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?,” The Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015).  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.

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  • From Vol. 7 No.39 (Oct. 17, 2014)

    Practical Guidance for Hedge Fund Managers on Preparing For and Handling NFA Audits

    A hedge fund manager may be subject to CFTC jurisdiction and registration as a commodity pool operator (CPO) or commodity trading adviser (CTA) if it uses derivatives or trades in commodities.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012); and Part Two of Two, Vol. 5, No. 19 (May 10, 2012).  A CPO or CTA is required to become a member of the National Futures Association (NFA) and, as such, is subject to NFA rules and regulations and to periodic audits.  In that regard, a recent program reviewed the nuts and bolts of an NFA audit, NFA compliance programs and common audit issues; offered strategies for preparing for and surviving an audit; and summarized recent CFTC guidance that affects CPOs and CTAs.  The program featured Robert V. Cornish, Jr., a partner at Phillips Lytle LLP; Dorothy D. Mehta, a special counsel at Cadwalader, Wickersham & Taft LLP; Deborah A. Monson, a partner at Ropes & Gray, LLP; and Heather Wyckoff, counsel at Haynes & Boone LLP.  See also “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests,” The Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).

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  • From Vol. 7 No.35 (Sep. 18, 2014)

    Three Reasons Why Hedge Fund Managers That Trade Commodities or Derivatives Should Care about Insider Trading in Securities

    For insider trading liability to attach, there must be, among other things, a purchase or sale of a security.  See “Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation,” The Hedge Fund Law Report, Vol. 5, No. 42 (Nov. 9, 2012) (subsection entitled “Summary of the Elements Under U.S. Law”).  Therefore, one might conclude that the manager of a hedge fund that invests exclusively in commodities and derivatives might fall outside the ambit of insider trading laws.  Similarly, one might conclude that the manager of one or more hedge funds that invest in commodities, derivatives and securities might only have to concern itself with insider trading laws to the extent of its securities trading.  This line of thinking is wrong – and hedge fund managers focused on commodities and derivatives do have to concern themselves with insider trading – for at least three reasons.

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  • From Vol. 7 No.20 (May 23, 2014)

    Bankruptcy Court Rules on Whether Funds Held by Bankrupt Futures Commission Merchant for Retail Forex and OTC Metals Trading Are “Customer Property” Entitled to Priority Distribution

    Peregrine Financial Group, Inc. (PFG) was a registered futures commission merchant (FCM) and a “Forex Dealer Member” of the National Futures Association (NFA).  In July 2012, after discovering the theft of client funds, PFG filed for bankruptcy protection.  Later that year, PFG’s bankruptcy trustee (Trustee) sought permission to distribute “customer property” to PFG customers who traded “commodity contracts.”  Such customers are entitled to priority in distributions from a commodities broker bankruptcy.  The Trustee did not include in the proposed distribution PFG customers who engaged in retail foreign exchange (retail forex) and over-the-counter spot metals (OTC metals) transactions.  As a result, Secure Leverage Group, Inc. and other customers of PFG that had accounts with PFG for trading in retail forex and OTC metals commenced an adversary proceeding.  They sought a declaration that their retail forex and OTC metals trading constituted “commodity contracts” within the meaning of the U.S. Bankruptcy Code and that, accordingly, they were entitled to share in the proposed priority distribution of “customer property.”  Jockeying over “customer” status is not unique to bankruptcies of FCMs; similar issues arise in SIPA liquidations as well.  See “U.S. District Court Rules on Whether a Party to a Repurchase Agreement with a Broker-Dealer That Enters Liquidation Is a ‘Customer’ of the Broker-Dealer under SIPA,” The Hedge Fund Law Report, Vol. 7, No. 18 (May 8, 2014).

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities

    On February 4, 2014 – this coming Tuesday – the New York office of Ropes & Gray will host GAIM Regulation 2014.  The event will feature an all-star speaking faculty including general counsels and chief compliance officers from leading hedge fund managers, top partners from Ropes and other law firms and officials from the SEC, CFTC, FINRA and other U.S. and global regulators.  The intent of the event is to share best practices in a private setting, and to hear directly from relevant regulators.  For a fuller description of the event, click here.  To register, click here.  The Hedge Fund Law Report recently interviewed three Ropes partners on some of the more noteworthy topics expected to be discussed at GAIM Regulation 2014.  Generally, we discussed SEC and regulatory issues with Laurel FitzPatrick, co-leader of Ropes’ hedge funds practice and co-managing partner of its New York office; CFTC and derivatives issues with Deborah A. Monson, a partner in Ropes’ Chicago office; and enforcement issues with Zachary S. Brez, co-chair of Ropes’ securities and futures enforcement practice.  Specifically, our long form interview with these partners included detailed discussions of the future of hedge fund advertising following the JOBS Act; the impact of the Volcker rule on hedge fund hiring and trading; fund manager responses to the SEC’s focus on broker registration of in-house marketing personnel; best practices for preparing for and navigating SEC examinations; structuring multi-year incentive fees; the impact of swap execution facilities on hedge fund manager obligations and cleared derivatives execution agreements; recent National Futures Association developments relevant to hedge fund managers; design and enforcement of robust information barriers; measures that managers can take to preserve the firm before and after initiation of an enforcement action; government enforcement priorities for hedge fund managers; and specific financial products likely to face government scrutiny in the next two years.

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  • From Vol. 6 No.42 (Nov. 1, 2013)

    K&L Gates Seminar Discusses Impact of CFTC Harmonization Rules on Alternative Mutual Funds and Other Registered Investment Companies

    In the absence of an exemption, a manager of a fund that trades in “commodity interests” (including swaps) may be required to register with the U.S. Commodity Futures Trading Commission (CFTC) as a commodity pool operator (CPO) and become subject to the Commodity Exchange Act and the CFTC’s “Part 4” regulations (which specify a CPO’s disclosure, financial reporting and recordkeeping obligations).  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  For managers of alternative mutual funds or other registered investment companies (RICs), the CFTC regime is yet another set of rules to navigate; such managers are already subject to the Securities Act of 1933 (Securities Act), the Securities Exchange Act of 1934, the Investment Company Act of 1940 (Company Act), the Investment Advisers Act of 1940, and rules under those statutes.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  To mitigate administrative and coordination challenges associated with duplicative or conflicting CFTC and SEC obligations impacting registered CPOs, on August 13, 2013, the CFTC issued an Adopting Release (Adopting Release) in which it amended existing CFTC rules to create a “substituted compliance” regime (harmonization rules).  Through these harmonization rules, compliance with designated SEC rules will be deemed to satisfy obligations imposed under corresponding CFTC rules.  A recent K&L Gates LLP seminar reviewed the Adopting Release, the harmonization rules and their impact on RICs.  As an increasing number of hedge fund managers have launched or are contemplating launching registered funds, this relief is welcome news in the hedge fund industry.  This article summarizes the key insights from that seminar.  For a discussion of the substituted compliance regime and its impact on managers of hedge funds and other entities not registered pursuant to the Company Act, see “What Do the CFTC Harmonization Rules Mean for Non-Mutual Fund Commodity Pools, Including Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013).

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  • From Vol. 6 No.41 (Oct. 25, 2013)

    National Futures Association Director of Compliance, Patricia L. Cushing, Discusses the Chief Regulatory Obstacles Faced by Hedge Fund Managers When Marketing Commodity Funds

    Following repeal of the CFTC Rule 4.13(a)(4) commodity pool operator (CPO) registration exemption, numerous hedge fund managers with strategies involving commodities or derivatives registered as CPOs with the CFTC and became members of the National Futures Association (NFA).  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Such managers face at least two broad challenges in marketing fund interests.  First, CFTC rules governing commodity pool marketing differ in important ways from SEC rules governing hedge fund marketing.  On CFTC marketing rules, see “CPO Compliance Series: Marketing and Promotional Materials (Part Two of Three),” The Hedge Fund Law Report, Vol. 5, No. 38 (Oct. 4, 2012); on hedge fund marketing, see “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 37 (Sep. 26, 2013).  Second, effectively negotiating CFTC marketing and other rules requires a thorough and continuously updated understanding of the views of relevant compliance and enforcement officials.  As an adjunct to the efforts of hedge fund managers on the latter point, The Hedge Fund Law Report recently interviewed Patricia L. Cushing, Director of Compliance at the NFA, which is charged with regulating and examining CPOs.  Our interview with Cushing addressed, among other topics, whether the NFA will increase its scrutiny of marketing by CPOs now that the JOBS Act rules have become effective; the NFA’s emerging enforcement focus areas; most common deficiencies uncovered during reviews of CPO marketing materials; the NFA’s views on the use of past specific recommendations in performance presentations; the NFA’s approach to marketing issues raised by use of social media; best practices for review and approval of marketing materials; best practices for retention of promotional materials disseminated through website, radio and television; the role of the CCO or other supervisors in the marketing review process; and supervisory liability of CCOs.  See “Recent SEC Settlement Clarifies the Scope of Supervisory Liability for Chief Compliance Officers of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Compliance, Regulation and Enforcement 2013 Symposium, to be held at the Pierre Hotel in New York City on October 31, 2013.  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.21 (May 23, 2013)

    RCA Symposium Panels Discuss New CFTC and NFA Regulations Governing Obligations of Hedge Fund Managers Required to Register as CPOs or CTAs

    On April 18, 2013, the Regulatory Compliance Association held its Regulation, Operations & Compliance 2013 Symposium (RCA Symposium) in New York City.  Panels during the RCA Symposium covered various topics, including new regulations of the U.S. Commodity Futures Trading Commission and the National Futures Association (NFA) that apply or will apply to numerous hedge fund managers.  The two panels that tackled these issues addressed, among other things, registration obligations of commodity pool operators (CPO) and their principals and associated persons; reporting and other obligations applicable to new CPO and CTA registrants; Bylaw 1101; required ethics training programs; regulations governing marketing and promotional materials; and NFA audits.  This article addresses salient points from both sessions.  See also “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).

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  • From Vol. 6 No.19 (May 9, 2013)

    U.S. District Court Interprets Extraterritorial Reach of Commodities Exchange Act in Private Lawsuits

    Longstanding precedent has held that the Commodity Exchange Act (CEA) does not apply “extraterritorially.”  However, what constitutes “domestic” conduct has been the subject of much recent debate.  In 2010, in Morrison v. National Australia Bank, the U.S. Supreme Court overturned longstanding precedent and established a “transactional” test for determining the extraterritorial reach of the Securities Exchange Act of 1934.  Then, in 2012, in Absolute Activist Master Value Fund v. Ficeto, the U.S. Court of Appeals for the Second Circuit provided specific guidance on when securities transactions would be considered “domestic.”  See “Second Circuit Clarifies When Offshore Hedge Funds Can Make Section 10(b) Securities Fraud Claims in Connection with ‘Domestic Transactions’ with Conduct and Effects in the United States,” The Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012); and “Update: Are There Still Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses After Morrison v. National Australia Bank Ltd.?,” The Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010).  The U.S. District Court for the Southern District of New York recently considered whether the “transactional” test in Morrison also applies to a private suit for fraud perpetrated in a non-U.S. fund brought under the CEA.  This article summarizes the Court’s decision and reasoning in this action.  See also “Does the U.S. Commodity Exchange Act Apply to Investments in Non-U.S. Commodity Funds?,” The Hedge Fund Law Report, Vol. 6, No. 15 (Apr. 11, 2013).

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  • From Vol. 6 No.15 (Apr. 11, 2013)

    Does the U.S. Commodity Exchange Act Apply to Investments in Non-U.S. Commodity Funds?

    A Federal District Court recently considered the extent of extraterritorial application of the Commodity Exchange Act to an investment in allegedly fraudulent non-U.S. funds that invest in commodities, among other assets.  See also “How Can Offshore Hedge Funds Ensure That Section 10(b) Will Apply to Their Transactions in Securities Not Listed on U.S. Exchanges,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012); and “Second Circuit Clarifies When Offshore Hedge Funds Can Make Section 10(b) Securities Fraud Claims in Connection with ‘Domestic Transactions’ with Conduct and Effects in the United States,” The Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012).

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  • From Vol. 6 No.13 (Mar. 28, 2013)

    Why and How Do Sovereign Wealth Funds Invest in Hedge Funds?

    Investments from sovereign wealth funds (SWFs) can be attractive to hedge fund managers because such investments typically represent significant and sticky assets.  Understanding the character, investment processes, objectives and allocation preferences of SWFs can increase a manager’s likelihood of receiving an allocation from this investor type, thereby growing assets, fees and clout.  For insight on refining a marketing approach vis-à-vis another important hedge fund investor type, see “Rothstein Kass Study Explains the ‘Consultative’ Approach to Marketing to Single-Family Offices and the Importance of That Approach for Smaller Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 20 (Jun. 17, 2011).  With these dynamics in mind, a recent report discusses trends in SWF growth and asset allocation preferences.  In particular, the report provides insight into SWF allocations to hedge funds and other alternative investment vehicles and the investment preferences of SWFs by economic sector.  This article summarizes the key findings of the report.  For a direct discussion of how hedge fund managers can hone their marketing efforts to attract SWF investments, see “Specific Steps that Hedge Fund Managers Can Take to Increase the Likelihood of an Investment from a Sovereign Wealth Fund,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009).

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  • From Vol. 5 No.48 (Dec. 20, 2012)

    CFTC Grants Additional Relief from CPO Regulation for Operators of Certain Securitization Vehicles

    On December 7, 2012, the CFTC’s Division of Swap Intermediary Oversight issued a letter expanding the scope of relief from commodity pool regulation for certain securitization and structured finance vehicles and their operators.  This article summarizes the guidance and relief granted in the letter.  See also “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests,” The Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).

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  • From Vol. 5 No.46 (Dec. 6, 2012)

    Preqin Hedge Fund Spotlight Looks at Growth in CTA/Managed Futures Funds, and Contrasts Their Performance to Hedge Funds

    Recent research by Preqin Ltd. focused on growth trends relating to funds managed by commodity trading advisers that employ commodity trading strategies (CTA funds).  Preqin discussed the utility of CTA funds in hedging against market crises and noted how their performance differs from hedge funds.  This article summarizes the key takeaways from that research.

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  • From Vol. 5 No.34 (Sep. 6, 2012)

    CPO Compliance Series: Conducting Business with Non-NFA Members (NFA Bylaw 1101) (Part One of Three)

    Commodity pool operators (CPOs) that must soon register with the U.S. Commodity Futures Trading Commission (CFTC) and become members of the National Futures Association (NFA) because of the repeal of the CFTC Regulation 4.13(a)(4) registration exemption will need to undertake numerous CFTC and NFA compliance obligations.  One of the key NFA compliance obligations facing new CFTC registrants and NFA members arises out of NFA Bylaw 1101, which prohibits an NFA member, such as a CPO, from conducting business with or on behalf of a non-NFA member that is otherwise required to register with the CFTC.  NFA Bylaw 1101 compliance is also topical for existing NFA members given the repeal of the Regulation 4.13(a)(4) registration exemption, as existing NFA members will need to take steps to ensure that they comply with NFA Bylaw 1101 with respect to any CPOs with whom they are engaged in commodity interest business that currently claim the Regulation 4.13(a)(4) exemption.  The Hedge Fund Law Report is publishing a three-part article series focusing in detail on the compliance obligations of CPOs under CFTC and NFA regulations and providing guidance addressing a CFTC-registered CPO’s: (i) conducting business with non-NFA members; (ii) preparation and use of marketing and promotional materials; and (iii) reporting of principals and registration of associated persons.  Each of these topics is also briefly summarized in “Do You Need to Be a Registered Commodity Pool Operator Now and What Does it Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  This article is the first in the series and discusses in greater detail the NFA’s guidelines on conducting business with non-NFA members.  The authors of the series are Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC; Cary J. Meer, a partner at K&L Gates LLP; and Lawrence B. Patent, of counsel at K&L Gates LLP.

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  • From Vol. 5 No.26 (Jun. 28, 2012)

    SEC Staff Publishes Answers to Frequently Asked Questions Concerning Form PF

    On June 8, 2012, the SEC’s Division of Investment Management (Staff) published answers to seven frequently asked questions about Form PF, covering topics such as the definition of a “commodity pool”; the definition of a “hedge fund”; the reporting treatment of hedge funds; treatment of parallel managed accounts; and the definition and treatment of “disregarded private funds.”  This article highlights the primary practice points from the Staff answers.

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  • From Vol. 5 No.17 (Apr. 26, 2012)

    Recent CFTC Settlement Highlights Regulatory Focus on Manipulation of Commodity Futures and High Frequency Trading

    On April 19, 2012, Chief Judge Loretta Preska of the U.S. District Court for the Southern District of New York approved a consent order detailing a settlement entered into among the U.S. Commodity Futures Trading Commission (CFTC), high frequency global proprietary trading firm Optiver Holding BV, two of its subsidiaries (collectively, Optiver) and three individual principals.  The settling parties were accused of manipulating the market for light sweet crude oil, New York harbor heating oil and New York harbor gasoline futures contracts.  This settlement demonstrates a renewed government emphasis on stamping out market manipulation in these markets.  While Optiver is a proprietary trading firm that utilizes high frequency algorithmic trading, as opposed to a hedge fund manager, the legal points raised by the action apply with equal force to hedge fund managers that trade commodity futures or that employ high frequency strategies.  For a discussion of a CFTC action brought against a hedge fund trader, see “Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts,” The Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011).  This article describes the complaint initially brought by the CFTC in 2008, the terms of the settlement and the stiff sanctions imposed on the defendants, including disgorgement, civil monetary penalties, trading restrictions imposed on Optiver and statutory bars imposed on each of the individual defendants.

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  • From Vol. 5 No.7 (Feb. 16, 2012)

    CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators

    On February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules (Final Rules) amending Part 4 of its regulations promulgated under the Commodity Exchange Act governing commodity pool operators (CPOs) and commodity trading advisers (CTAs).  Notably for hedge funds, the Final Rules, among other things, rescind the exemption from CPO registration contained in Rule 4.13(a)(4), which is relied on substantially in the hedge fund industry.  Notably for hedge funds, the Final Rules differ from the rule amendments proposed by the CFTC (Proposed Rules) on January 26, 2011, in that the Final Rules do not rescind the exemption from CPO registration under Rule 4.13(a)(3) for hedge funds that conduct a de minimis amount of trading in futures, commodity options and other commodity interests.  For an in-depth discussion of the Proposed Rules, see “CFTC Proposes New Reporting and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers and Jointly Proposes with the SEC Reporting Requirements for Dually-Registered CPO and CTA Investment Advisers to Private Funds,” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  As a result, unless an exemption is otherwise available, the Final Rules will require a CPO to register with the National Futures Association if the managed commodity pool (i.e., hedge fund) conducts more than a de minimis amount of speculative trading in futures, commodity options and other commodity interests; and CPO registration imposes significant obligations on registrants.  This article provides a detailed summary of the CFTC’s Final Rules and highlights relevant changes from the Proposed Rules.  The article focuses on the provisions of the Final Rules with most direct application to hedge fund managers following commodities-focused investment strategies.

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  • From Vol. 4 No.45 (Dec. 15, 2011)

    CFTC Position Limit Rules Challenged in Lawsuit by ISDA and SIFMA

    On Friday, December 2, 2011, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) jointly filed a complaint in the U.S. District Court for the District of Columbia against the Commodity Futures Trading Commission (CFTC).  Their complaint challenges the final rules adopted by the CFTC at its October 18, 2011 meeting establishing speculative position limits on 28 commodity futures, option contracts and economically equivalent commodity swaps (the Position Limit Rules).  This article summarizes the Position Limit Rules and the lawsuit challenging them.  For hedge fund managers that trade covered commodities or derivatives based on them, the Position Limit Rules and the lawsuit can directly affect trading volumes and strategies.  See also “Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts,” The Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011).

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  • From Vol. 4 No.31 (Sep. 8, 2011)

    Gold Investment Alternatives for Hedge Fund Managers

    Many hedge fund managers have a view with respect to gold, but few know how to put such a view into practice.  In a guest article, David A. Gulley, a Senior Managing Director at Mesirow Financial Consulting, LLC, and veteran gold banker Ian C. MacDonald, detail the benefits, burdens and mechanics of six distinct methods of investing in gold, the price of gold or gold-related trends.  In addition, Gulley and MacDonald provide a comprehensive discussion of historical, cultural and practical issues relating to gold.

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  • From Vol. 4 No.30 (Sep. 1, 2011)

    Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts

    The Commodity Futures Trading Commission (CFTC) recently entered an order (Order) settling charges that former Moore Capital trader Christopher Louis Pia attempted to manipulate the settlement prices of palladium and platinum futures contracts by “banging the close.”  Specifically, the CFTC alleged that Pia caused market-on-close (MOC) buy orders to be entered in the last ten seconds of the closing periods for both types of contracts in an effort to exert upward pressure on the settlement prices for the contracts.  The Order has attracted considerable attention for various reasons, including the prominence of Moore Capital, the obscure allure of the metals at issue and the Wall Street Journal’s report that Pia “tooled around town in an orange Lamborghini.”  But less attention has been paid to the more important implications of the Order for the hedge fund industry.  Those implications fall into two general categories, one of which focuses on best compliance practices for hedge fund managers that trade commodity futures contracts.  This article discusses the factual allegations and legal analysis in the Order, then outlines some of the more noteworthy implications of the Order for hedge fund managers focused on commodities.  See also “CFTC and SEC Propose Rules to Further Define the Term ‘Eligible Contract Participant’:  Why Should Commodity Pool and Hedge Fund Managers Care?,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 4 No.26 (Aug. 4, 2011)

    SEC Order against Pegasus Investment Management Suggests That a Hedge Fund Manager Cannot Keep the Proceeds of an Undisclosed “Rental” of Its Trading Volume

    A recent SEC order instituting administrative and cease-and-desist proceedings against a small hedge fund manager confirms the principle that hedge fund investors – not managers – own the assets in funds and any assets generated with those assets, subject to specific exceptions.  The matter also addresses, albeit indirectly and inconclusively, the question of whether hedge funds may agree by contract to permit conduct by the manager that, absent such agreement, would constitute fraud or a breach of fiduciary duty.

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  • From Vol. 4 No.21 (Jun. 23, 2011)

    CFTC and SEC Propose Rules to Further Define the Term “Eligible Contract Participant”:  Why Should Commodity Pool and Hedge Fund Managers Care?

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Dodd-Frank”) into law.  Section 721(c) of Title VII of the Dodd-Frank Act made certain changes to the definition of the term “eligible contract participant” (“ECP”).  Subsequently, as part of their efforts to implement Dodd-Frank, the Commodity Futures Trading Commission (the “CFTC”) and the Securities and Exchange Commission (the “SEC” and, together with the CFTC, the “Commissions”) proposed rules to further refine the definition of ECP under the Commodity Exchange Act (“CEA”) (the “Proposed Rules”).  Unless the Commissions withdraw or revise the Proposed Rules before they become effective, the definitional change will negatively affect many commodity pools that engage in over-the-counter (“OTC”) foreign currency (“FX”) transactions.  In a guest article, Steven M. Felsenthal, General Counsel and Chief Compliance Officer of Millburn Ridgefield Corporation, The Millburn Corporation and Millburn International, LLC, and Stephanie T. Green, a legal and compliance intern at The Millburn Corporation: (1) introduce the Proposed Rules as applied to commodity pools engaged in OTC FX transactions; (2) highlight the adverse result of the Proposed Rules; and (3) discuss revisions or alternatives to the Proposed Rules that could help to avoid such adverse results.  While the focus of this article is the adverse results on commodity pools, the same adverse results would apply to any pooled investment vehicle that seeks to trade OTC FX forward contracts, including hedge funds that trade such instruments, because they would likely fall within the definition of commodity pool under Dodd-Frank.

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  • From Vol. 4 No.15 (May 6, 2011)

    Federal Energy Regulatory Commission Upholds Administrative Law Judge Ruling that Imposes $30 Million Penalty on Former Amaranth Trader Brian Hunter for Natural Gas Market Manipulation During 2006

    Defendant Brian Hunter (Hunter) was an executive and head natural gas trader at hedge fund manager Amaranth Advisors, LLC (Amaranth).  The Federal Energy Regulatory Commission (FERC), which has jurisdiction over interstate sales of natural gas and electricity, has upheld in all respects the findings of a FERC administrative law judge who found Hunter guilty of manipulation of the natural gas market and imposed a $30 million penalty on him.  At the end of February, March and April 2006, Hunter sold large volumes of natural gas futures contracts on their expiration dates in order to drive down the settlement prices of those contracts.  Gas futures contracts trade on the New York Mercantile Exchange (NYMEX).  FERC argued that, unbeknownst to traders on the NYMEX, Hunter had amassed short positions in natural gas swap agreements that referenced the settlement prices of the gas futures contracts.  Consequently, he stood to profit from the drop in the settlement price of gas futures contracts that occurred when Amaranth dumped those contracts on their expiration dates.  Amaranth collapsed in late 2006, in large part because of the bets it had made on the natural gas market.  FERC determined that Hunter’s trading was intended to manipulate the price of natural gas futures contracts, was done knowingly and had an effect on the market for natural gas.  FERC bills this case as the “first fully litigated proceeding involving FERC’s enhanced enforcement authority under section 4A of the Natural Gas Act, which prohibits manipulation in connection with transactions subject to FERC jurisdiction.”  The trading at issue occurred only in the futures market, rather than in the physical gas market.  We summarize FERC’s decision.  See also “Federal District Court Dismisses Lawsuit Brought by San Diego County Employees Retirement Association against Hedge Fund Manager Amaranth Advisors and Related Parties for Securities Fraud, Gross Negligence and Breach of Fiduciary Duty,” The Hedge Fund Law Report, Vol. 3, No. 12 (Mar. 25, 2010).

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  • From Vol. 3 No.45 (Nov. 19, 2010)

    Morgan Stanley Sues Commodities Hedge Fund Peak Ridge for Alleged Failure to Satisfy Margin Calls

    On November 8, 2010, Morgan Stanley & Co. Incorporated filed suit against commodities hedge fund Peak Ridge Master SPC LTD (Peak Ridge), claiming $40.6 million in damages resulting from losses stemming from bad bets on natural gas.  According to Morgan Stanley, the losses resulted from Peak Ridge’s inability to meet contractually required margin calls, which Morgan Stanley had tripled over a period of ten months leading up to Peak Ridge’s alleged default due to the increasing level of risk the fund had taken on since it began trading through Morgan Stanley’s futures commission merchant (FCM) unit.  Morgan Stanley took control of the fund’s positions from June 10, 2010, and undertook several transactions in the following two weeks “in order to reduce risk and stabilize the book in an orderly fashion.”  We review the background of the action and the main points in Morgan Stanley’s Complaint.

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  • From Vol. 3 No.39 (Oct. 8, 2010)

    Does Dodd-Frank Enable Certain Hedge Fund Managers to Elect Between Registration with the SEC and CFTC?

    The working consensus in the hedge fund industry appears to be that Dodd-Frank will materially expand the range of hedge fund managers required to register with the SEC as investment advisers.  A less-frequently told story, if it has been told at all, is that the plain language of Dodd-Frank may, subject to rulemaking, enable certain hedge fund managers to elect between registration with the SEC and CFTC – a sort of regulatory franchise previously reserved for banking institutions.  Put slightly differently, Dodd-Frank may contain an expansive but as yet under-examined exemption from SEC registration for certain hedge fund managers – an exemption, moreover, that is not based on assets under management.  That exemption – if indeed it is one – is contained in Section 403 of Dodd-Frank.  Here’s how it would work.

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  • From Vol. 3 No.36 (Sep. 17, 2010)

    Vitol Capital Management and Affiliate Settle CFTC Charges That They Failed to Disclose the Extent of Information Flow between Them and Thereby Circumvented Position Limits

    By Order dated September 14, 2010, Vitol Inc. (VIC) and Vitol Capital Management Ltd. (VCM) settled charges brought by the Commodity Futures Trading Commission (CFTC) that they failed to disclose material information to the New York Mercantile Exchange (NYMEX) and, as a result, were able to circumvent NYMEX position limits for approximately two years.  Specifically, according to the order, VIC and VCM learned in 2007 that NYMEX misperceived the nature of the relationship between VIC and VCM, including the extent to which trading information flowed between the two entities.  While the Order does not say so explicitly, the Order implies that NYMEX was under the impression that VIC and VCM had established robust barriers preventing the flow trading information between the two entities, when in fact they had imposed only limited information barriers.  VIC and VCM were aware of NYMEX’s misperception on this point, but, according to the Order, failed to correct it.  As a result, NYMEX did not aggregate the trading positions of VIC and VCM for purposes of accountability levels and position limits until March 2009.  (NYMEX was acquired by the CME Group in March 2009.)  We describe the allegations and implications of the Order.

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  • From Vol. 3 No.3 (Jan. 20, 2010)

    CFTC Proposes Position Limits for Four Energy Contracts in the Energy Futures and Options Markets to Curb Volatility

    On January 14, 2010, the Commodity Futures Trading Commission (CFTC) proposed limits for certain futures and option contracts in the major energy markets that may curtail the investments of large banks and swaps dealers in the markets for oil, natural gas, heating oil and gasoline.  The proposal aims to curb some of the significant price volatility that occurred in 2007 and 2008.  Under the proposal, speculators in the futures markets will no longer be grouped together with commodity-linked businesses like airlines and oil companies that may exceed limits on the number of energy futures one trader can hold.  In addition, the proposal establishes consistent, uniform exemptions for certain swap dealer risk management transactions while maintaining exemptions for bona fide hedging.  This article outlines the proposed rule, the exemptions and the rule’s implications for hedge fund participants in the futures markets.

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  • From Vol. 2 No.42 (Oct. 21, 2009)

    Specific Steps that Hedge Fund Managers Can Take to Increase the Likelihood of an Investment from a Sovereign Wealth Fund

    Sovereign debt has been the historical repository of foreign exchange reserves.  In the old model, state enterprises would export goods (often commodities, such as oil) abroad, and the revenue from such sales would be used to purchase debt issued by other governments or their subdivisions, often the U.S. Treasury.  Alternatively, private firms would export goods produced with a state license, thereby generating tax revenue that the host country invested in sovereign debt.  With the bull run in commodities that began in the late 1990s, the foreign exchange coffers of various nations – especially the oil-rich – swelled, and the financial authorities in those nations took notice.  Rather than reflexively pouring growing foreign exchange reserves exclusively into sovereign debt, resource rich countries and other countries organized sovereign wealth funds (SWFs).  The goals of such funds included more concerted and disciplined management of reserves, and diversification among asset classes, industries and geographies.  For various countries, SWFs represented an effort to surmount the “resource curse” – the paradox in which development is often stunted in a nation rich in a single or a few natural resources.  Historically, SWFs have invested primarily in straightforward, liquid assets such as public equity and bonds, and allocated only a modest proportion of their net assets to hedge funds and other alternatives.  However, the credit crisis complicated the assumptions that undergirded that investment approach.  Among other things, the crisis demonstrated that investments in public equity – for example, in the stock of bank holding companies – could entail greater risk and exposure to more leveraged entities than investments in hedge funds.  Accordingly, SWFs are now looking to invest a greater proportion of their assets in hedge funds.  For example, in August of this year, the China Investment Corporation confirmed its plan to allocate approximately $6 billion to alternative investment strategies by the end of 2009.  For hedge funds managers still facing a difficult money-raising climate, the significant volume of assets in SWFs presents a compelling fund raising opportunity.  However, fund raising from SWFs is different in subtle but important ways from fund raising from the more traditional hedge fund investor base.  With the goal of assisting hedge fund managers in this unique but critical fund raising niche, this article explores: what SWFs are and how they are funded; the history and purpose of investments by SWFs in hedge funds; specific considerations for hedge fund managers when seeking to raise funds from SWFs; and potential concerns arising out of the receipt by hedge fund managers of SWF investments.

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  • From Vol. 1 No.27 (Dec. 9, 2008)

    Who Should Regulate Energy Markets?

    The FERC’s administrative case against defunct hedge fund manager Amaranth Advisors and certain of its managed funds and traders, along with an action arising out of similar facts brought by the CFTC in federal district court in New York, have raised important questions for U.S. energy regulation: which agency is responsible for ensuring that traders do not cross the line from legal speculation into illegal price manipulation?  If two or more agencies share that responsibility, how are those agencies supposed to coordinate their activities?  Answers to these questions can have a profound effect on hedge funds that trade commodities or commodity derivatives.

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  • From Vol. 1 No.19 (Aug. 21, 2008)

    Quick, Easy and Wrong: Congress Considers Legislation to Curtail Energy Trading and the Use of Off-shore Blockers

    On August 1, 2008, Senators Ron Wyden (D-Ore.) and Charles Grassley (R-Iowa) proposed legislation that would make the tax code even more complicated and obtuse and would curtail the use of so-called “foreign blockers” by tax-exempt investors.  The one sentence take-away on the Wyden-Grassley bill is that it would eliminate long-term capital gains treatment, as well as preferential treatment for tax-exempt entities, on profits from investments in the oil and gas markets, beginning in 2008.  In this article, guest contributors Mark Leeds and Rita Cameron, shareholder and associate, respectively, at Greenberg Traurig, provide a lucid, informed and critical analysis of the proposal.  In their view, the proposal could have a profound and adverse effect on tax-exempt US investors in offshore hedge funds.  In the worst case scenario, it could even trigger provisions sometimes found in offshore feeder documents that allow tax-exempt investors to redeem if there is a change in law (or in some cases even a proposed change in law) that would adversely affect the tax treatment of their investments.  On the positive side, the proposal has only a slim chance of becoming law, at least in its current form.

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  • From Vol. 1 No.19 (Aug. 21, 2008)

    Taxing Speculation?

    A new proposal to control oil and gas speculation through increased taxation of capital gains made through offshore hedge funds, index funds and various other investment vehicles has sparked concern among an array of energy and tax-policy experts who monitor Capitol Hill.  An energy policy expert interviewed by The Hedge Fund Law Report expressed doubts about whether such legislation would have any effect on gas prices, and a Washington lawyer suggested that flaws and complexity would undermine the likelihood of the proposal becoming law.  Others identified additional problems with the proposal.

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  • From Vol. 1 No.12 (May 20, 2008)

    District Court Denies Motions by Amaranth and Brain Hunter to Dismiss CFTC’s Claims of Attempted Market Manipulation and Attempted Cover Up

    • District Court found that the CFTC had alleged sufficient facts regarding Amaranth’s attempted manipulation of natural gas futures markets – including two sets of “marking the close” trades in early 2006 – to survive motions to dismiss.
    • Court also found that the CFTC had adequately pleaded its cover up case, based on allegations of misrepresentations in a letter from Amaranth to the NYMEX Compliance Department.
    • Court held that it had personal jurisdiction over Hunter based on NYMEX orders he placed from Canada through a broker in New York.
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