The Hedge Fund Law Report

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

Articles By Topic

By Topic: Commodity Pool Operators and Commodity Trading Advisors

  • From Vol. 11 No.22 (May 31, 2018)

    As Cryptocurrencies Advance, CFTC Commissioner Encourages Formation of an SRO to Oversee Customer Protection

    In the past year, cryptocurrencies have received increasing attention from fund managers, investors and the media. Regulators have also been focusing on cryptocurrencies, although a cohesive approach to regulating this developing asset class has yet to emerge. See “Funds and Managers Must Be Wary of State, in Addition to Federal, Regulatory Scrutiny of ICOs” (May 17, 2018); and “SEC Halts Registration of Cryptocurrency Mutual Funds, Calling for Dialogue Regarding Valuation, Liquidity, Custody, Arbitrage and Manipulation Risk” (Feb. 15, 2018). In a recent speech, CFTC Commissioner Brian Quintenz examined the role of regulators such as the CFTC during periods of technological change; discussed the use of blockchain technology by funds and managers; explored current approaches to cryptocurrencies by U.S. and global regulators; and called for the formation of a self-regulatory organization by cryptocurrency spot platforms to enforce customer protection rules in spot commodity markets. This article highlights the key points from Quintenz’s remarks. For more on the CFTC’s approach to cryptocurrencies, see “U.S. District Court Rules That Virtual Currencies Are Commodities Under the Commodity Exchange Act” (Apr. 12, 2018); and “Virtual Currencies Present Significant Risk and Opportunity, Demanding Focus From Regulators, According to CFTC Chair” (Feb. 8, 2018).

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  • From Vol. 11 No.21 (May 24, 2018)

    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. CFTC-registered CPOs and CTAs are required to become members of the National Futures Association (NFA) and, as such, are subject to NFA rules and regulations and to periodic audits. This article highlights the key points raised by a panel that 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. See “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests” (Dec. 13, 2012); and our two-part series “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do”: Part One (Feb. 23, 2012); and Part Two (May 10, 2012).

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  • From Vol. 11 No.11 (Mar. 15, 2018)

    CFTC Enforcement Action Spotlights Fund Managers’ Duty to Supervise IT Providers

    The CFTC recently announced a settlement with a registered futures commission merchant (FCM) that had tens of thousands of client records compromised after its information technology vendor installed a backup drive on the FCM’s network that included an unsecured port of which the vendor was unaware. Although this case concerned an FCM, it puts all CFTC registrants on notice that they are responsible for protecting sensitive information. “Entities entrusted with sensitive information must work diligently to protect that information,” CFTC Director of Enforcement James McDonald noted, adding that, “[a]s this case shows, the CFTC will work hard to ensure regulated entities live up to that responsibility, which has taken on increasing importance as cyber threats extend across our financial system.” Further, the settlement reminds fund managers and other CFTC-registered entities that, under CFTC Regulation 166.3, they must monitor third-party service providers to avoid similar regulatory action. This article analyzes the terms of the settlement order, including the facts that led up to the settlement, the penalties imposed and the remedial steps the FCM agreed to take. For more from the CFTC, see “Virtual Currencies Present Significant Risk and Opportunity, Demanding Focus From Regulators, According to CFTC Chair” (Feb. 8, 2018).

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  • From Vol. 11 No.9 (Mar. 1, 2018)

    What Fund Managers Investing in Virtual Currency Need to Know About NFA Reporting Requirements and the CFTC’s Proposed Interpretation of “Actual Delivery”

    Last December, the NFA adopted new reporting requirements for member commodity pool operators (CPOs) and commodity trading advisors (CTAs) related to virtual currency. Separately, the CFTC published a proposed interpretation of the term “actual delivery” in the context of retail commodity transactions in virtual currency. These actions reflect the enhanced regulatory oversight of virtual currency against the backdrop of spectacular volatility in these products and the recent launch of futures contracts involving virtual currency products. In a guest article, Lawrence B. Patent, of counsel at K&L Gates, reviews the new NFA reporting requirements for CPOs and CTAs; the CFTC’s proposed interpretation of the term “actual delivery”; considerations for hedge fund managers seeking to invest in virtual currency; and the outlook for further regulatory action in this area. See our three-part series on blockchain and the private funds industry: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017). For additional insights from Patent, see our three-part CPO compliance series: “Conducting Business with Non-NFA Members (Bylaw 1101)” (Sep. 6, 2012); “Marketing and Promotional Materials” (Oct. 4, 2012); and “Registration Obligations of Principals and Associated Persons” (Feb. 7, 2013).

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  • From Vol. 11 No.1 (Jan. 4, 2018)

    HFA Briefing Covers U.S. and Global Regulatory Climate Relating to Liquidity, Enforcement, Examinations and Cybersecurity

    A recent 2017 global regulatory briefing sponsored by Bloomberg and the Hedge Fund Association (HFA) offered insight into the global regulatory climate, including liquidity management, cross-border enforcement, NFA exams abroad and cybersecurity. Greg Babyak, Bloomberg’s head of government and regulatory affairs, delivered opening remarks focused on the Trump administration and the current U.S. regulatory climate. Lisa Roitman, Bloomberg business development and marketing strategist, moderated the subsequent panel discussion, which featured Louis P. Berardocco, Senior Manager of Examinations Compliance at the NFA; Ryan Hill, Supervisory Special Agent at the Department of Homeland Security; Edward Y. Kim, partner at Krieger Kim & Lewin; Jude Scott, Chief Executive Officer of Cayman Finance; and Robert Taylor, Head of Global Asset Management Regulatory Strategy at the U.K. Financial Conduct Authority. This article summarizes the key takeaways from the program. For coverage of another HFA global regulatory briefing, see “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Views on Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016).

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  • From Vol. 10 No.45 (Nov. 16, 2017)

    Fund Managers Must Supervise Third-Party Service Providers or Risk Regulatory Action

    It is not enough for a fund manager to have its own cybersecurity defenses; a manager must also exercise appropriate oversight of the defenses of third parties acting on its behalf. A recent CFTC settlement affirms the notion that registrants are not only responsible for their own compliance programs, but are also charged with the duty of supervising third-party vendors and are expected to maintain appropriate procedures to monitor those third parties. Further, a fund manager may be held responsible for the actions of third parties, even when the fund manager itself lacks the power to directly take those actions or when the fund manager itself is the victim of a third party’s missteps. This article analyzes the underlying facts and terms of the CFTC settlement order. For coverage of other recent CFTC enforcement efforts, see “New CFTC Chair Outlines Enforcement Priorities and Approaches to FinTech, Cybersecurity and Swaps Reform” (Nov. 9, 2017); “Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement” (Oct. 19, 2017); and “Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing” (Oct. 12, 2017).

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  • From Vol. 10 No.44 (Nov. 9, 2017)

    New CFTC Chair Outlines Enforcement Priorities and Approaches to FinTech, Cybersecurity and Swaps Reform

    In recent testimony before the House Committee on Agriculture, CFTC Chairman J. Christopher Giancarlo summarized the CFTC’s enforcement priorities and discussed ways to facilitate market-enhancing financial technology, cybersecurity and swaps reform. Giancarlo also outlined Project KISS, or “Keep it Simple Stupid” – an initiative meant to simplify and reduce the cost of CFTC regulations and practices – and the CFTC’s continued commitment to developing a position limits rule and the correct threshold for the de minimis exception. Giancarlo’s testimony provides valuable insight to fund managers into the regulator’s priorities and anticipated actions. This article reviews those portions of Giancarlo’s testimony most relevant to fund managers. For additional analysis of CFTC priorities and goals, 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.41 (Oct. 19, 2017)

    Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement

    The CFTC’s stated mission is to “foster open, transparent, competitive and financially sound markets.” Essential to fulfilling that mission is vigorous enforcement by the regulator, and as CFTC Chair J. Christopher Giancarlo has made clear, the CFTC will not curtail its duty to enforce the law and punish wrongdoing. The CFTC Division of Enforcement (Division) has attempted to perform this duty by battling manipulation; prosecuting fraud in traditional markets and in new markets, such as virtual currencies; and fighting spoofing. See “Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing” (Oct. 12, 2017); and “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017). Meanwhile, the Division has also aimed to find ways to deter misconduct. As noted by Division Director James McDonald in a recent speech to the NYU Program on Corporate Compliance & Enforcement, to achieve optimal deterrence, the Division needs the endorsement of fund managers and others it polices. To achieve that support, McDonald unveiled the CFTC’s new self-reporting and cooperation program. This article highlights the key points from McDonald’s speech and the mechanics of the new self-reporting regime. For analysis of self-reporting in another context, see “Self-Reporting and Remedying Improper Fee Allocations May Not Be Sufficient for Fund Managers to Avoid SEC Action” (Sep. 15, 2016).

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

    Compliance Corner Q4-2017: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

    While the fourth quarter is often the busiest one for regulatory filings and fulfilling other compliance obligations, hedge fund managers should ensure that their compliance programs finish the year on a strong note and that key compliance processes are not neglected. This second installment of The Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anne Wallace, director and analyst, respectively, at ACA Compliance Group, highlights certain notable regulatory filings fund managers need to address in the fourth quarter of 2017. In addition to the filing obligations discussed herein, this article examines recent actions by the SEC relating to virtual currency and electronic communications, along with their potential impact on advisers’ compliance programs. For other recent commentary from the SEC, see “SEC Chair Clayton Details Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017); and “SEC Chair’s Budget Testimony Emphasizes Strong Agency Focus on Oversight and Enforcement in Trump Era” (Jul. 13, 2017). For additional insights from Joseph, see our two-part series “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices”: Part One (Oct. 3, 2013); and Part Two (Oct. 11, 2013).

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  • From Vol. 10 No.19 (May 11, 2017)

    Recent Settlement Highlights Importance of Compliance With NFA Rules, Even for Managers Relying on CFTC Regulation 4.13(a)(3) Exemption

    A London-based private fund manager with more than $4 billion in assets under management recently settled NFA charges that it improperly advanced funds from its investment pools to its affiliates and engaged in other misconduct and compliance failures. The action is notable both because substantive NFA-enforcement proceedings are relatively uncommon and because certain of the pools involved in the prohibited affiliate transactions were exempt from registration under CFTC Regulation 4.13(a)(3). The action serves as a reminder that NFA members operating exempt pools are nevertheless subject to NFA rules and that compliance will be audited by the NFA during examinations. This article discusses the NFA allegations set forth in the complaint and the terms of the settlement. For more on NFA membership, see “CFTC Requires Most Registered Commodity Pool Operators, Commodity Trading Advisors and Introducing Brokers to Join the NFA” (Sep. 17, 2015); “K&L Gates Investment Management Seminar Addresses Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part One of Two)” (Jan. 30, 2014); and “CPO Compliance Series: Registration Obligations of Principals and Associated Persons (Part Three of Three)” (Feb. 7, 2013).

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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. 10 No.7 (Feb. 16, 2017)

    WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration

    Fund managers that trade futures, swaps and other derivatives may be subject to both CFTC and SEC supervision. A recent web briefing by regulatory and enforcement attorneys from WilmerHale provided a comprehensive review of significant enforcement and regulatory actions by the CFTC in 2016, considered pending CFTC legislation and regulation and offered insight into what CFTC operations and priorities may look like under the Trump administration. The briefing featured WilmerHale partners Paul M. Architzel, Dan M. Berkovitz and Anjan Sahni, along with special counsel Gail C. Bernstein. This article highlights the panelists’ key insights. For additional insight from WilmerHale attorneys, see “FCPA Concerns for Private Fund Managers (Part One of Two)” (May 28, 2015); “FCPA Risks Applicable to Private Fund Managers (Part Two of Two)” (Jun. 11, 2015); and “Best Legal and Accounting Practices for Hedge Fund Valuation, Fees and Expenses” (Jul. 18, 2013).

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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.30 (Jul. 28, 2016)

    How Hedge Fund Managers Can Navigate Dual AIFMD and CFTC Compliance (Part Two of Two)

    Both the Alternative Investment Fund Managers Directive (AIFMD) and the regulations of the U.S. Commodity Futures Trading Commission (CFTC) regulate hedge fund and other private fund managers. Depending on where a hedge fund manager is located and what investors it solicits, the manager may be subject to AIFMD and also required to register with the CFTC. Consequently, that manager would need to ensure that it is able to comply with both regimes. See “Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss CFTC Compliance, Conflicting Regulatory Regimes and Best Marketing Practices (Part Two of Four)” (Jan. 29, 2015). A recent program sponsored by the Futures Industry Association (FIA) provided an overview of the intersection of AIFMD and CFTC regulations, along with other regulatory issues. Michael Sorrell, an associate general counsel at the FIA, moderated the discussion, which featured Fried Frank partners Gregg Beechey, William J. Breslin and David S. Mitchell. This article, the second in a two-part series, summarizes the speakers’ key insights with respect to the intersection of CFTC regulation with AIFMD, as well as the impact on AIFMD of the U.K.’s vote to leave the E.U. The first article addressed the current options available to U.S. managers to market their funds in the E.U. For additional insight from Fried Frank partners, see “Application to Hedge Fund Managers of the Internal Control Report Requirement of the Amended Custody Rule” (Feb. 11, 2010); and “Hedge Fund Manager Fiduciary Duty, SEC Subpoena Power, Hybrid Hedge Fund Structures, Managed Account Platforms, Codes of Ethics and More” (Feb. 4, 2010).

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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.8 (Feb. 25, 2016)

    Hedge Fund Managers Face Imminent NFA Cybersecurity Deadline

    The NFA’s recent Interpretive Notice on cybersecurity is poised to become effective in a matter of days. NFA members, including hedge fund managers registered with the NFA as commodity pool operators or commodity trading advisers, are now required to adopt an Information Systems Security Program. See “NFA Notice Provides Cybersecurity Guidance to Hedge Fund Managers Registered As CPOs and CTAs” (Nov. 19, 2015). To help NFA members prepare for the impending deadline, the NFA recently held a “Cybersecurity Workshop” featuring a number of senior NFA personnel and industry experts. Among other topics discussed during the presentation, panelists offered an overview of the requirements set out in the Notice and insight into what NFA examiners will look for after the notice takes effect. This article summarizes the panelists’ discussion of these issues. 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)” (Sep. 6, 2012); “Marketing and Promotional Materials” (Oct. 4, 2012); and “Registration Obligations of Principals and Associated Persons” (Feb. 7, 2013).

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  • From Vol. 9 No.4 (Jan. 28, 2016)

    Adhering to Disclosed Fee and Valuation Methodologies Is Crucial for Hedge Fund Managers to Avert Enforcement Action

    The SEC continues to focus on the fee and valuation practices of investment advisers. See “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016). Although disclosure does not necessarily cure all potential issues, adherence to disclosed practices is essential. See “Explicit Disclosure of Changes in Hedge Fund Investment Strategy to Investors and Regulators Is Vital to Reduce Risk of Enforcement Action” (Oct. 29, 2015). The SEC recently took forceful action against an adviser that manages several publicly traded funds, alleging that the adviser disregarded fund disclosures regarding calculation of management fees and valuation of fund assets. In the press release announcing the settlement, Marshall S. Sprung, Co-Chief of the Asset Management Unit of the SEC Division of Enforcement, cautioned, “Fund managers can’t tell investors one thing and do another when assessing fees and valuing assets.” This article summarizes the adviser’s alleged misconduct and federal securities laws violations, as well as the outcome of the settlement. For more on enforcement actions involving fee disclosures and practices, see “Full Disclosure of Portfolio Company Fee and Payment Arrangements May Reduce Risk of Conflicts and Enforcement Action” (Nov. 12, 2015); “Blackstone Settles SEC Charges Over Undisclosed Fee Practices” (Oct. 22, 2015); and “SEC Enforcement Action Involving ‘Broken Deal’ Expenses Emphasizes the Importance of Proper Allocation and Disclosure” (Jul. 9, 2015). Management fees and valuation practices are inextricably intertwined. See “SEC Fraud Charges Against Lynn Tilton, So-Called ‘Diva of Distressed,’ Confirm the Agency’s Focus on Valuation and Conflicts of Interest” (Apr. 9, 2015).

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  • From Vol. 9 No.1 (Jan. 7, 2016)

    Preference for Investing in Proprietary Hedge Funds Must Be Fully Disclosed by Investment Banks to Avoid Conflicts

    The SEC and CFTC recently announced the settlement of enforcement proceedings involving an investment bank and affiliated investment adviser that allegedly failed to disclose to clients various conflicts of interest arising out of their management of client funds. Although the respondents disclosed that client funds were invested in proprietary products, such as proprietary mutual funds and hedge funds, they allegedly failed to disclose that they preferred to invest in such products. In addition, the SEC and CFTC found that the bank and investment adviser failed to disclose certain other conflicts, including the bank’s preference to add to its private account platform hedge fund managers willing to pay placement fees, or “retrocessions,” to an affiliate, as well as the existence of lower-fee classes of certain proprietary funds available to investors. This article summarizes the business practices that gave rise to the enforcement proceedings, the specific violations alleged and the outcome of each proceeding. The SEC has made conflicts of interest a top enforcement priority in recent years, although until now the CFTC has been less vocal on that front. See “SEC’s Rozenblit Discusses Operations and Priorities of the Private Funds Unit” (Sep. 24, 2015); and “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit” (Mar. 12, 2015).

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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.47 (Dec. 3, 2015)

    How Hedge Fund Managers Can Meet the Cybersecurity Challenge:  A Snapshot of the Regulatory Landscape (Part One of Two)

    In the past two years, cybersecurity has become a leading buzzword – if not the leading buzzword – in the hedge fund compliance community.  In recent months, the cyber focus has become even more intense for the hedge fund industry, as every week seems to bring a new major cyber regulatory development.  Consequently, keeping up with cyber compliance news is challenging for hedge fund compliance personnel.  Regulators have done a tremendous job of sharing principles-based guidance with the compliance community, clarifying regulatory expectations to assist firms with respect to cybersecurity.  In a guest article, the first in a two-part series, Moshe Luchins, the deputy general counsel and compliance officer of Zweig-DiMenna Associates LLC, provides hedge fund compliance professionals with an outline of the regulatory expectations in the area of cybersecurity.  The second article will provide hedge fund managers with a practical blueprint to build a cyber-compliance program.  For more on cybersecurity, see “PLI ‘Hot Topics’ Panel Addresses Cybersecurity and Swaps Regulation,” The Hedge Fund Law Report, Vol. 8, No. 43 (Nov. 5, 2015); and “K&L Gates-IAA Panel Addresses Regulatory Compliance and Practical Elements of Cybersecurity Testing (Part Two of Two),” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).

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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.43 (Nov. 5, 2015)

    PLI “Hot Topics” Panel Addresses Cybersecurity and Swaps Regulation

    A recent panel discussion at The Practising Law Institute’s Hedge Fund Management 2015 program, “Hot Topics for Hedge Fund Managers,” offered the perspective of an SEC counsel on cybersecurity and a summary of significant developments in swaps regulation, in addition to insight on current investor due diligence practices and a look at the challenges of starting a registered alternative fund.  Nora M. Jordan, a partner at Davis Polk & Wardwell, moderated the discussion, which featured Jessica A. Davis, chief operating officer and general counsel of investment adviser Lodge Hill Capital, LLC; Jennifer W. Han, associate general counsel at the Managed Funds Association; and Aaron Schlaphoff, an attorney fellow in the Rulemaking Office of the SEC Division of Investment Management.  This article summarizes the key takeaways from the program with respect to cybersecurity and swaps regulation.  For additional coverage of PLI’s Hedge Fund Management 2015 program, see “SEC’s Rozenblit Discusses Operations and Priorities of the Private Funds Unit,” The Hedge Fund Law Report, Vol. 8, No. 37 (Sep. 24, 2015).

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  • From Vol. 8 No.36 (Sep. 17, 2015)

    CFTC Requires Most Registered Commodity Pool Operators, Commodity Trading Advisors and Introducing Brokers to Join the NFA

    The Dodd-Frank Act requires hedge fund managers that engage in certain swap-related activities to register with the CFTC as either commodity pool operators (CPOs), commodity trading advisors (CTAs) or introducing brokers (IBs).  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).  Until now, such CFTC registrants have generally only been required to join the National Futures Association (NFA) if they were also engaged in commodities futures transactions.  To ensure that registrants engaging only in swap-related activities join the NFA – and thereby become “subject to the same level of comprehensive NFA oversight” – the CFTC recently adopted Final Rule 170.17 (Rule), which requires all registered CPOs and IBs, as well as many registered CTAs, to join the NFA.  This article summarizes the Rule, the relevant regulatory background and the CFTC’s rationale for adopting it.  For more on the impact of Dodd-Frank on hedge fund managers, see “How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?,” The Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013).

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  • From Vol. 8 No.24 (Jun. 18, 2015)

    NFA Conference Addresses Examination Focus Areas, Investigation Processes and Reporting Requirements for Swap Dealers and Major Swap Participants (Part Two of Two)

    As members of the NFA, registered swap dealers (SDs) and major swap participants (MSPs) are subject to examination and investigation by the NFA – an involved process that can lead to disciplinary action.  In addition to compliance with NFA and CFTC regulations, the NFA examines SDs and MSPs for compliance with multiple substantive regulatory requirements (Section 4s Implementing Regulations).  While most hedge fund managers likely do not themselves qualify as SDs or MSPs, counterparties with which they do business may be so registered, and non-compliance issues with, or disciplinary action against, those counterparties may affect the managers’ hedge funds.  During the recent NFA Member Regulatory Conference held in New York City, members of the NFA and other industry experts discussed best practices in compliance training, testing and monitoring and SD and MSP reporting requirements.  This article, the second in a two-part series, discusses upcoming examination focus areas; NFA investigations; the Section 4s Implementing Regulation review process; and filings required from SDs and MSPs.  The first article highlighted the main points regarding the NFA’s examination process and NFA expectations concerning member training programs, compliance monitoring and testing.  For more on SDs and MSPs, see “Katten Partner Raymond Mouhadeb Discusses the Purpose, Applicability and Implications of the August 2012 ISDA Dodd-Frank Protocol for Hedge Fund Managers, Focusing on Whether Hedge Funds Should Adhere to the Protocol,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).

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  • From Vol. 8 No.22 (Jun. 4, 2015)

    NFA Conference Addresses Examination Processes, Training and Compliance Best Practices for Swap Dealers and Major Swap Participants (Part One of Two)

    Under Dodd-Frank, registered swap dealers (SDs) and major swap participants (MSPs) are required to become members of a registered futures association, such as the NFA or the CFTC.  In addition, Section 4s of the Commodity Exchange Act requires registered SDs and MSPs to meet specific requirements with regard to, among other things, capital and margin; reporting and recordkeeping; daily trading records; business conduct standards; documentation standards; trading duties; and designation of a chief compliance officer.  Registered member firms will be examined by the NFA for compliance with multiple substantive regulatory requirements (Section 4s Implementing Regulations).  During the recent NFA Member Regulatory Conference held in New York City, members of the NFA and other industry experts discussed best practices in compliance training, testing and monitoring, and SD and MSP reporting requirements.  This article, the first in a two-part series, highlights the main points regarding the NFA’s examination process and NFA expectations concerning member training programs, compliance monitoring and testing.  The second article will review upcoming examination focus areas; NFA investigations; the Section 4s Implementing Regulation review process; and filings required from SDs and MSPs.  For more on SDs and MSPs, see “CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants,” The Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).

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  • From Vol. 8 No.14 (Apr. 9, 2015)

    CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants

    Commodity Futures Trading Commission (CFTC) Regulation 3.3(f)(2), promulgated under the Commodity Exchange Act, requires the chief compliance officer of a futures commission merchant, swap dealer or major swap participant to furnish an annual report to the CFTC not more than 60 days after the end of the applicable registrant’s fiscal year, simultaneously with the submission of Form 1-FR-FCM or the Financial and Operational Combined Uniform Single Report.  See “CFTC Issues Guidance for Completing Annual CCO Reports of Swaps and Futures Firms,” The Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015).  However, in response to a joint request from the Futures Industry Association and the International Swaps and Derivatives Association, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued no-action relief from those timing requirements.  Consequently, the deadline for those entities to file the required annual report has been extended.  This article explains the mechanics and impact of the extension.

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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. 8 No.4 (Jan. 29, 2015)

    Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss CFTC Compliance, Conflicting Regulatory Regimes and Best Marketing Practices (Part Two of Four)

    The most difficult compliance issues currently facing the hedge fund industry were front and center at the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  This article, the second in a four-part series covering the Summit, contains insight on CFTC compliance, conflicting regulatory regimes in compliance programs, and the regulatory and operational considerations of marketing from Amanda Olear, associate director of the Division of Swap Dealer Intermediary Oversight at the CFTC; Patricia Cushing, director of compliance at the National Futures Association; Myles Edwards, general counsel and CCO at Constellation Wealth Advisors; Mark Schein, CCO and managing director at York Capital Management; Jeanette Turner, managing director and general counsel at Advise Technologies; Jennifer Duggins, senior vice president and CCO at Chilton Investment Company; Edward Dartley, of counsel at Pepper Hamilton; Marc Baum, general counsel and chief administrative officer at Serengeti Asset Management; and Simon Raykher, general counsel at Kepos Capital LP.  The first article in the series covered regulatory priorities, handling regulatory examinations and cybersecurity preparedness.  The third and fourth installments in the series will cover: proposed changes to Form 13F and Schedule 13D; employment-related disputes with highly compensated employees; insider trading; negotiating terms with institutional investors; negotiating seeding arrangements; and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

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  • From Vol. 7 No.47 (Dec. 18, 2014)

    Regulators from the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part Two of Four)

    This is the second article in a four-part series covering this year’s edition of Practising Law Institute’s annual hedge fund enforcement event.  Participants at the event included regulators from the SEC, CFTC and New York Attorney General’s Office.  This article addresses CFTC enforcement concerns and cases, New York Attorney General’s Office initiatives and defense strategies for avoiding and managing government investigations.  The first article in this series discussed key points made by Julie M. Riewe, Co-Chief of the SEC’s Asset Management Unit, on enforcement trends, principal transactions, conflicts raised by side-by-side management, valuation, allocation of expenses and the potential deterrent value of smaller enforcement actions.  The third article in the series will focus on SEC inspections and examinations.  And the final article will provide instruction (based on points made at the PLI event) on how to establish an effective private fund compliance program.  See also “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).

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  • From Vol. 7 No.42 (Nov. 6, 2014)

    Rules Against “Spoofing” and Other Disruptive Trading in Futures, Swaps and Options

    The Dodd-Frank Act resulted in new rules on disruptive trading in futures, options and swaps.  Following Dodd-Frank, both the Commodity Futures Trading Commission (CFTC) and the CME Group Exchanges implemented their own rules to address disruptive trading.  These new rules have significant implications for pooled investment vehicles, such as hedge funds and commodity pools.  This guest article outlines new disruptive trading rules and recent cases that the CFTC, futures exchanges and U.S. Attorneys’ Offices have brought under these new rules.  The authors of this article are Thomas K. Cauley, Jr. and Courtney A. Rosen, both litigation partners in the Investment Funds, Advisers and Derivatives and Securities and Derivatives Enforcement and Regulatory practices in the Chicago office of Sidley Austin LLP, and Lisa A. Dunsky, a counsel in those practices.  For additional insight from the authors, see “Contractual Provisions That Matter in Litigation between a Fund Manager and an Investor,” The Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014); and “Derivative Actions and Books and Records Demands Involving Hedge Funds,” The Hedge Fund Law Report, Vol. 7, No. 39 (Oct. 17, 2014).

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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.38 (Oct. 10, 2014)

    Davis Polk and Sidley Partners and MFA GC Address the Maze of Hedge Fund Marketing Regulation in the U.S. and E.U. (Part One of Three)

    This is the first article in a three-part series focusing on a recent Practising Law Institute program entitled “Hedge Fund Management 2014.”  This article examines the key points from a panel on European hedge fund regulation and Securities Act Rule 506(c) offerings.  In this panel, Stuart J. Kaswell, Executive Vice President, Managing Director and General Counsel of the Managed Funds Association in Washington, D.C., addressed ways in which the Alternative Investment Fund Managers Directive (AIFMD), the Markets in Financial Instruments Directive (MiFID), the Markets in Financial Instruments Regulation (MiFIR) and recent activity by the European Securities and Markets Authority (ESMA) are complicating the process by which U.S.-based hedge fund managers approach and interact with European investors.  Thomas J. Kim, a partner at Sidley Austin, discussed Rule 506(c) offerings and recent harmonization of SEC and CFTC guidance on general solicitation.  See “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend,” The Hedge Fund Law Report, Vol. 7, No. 35 (Sep. 18, 2014).  Davis Polk partner Nora M. Jordan chaired the program and participated in the panel that is the subject of this article.

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  • From Vol. 7 No.36 (Sep. 25, 2014)

    The Odyssey of Private Fund Advertising: From Great Expectations to Much Ado about Nothing

    On September 9, 2014, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued an exemptive letter (the JOBS Act Exemptive Letter) for private fund managers relying on exemptions from registration as commodity pool operators (CPOs) with the CFTC.  This relief harmonizes the CFTC’s CPO exemptions with the 2013 final rules issued by the SEC relating to offerings exempt from registration under the Securities Act of 1933 as required by the JOBS Act.  In a guest article, David M. Matteson and Andrew C. Raby, partner and senior associate, respectively, in the Chicago office of Drinker Biddle & Reath LLP, discuss the impact of the JOBS Act Exemptive Letter and summarize the current state of private fund advertising.  See also “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend,” The Hedge Fund Law Report, Vol. 7, No. 35 (Sep. 18, 2014).

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  • From Vol. 7 No.35 (Sep. 18, 2014)

    Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend

    It is widely recognized that the Commodity Futures Trading Commission (CFTC) has made great strides previously in terms of harmonizing its rules with those of other regulators, including the Securities Exchange Commission (SEC).  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).  In perhaps a sign that new leadership at the CFTC has settled in and intends to continue the trend toward harmonization, the CFTC has recently acted on a variety of items with respect to which the industry was waiting, in some cases for a year or more, for sorely needed guidance.  While not all pressing issues have been resolved by the CFTC, a number of them have been.  In a guest article, Steven M. Felsenthal, General Counsel and Chief Compliance Officer of Millburn Ridgefield Corporation, The Millburn Corporation and Millburn International, LLC, summarizes some of the recent CFTC actions and guidance, notes certain implications thereof that may or may not require further guidance and identifies certain items with respect to which further CFTC action would be welcome.  The focus of this article is on certain issues affecting hedge fund advisers that are also commodity pool operators, who are thus subject to both SEC and CFTC regulatory regimes.

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  • From Vol. 7 No.35 (Sep. 18, 2014)

    CFTC Allows Hedge Fund Managers to Advertise

    Private funds that are subject to regulation by the SEC may also constitute commodity pools within the meaning of the Commodity Exchange Act, which may subject them and their advisers to regulation by the CFTC.  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).  In accordance with the JOBS Act, the SEC issued new rules that lift the ban on general solicitation and general advertising by private fund sponsors under certain conditions.  See “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  The CFTC did not follow suit, leaving managers of funds that trade in commodities in a bind, because general solicitation and general advertising render commodity pool operators ineligible for certain important exemptions from CFTC rules.  See “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  Specifically, CFTC Regulation 4.7(b) provides registered commodity pool operators with relief from certain disclosure, reporting and recordkeeping requirements; and Regulation 4.13(a)(3) contains an exemption from registration as a commodity pool operator.  However, both regulations contain requirements that are inconsistent with the lifting of the ban on general solicitation and general advertising reflected in new SEC Rules 506(c) and 144A.  On September 9, 2014, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued exemptive relief to bring Regulations 4.7(b) and 4.13(a)(3) into line with those new SEC Rules.  This article summarizes the existing regulatory lay of the land and the key provisions of the relief.

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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.31 (Aug. 21, 2014)

    “Best Ideas” Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part Two of Two)

    This is the second article in a two-part series discussing the chief legal concerns raised by hedge fund manager presentations at “best ideas” conferences – conferences at which investment professionals present investment ideas, share convictions and analyze recommendations.  The benefits of presenting at such events include increased visibility and often a charitable component.  The legal pitfalls of presenting at such conferences, however, are various.  The first article in this series discussed issues under Rule 506 of Regulation D, including whether a presentation at a best ideas conference constitutes an offering or general solicitation, as well as Investment Company Act issues.  This article discusses Investment Advisers Act issues, advertising restrictions, fiduciary duty and related considerations and Commodity Exchange Act issues.  The authors of this article series are S. Brian Farmer, Co-Managing Partner of the Investment Management & Private Funds Practice Group at Hirschler Fleischer, and John C. C. Byrne, II.

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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. 7 No.4 (Jan. 30, 2014)

    K&L Gates Investment Management Seminar Addresses Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part One of Two)

    K&L Gates partners and in-house counsel gathered on December 10, 2013 at the firm’s annual investment management seminar to provide updates on some of the most pertinent topics impacting the private fund industry.  This two-part series summarizes salient points from various sessions at the seminar.  This first installment summarizes a session covering CFTC and NFA regulations impacting registered commodity pool operators and commodity trading advisors as well as U.S. and European regulations governing transactions in swaps and other over-the-counter derivatives, including discussions of swap execution facilities and the European Market Infrastructure Regulation.  The second installment will discuss two sessions, one addressing the newest approaches and strategies used by the SEC to examine investment managers and bring enforcement actions where necessary, and another tackling the implications of the JOBS Act for fund managers.

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  • From Vol. 6 No.48 (Dec. 19, 2013)

    RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Two of Three)

    Hedge fund industry experts, including regulators from the SEC and National Futures Association (NFA), recently gathered at the RCA’s Compliance, Risk & Enforcement 2013 Symposium (Symposium) to offer varied perspectives and advice on topics relevant to hedge fund managers.  This second installment in a three-part article series covering the Symposium summarizes notable points from two sessions, including: (1) the keynote address by Andrew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), who outlined OCIE examination priorities for hedge fund managers; and (2) another session addressing regulatory challenges confronting managers engaged in fund distribution, including the JOBS Act, broker registration, NFA oversight of hedge fund marketing practices and the EU’s Alternative Investment Fund Managers Directive.  The first article in this series covering the Symposium summarized two sessions, one on conducting effective risk assessments for hedge fund managers (including discussions of forensic testing and testing for insider trading, order allocations and best execution), and the other incorporating current and former government officials’ perspectives on expert networks, political intelligence, insider trading investigations and prosecutions and valuation-related conflicts of interest.  See “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013).  The third article will summarize key points from two sessions, one identifying regulatory risks and outlining compliance best practices with respect to use of expert networks, valuation of assets, custody and the allocation of expenses, and another providing a detailed look into fund administrator shadowing.

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  • From Vol. 6 No.47 (Dec. 12, 2013)

    RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part One of Three)

    The Regulatory Compliance Association recently held its Compliance, Risk & Enforcement 2013 Symposium (Symposium), at which regulators and hedge fund industry experts offered insights on relevant regulatory, compliance and operational topics.  This first installment of a three-part series covering the Symposium summarizes two sessions, one on conducting effective risk assessments for hedge fund managers (including discussions of forensic testing and testing for insider trading, order allocations and best execution), and the other incorporating current and former government officials’ perspectives on expert networks, political intelligence, insider trading investigations and prosecutions and valuation-related conflicts of interest.  The second installment will summarize salient points from the keynote address by Andrew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations, and a session addressing challenges for fund distribution raised by the JOBS Act, broker registration issues and the AIFMD.  The third installment will summarize key points from two sessions, one on compliance best practices for use of expert networks, valuation, custody and expense allocation, and another on fund administrator shadowing.

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  • From Vol. 6 No.44 (Nov. 14, 2013)

    Sidley Austin Private Funds Conference Addresses Recent Developments Relating to Fund Structuring and Terms; SEC Examinations and Enforcement Initiatives; Seeding Arrangements; Fund Mergers and Acquisitions; CPO Regulation; JOBS Act Implementation and Compliance; and Derivatives Reforms (Part Three of Three)

    This is the third installment in The Hedge Fund Law Report’s three-part series covering the recent Sidley Austin LLP conference entitled “Private Funds 2013: Developments and Opportunities.”  This article summarizes the key points made by presenting Sidley partners on relevant regulatory developments, including commodity pool operator registration and regulation, over-the-counter derivatives reforms and implementation and compliance with the JOBS Act.  The first article summarized conference segments on fund structuring, single-investor funds, first loss capital arrangements, side letter terms, hard wiring of feeder funds for ERISA purposes, liquidity terms, fee terms, founder share classes and expense allocations and caps.  And the second article addressed SEC examinations and enforcement, the SEC’s new policy requiring admissions of wrongdoing and best practices for compliance, seeding arrangements and fund mergers and acquisitions.

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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.40 (Oct. 17, 2013)

    What Do the CFTC Harmonization Rules Mean for Non-Mutual Fund Commodity Pools, Including Hedge Funds?

    As a result of 2012 changes in the exemptions from registration as a commodity pool operator (CPO) available to operators of pooled investment vehicles, a large number of operators of unregistered investment companies – which may include hedge fund investment advisers, investment managers and/or boards of directors – were required to register with the Commodity Futures Trading Commission (CFTC) as CPOs, thus becoming subject to the Commodity Exchange Act (CEA) and the rules promulgated by the CFTC thereunder (CFTC Rules, and, together with the CEA, the Commodity Rules).  As a result, many investment advisers that were already subject to various federal securities laws and regulations, including the Investment Company Act of 1940 (Company Act), the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 and the rules under each of those Acts (collectively, Securities Rules), became subject to an additional regulatory regime.  Duplicative rules and regulations are nothing new to investment advisers or CPOs, and the public, press, politicians and regulators whose collective conscience had been scarred and greatly influenced by Madoff and other scandals and a debilitating financial crisis for which many scapegoated hedge funds were not particularly concerned with creating a larger regulatory and compliance burden for investment advisers.  Nevertheless, it was soon recognized that conflicting Commodity Rules and Securities Rules created an environment under which dual registrants (that is, those subject to both the Commodity Rules and Securities Rules) could not reasonably comply with certain of the conflicting requirements of both sets of rules.  Rather than permit this situation to drive certain types of pooled investment vehicles either to cease or materially alter their operations due to these conflicts, the CFTC adopted rules and rule interpretations designed to resolve them (Harmonization Rules).  Most of the Harmonization Rules pertain to “investment companies” registered under the Company Act (RICs), many of which are commonly referred to as mutual funds.  In a guest article, Steven M. Felsenthal and Stephanie T. Green focus on those Harmonization Rules that apply to CPOs whose pooled investment vehicles are not RICs, including hedge funds and other commodity pools, describing the implications of the Harmonization Rules for such commodity pools in the process.  Felsenthal is General Counsel and Chief Compliance Officer of Millburn Ridgefield Corporation, The Millburn Corporation and Millburn International, LLC; Green is a legal and compliance associate at The Millburn Corporation.

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  • From Vol. 6 No.40 (Oct. 17, 2013)

    How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?

    The Practising Law Institute recently sponsored a panel highlighting the impact of derivatives reforms on managers of hedge funds that trade swaps.  Among other things, the panel addressed key product definitions, including whether certain instruments are considered “swaps”; CPO registration obligations, exemptions and other administrative relief; ongoing compliance requirements applicable to registered CPOs, including the Series 3 exam requirement; and amendments to swap trading documentation triggered by Dodd-Frank and European Union derivatives regulatory reforms.  See “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations between Hedge Fund Managers and Futures Commission Merchants regarding Cleared Derivative Agreements,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013); and “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  This article summarizes the key insights from the discussion.  The speakers were Michael J. Drayo, Senior Counsel at investment adviser The Vanguard Group, Inc., and Susan C. Ervin, a partner in the Financial Institutions group at Davis Polk & Wardwell LLP.  See “Do You Need to Be a Registered CPO 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.24 (Jun. 13, 2013)

    PLI Panel Provides Regulator and Industry Perspectives on SEC and NFA Examinations, Allocation of Form PF Expenses, Annual Compliance Review Reporting and NFA Bylaw 1101 Compliance

    The Practising Law Institute recently sponsored a program entitled “Hedge Fund Compliance and Regulation 2013,” which included a segment entitled “Building an effective compliance program and strategies for dealing with regulators.”  During that segment, the expert panel – consisting of regulators and industry professionals – offered unique and detailed insight on how regulators and managers approach the SEC and NFA examination process.  Among other things, the panel offered a behind-the-scenes look at how the SEC and NFA approach regulatory examinations; practical guidance on how managers should approach the examination process; candid thoughts on hot-button issues, including the allocation of Form PF expenses, whether managers should document their annual compliance reviews and how regulators use such reports; challenges that hedge fund managers face in complying with NFA Bylaw 1101; and making disciplinary disclosures.

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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.17 (Apr. 25, 2013)

    New SEC and CFTC Rules Require Certain Hedge Fund Managers to Establish Policies and Procedures to Combat Identity Theft

    On April 10, 2013, the SEC and the U.S. Commodity Futures Trading Commission (CFTC) jointly adopted rules to require certain hedge fund managers and other financial institutions to implement programs designed to detect and address identity theft, which is “fraud committed or attempted using the identifying information of another person without authority.”  More specifically, certain hedge fund managers that are registered or required to be registered with the SEC as investment advisers, as well as certain commodity pool operators and commodity trading advisors (as defined in CFTC regulations) will be subject to the new identity theft rules.  See “CPO Compliance Series: Registration Obligations of Principals and Associated Persons (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  SEC Commissioner Luis Aguilar recently observed, “investment advisers registered under the Investment Adviser Act, particularly the private fund and hedge fund advisers that are recent registrants with the SEC, might not have existing identity theft red-flag programs, and will need to pay particular attention to the rules being adopted.”  This article discusses: (1) which hedge fund managers will be subject to the new rules; (2) the required elements of identity theft programs; and (3) some steps that covered entities must take to administer their identity theft programs.

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  • From Vol. 6 No.14 (Apr. 4, 2013)

    NFA Adopts Rule Permitting Certain Loans from Commodity Pools to Commodity Pool Operators and Their Affiliates

    Hedge fund managers that take personal loans from their hedge funds without the authority to do so, or without full disclosure of such loan arrangements, can trigger enforcement activity from regulators.  For a discussion of such an action, see “SEC Charges Philip A. Falcone, Harbinger Capital Partners and Related Entities and Individuals with Misappropriation of Client Assets, Granting of Preferential Redemptions and Market Manipulation,” The Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).  Such loans can also trigger rule violations, depending on the circumstances.  Since 2009, commodity pool operators (CPOs) that are registered or required to register as such with the U.S. Commodity Futures Trading Commission and become members of the National Futures Association (NFA) have been subject to NFA Rule 2-45 (Rule), which generally prohibits CPOs from permitting the commodity pools (pools) they operate to make loans or advances to the CPO or any affiliated person or entity, which can include other pools operated by the CPO.  In response to concerns raised by prospective CPO registrants who, in the ordinary course of their business, regularly effect transactions (such as repurchase agreements and securities lending transactions) with and among pools they operate “that have characteristics similar to a loan” and that may be deemed to be impermissible loans or advances from the pool to the CPO, the NFA recently amended Rule 2-45 to except certain delineated transactions from the Rule’s coverage.  This article summarizes the changes to the Rule adopted by the NFA, including a discussion of the specific types of transactions that are no longer prohibited by the Rule.  For a discussion of considerations for loan transactions between a hedge fund manager and its funds, see “Key Legal Considerations in Connection with Loans from Hedge Funds to Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 28 (Jul. 15, 2010).

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  • From Vol. 6 No.10 (Mar. 7, 2013)

    How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated with the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?

    The Jumpstart Our Business Startups Act (JOBS Act) provisions allowing general solicitation and general advertising in private offerings (JOBS Act Marketing Provisions), upon becoming effective, will profoundly change how hedge fund managers can market their funds.  Before taking advantage of the JOBS Act Marketing Provisions, however, hedge fund managers should be aware of a number of potential pitfalls.  First, hedge fund managers may be prohibited from engaging in general solicitation and general advertising if they rely on exemptions from registration under certain Commodity Futures Trading Commission rules, or under certain state and federal investment adviser laws.  Second, hedge fund managers that are able to take advantage of the provisions need to be aware of several potential compliance issues under the Investment Advisers Act of 1940, including issues that arise when using social media, publicly available websites and publicly advertised performance history.  In a guest article, Adam Gale, a Member in the New York office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., identifies potential regulatory pitfalls associated with reliance on the JOBS Act Marketing Provisions and provides some recommendations to address compliance issues in connection with reliance on the JOBS Act Marketing Provisions.

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  • From Vol. 6 No.9 (Feb. 28, 2013)

    RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part Two of Two)

    On December 18, 2012, the Regulatory Compliance Association held its Compliance, Risk & Enforcement Symposium at the Pierre Hotel in New York City.  Participants at the event included leading hedge fund industry professionals, and panels focused on topics including insider trading, compliance programs and reviews, SEC examination priorities, hedge fund governance, Form PF and marketing and advertising issues.  This article – the second installment in a two-part series covering the Symposium – discusses SEC examination priorities (and practical guidance for addressing areas of concern); recent trends in hedge fund governance; lessons learned from initial Form PF filings and strategies for completing Form PF; and marketing and advertising issues, including a discussion of the JOBS Act and related topics.  The first installment covered, among other things: insider trading (including a discussion of manager cooperation, the elements of insider trading, the continuing viability of the mosaic theory, insider trading investigative techniques and the use of expert networks and paid consultants); and compliance programs and reviews (including a discussion of the approach to and framework for hedge fund compliance programs and reviews, and specific policies and procedures designed to address trading risks).  See “RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013).

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  • From Vol. 6 No.6 (Feb. 7, 2013)

    CPO Compliance Series: Registration Obligations of Principals and Associated Persons (Part Three of Three)

    Commodity pool operators (CPOs) that are registered, or registering, with the U.S. Commodity Futures Trading Commission (CFTC) and that are, or are becoming, members of the National Futures Association (NFA), need to comply with numerous CFTC and NFA requirements.  One of the key compliance obligations is the requirement for a CPO to (1) list its principals on its registration application with the NFA (Form 7-R) and (2) register its associated persons (APs) with the NFA (Form 8-R) and submit a Form 8-R for each natural person principal so that the NFA can perform a background check.  This article details who or what is a principal and who is an AP; outlines the process for registration of APs and listing of natural person principals; and describes some basic supervisory obligations applicable to APs and principals as employees of the CPO and provides some general guidance on how to comply with those supervisory obligations.  This article is the third of a three-part series of articles that focuses in detail on various compliance obligations of CPOs under CFTC and NFA regulations and guidance.  The first article covered NFA Bylaw 1101, which addresses conducting business with non-NFA members.  See “CPO Compliance Series – Conducting Business with Non-NFA Members (NFA Bylaw 1101) (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  The second article covered the various prohibitions and guidelines for marketing activities and promotional materials for both CPOs and commodity trading advisors under various CFTC regulations and NFA compliance 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).  For additional coverage of each of these topics and other relevant topics, 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).  The authors of this article and the other articles in this 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. 6 No.4 (Jan. 24, 2013)

    K&L Gates Investment Management Seminar Provides Guidance for Hedge Fund Managers on Social Media, Pay to Play Rules, ERISA Rule Changes, AIFMD, SEC Examination and Enforcement Priorities, Form PF, the JOBS Act, CPO Regulation and FATCA

    On December 5, 2012, international law firm K&L Gates held its 2012 Investment Management Conference in New York.  Speakers at the conference provided guidance on various regulatory developments impacting hedge funds, including: the use of social media; pay to play rules; rule changes under the Employee Retirement Income Security Act of 1974 (ERISA) impacting managers of plan assets; the E.U. Alternative Investment Fund Managers Directive (AIFMD); SEC examination and enforcement priorities; Form PF; the JOBS Act; regulation of commodity pool operators (CPOs); and the Foreign Account Tax Compliance Act (FATCA).  This article highlights the key points discussed at the conference on each of the foregoing topics.

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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.47 (Dec. 13, 2012)

    NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests

    The National Futures Association (NFA) held a workshop (workshop) in New York on October 23, 2012 to help commodity pool operators (CPOs) and commodity trading advisors (CTAs) – including hedge fund managers that trade commodity interests – determine whether they must register with the U.S. Commodity Futures Trading Commission and the NFA, and to understand their regulatory obligations if they are required to do so.  Topics discussed during the workshop included popular CPO and CTA registration exemptions; reporting requirements for registrants, including those related to disclosure documents and financial reports; requirements related to promotional materials and sales practices for registrants; and the NFA audit process.  This article provides feature length coverage of the key topics discussed during the workshop.

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  • From Vol. 5 No.46 (Dec. 6, 2012)

    CFTC Grants Permanent No-Action Relief from CPO Registration for Family Offices and Temporary No-Action Relief for Operators of Funds of Funds

    The February 2012 CFTC rule amendments implementing provisions of the Dodd-Frank Act raised many questions concerning the obligations of fund of fund operators and family offices to register as commodity pool operators (CPOs) with the CFTC, particularly in light of the rescission of the Rule 4.13(a)(4) registration exemption relied upon by many fund of fund operators and family offices.  Recognizing that many fund of fund operators and family offices may need to register as CPOs with the CFTC by December 31, 2012, on November 29, 2012, the Division of Swap Intermediary Oversight (Division) of the CFTC issued two no-action letters, one granting temporary relief from CPO registration for operators of funds of funds and one granting permanent no-action relief for family offices.  However, the relief for fund of fund operators and family offices is not self-executing as potential claimants must make an electronic notice filing with the CFTC and satisfy other conditions to claim the relief.  This article outlines the relief granted by the Division in its no-action letters and the conditions that fund of fund operators and family offices must satisfy to claim such relief.  See also “Practising Law Institute Panel Discusses Sweeping Regulatory Changes for Hedge Fund Managers That Trade Swaps,” The Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 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.45 (Nov. 29, 2012)

    Practising Law Institute Panel Discusses Sweeping Regulatory Changes for Hedge Fund Managers That Trade Swaps

    The Practising Law Institute recently hosted its “Hedge Funds 2012: Strategies and Structures for an Evolving Marketplace” program, which included a panel entitled “Trading Issues Relating to Swaps Under Dodd-Frank: The CFTC’s Expanded Registration Requirements for Commodity Pool Operators.”  This panel provided a comprehensive overview of the business consequences for buy-side swaps market participants (such as hedge fund managers that trade swaps) of the regulatory changes caused by the Dodd-Frank Act.  This article summarizes the notable insights from the panel discussion, including coverage of which entities must register as commodity pool operators (CPOs) or commodity trading advisors (CTAs) based on their swaps trading activity; the registration exemptions available to such CPOs and CTAs; certain regulations governing CPOs and CTAs that are required to register; and the regulations governing trading and clearing of swaps.  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. 5 No.44 (Nov. 21, 2012)

    How Can Fund Managers Address the Regulatory, Compliance, Privacy and Ethics Issues Raised by Social Media?

    On November 28, 2012 – a week from today – Richards Kibbe & Orbe LLP (RKO), Berkeley Research Group (BRG) and The Hedge Fund Law Report will host a complimentary, CLE-eligible webinar entitled “How can fund managers address the regulatory, compliance, privacy and ethics issues raised by social media?”  Topics to be covered in the webinar include: tapping into the benefits of social media for hedge fund advisory businesses while maintaining necessary control and oversight; navigating the complexities of user privacy, regulatory compliance and ethics; components of a model social media policy for fund managers; and implications of the Jumpstart Our Business Startups (JOBS) Act and rules for social media use.  The participants in the webinar will be: Eva Marie Carney, a partner in the Washington, D.C. office of RKO; James Walker, a partner in the New York office of RKO; Charles Lundelius, a director at BRG; and Karina Bjelland, a managing consultant in BRG’s Financial Institutions Practice.  Michael Pereira, publisher of The Hedge Fund Law Report, will moderate the discussion.  To register for the event, please click here.  As a preview of the material to be discussed during the webinar, The Hedge Fund Law Report conducted a comprehensive interview with the four participants.  Our interview covered, among other topics: the definition of social media; ways in which hedge fund managers are using social media; authority governing the use by fund managers of social media; the chief ways in which the JOBS Act will impact the use by private fund managers of social media; whether the prohibition on public offerings in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act will curtail the expanded solicitation and advertising rights granted by the JOBS Act; the tension between the CFTC’s “de minimis” exception from commodity pool operator registration requirements and the JOBS Act; steps to be taken by a private fund manager to ascertain the “accredited” status of investors sourced via social media; rules governing a fund manager’s recordkeeping obligations with respect to social media; best practices with respect to mobile devices; the interaction between federal and state privacy laws and monitoring and archiving of employee social media communications; insider trading concerns raised by social media; and social media activity that may fall within the ambit of the SEC’s rules on testimonials.  The full text of our interview with Carney, Walker, Lundelius and Bjelland is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 5 No.42 (Nov. 9, 2012)

    Annual Thompson Hine Hedge Fund Seminar Focuses on Implications for Hedge Fund Managers of the JOBS Act, Form PF and Form CPO-PQR

    On October 4, 2012, Thompson Hine LLP hosted its annual Hedge Fund Seminar, which this year was entitled, “The JOBS Act and Dodd-Frank – Two Years Later.”  Speakers at the event addressed the impact of Form PF and Form CPO-PQR as well as the anticipated impact of the Jumpstart Our Business Startups (JOBS) Act on hedge fund managers.  In addition, the speakers discussed the building blocks of a culture of compliance at hedge fund management companies.  This article summarizes the most salient points raised at the seminar.

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  • From Vol. 5 No.41 (Oct. 25, 2012)

    CFTC Grants Temporary Relief from CPO and CTA Registration to Certain Hedge Fund Managers that Trade Swaps

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a comprehensive new regulatory framework for swaps and security-based swaps which would bring many market participants within the ambit of CFTC regulation, including requiring numerous entities to register with the CFTC.  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).  Hedge fund managers were principally concerned that the inclusion of swaps as “commodity interests” would cause their hedge funds to be treated as “commodity pools,” which in turn could subject the hedge fund manager to compliance and registration obligations as a commodity pool operator (CPO) or a commodity trading advisor (CTA).  This concern was amplified when the CFTC and SEC jointly adopted rules refining the definition of the term “swap” and related terms, on August 13, 2012.  Specifically, the August 13 rules required hedge fund managers to determine whether their swaps-related activities would subject them to CFTC regulation and require them to register as a CPO or CTA by October 12, 2012, the effective date of the rules.  In light of the complexity of the definitions and the business arrangements to which the definitions applied, many hedge fund managers struggled to arrive at a conclusive determination.  See “CFTC Issues Responses to Frequently Asked Questions Concerning Registration Exemption Eligibility and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors,” The Hedge Fund Law Report, Vol. 5, No. 32 (Aug. 16, 2012).  Fortunately for managers grappling with this issue, on October 11 and 12, 2012, the CFTC issued two no-action letters relevant to the registration obligations of hedge fund managers that trade swaps.  This article summarizes the key practical points arising out of the two no-action letters for hedge fund managers that trade foreign exchange and other swaps and foreign exchange forwards.

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  • From Vol. 5 No.41 (Oct. 25, 2012)

    CFTC Interpretive Guidance Takes the View That Certain Securitization Vehicles Are Not Commodity Pools, Even Though They Use Swaps

    Prior to the Dodd-Frank Act, few considered securitization vehicles commodity pools.  But after the Dodd-Frank Act – and, in particular, after passage of various CFTC rules governing swaps trading – a question has arisen in the structured finance world as to whether certain securitization vehicles that use swaps are commodity pools.  The answer matters because if such securitization vehicles are commodity pools, the vehicles would be subject to CFTC regulation and their operators would be subject to CFTC registration (unless an exemption is available).  In turn, CFTC regulation is complicated and CFTC registration can be onerous.  See, e.g., “So You Don’t Want to Take the Series 3 Exam?  Alternatives to the General Proficiency Requirement for Associated Persons of Commodity Pool Operators and Commodity Trading Advisors,” The Hedge Fund Law Report, Vol. 5, No. 37 (Sep. 27, 2012).  Accordingly, the American Securitization Forum (ASF) and The Securities Industry and Financial Markets Association (SIFMA and, together with ASF, Applicants) recently requested guidance from the CFTC’s Division of Swap Dealers and Intermediary Oversight concerning these issues.  This article summarizes the interpretive guidance provided by the CFTC in response to the Applicants’ request.  Also, this article includes insight from Sidley Austin partner Jonathan Miller on the guidance and its implications for the registration and filing obligations (including potential Form PF filing obligations) of operators of securitization vehicles.

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  • From Vol. 5 No.38 (Oct. 4, 2012)

    CPO Compliance Series: Marketing and Promotional Materials (Part Two 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 rescission of the CFTC Regulation 4.13(a)(4) registration exemption will shortly need to undertake numerous CFTC and NFA compliance obligations.  One of the key compliance obligations arises from CFTC Regulation 4.41 and NFA Compliance Rule 2-29, each of which sets forth various prohibitions and guidelines for marketing activities and promotional materials for both CPOs and commodity trading advisors (CTAs).  This article discusses in detail the CFTC and NFA prohibitions and guidelines for marketing activities and promotional materials for CPOs and CTAs contained in CFTC Regulation 4.41 and NFA Compliance Rule 2-29 and its related interpretive notices and provides practical guidance on how to comply with these prohibitions and guidelines.  This article is the second of a three-part series of articles that focus in detail on various compliance obligations of CPOs under CFTC and NFA regulations and guidance.  The first article addressed NFA Bylaw 1101, which addresses conducting business with non-NFA members.  See “CPO Compliance Series: Conducting Business with Non-NFA Members (NFA Bylaw 1101) (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  The third article will address reporting of principals and registration of associated persons.  For additional coverage of each of these topics and the topics discussed in this article, 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).

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  • From Vol. 5 No.37 (Sep. 27, 2012)

    So You Don’t Want to Take the Series 3 Exam?  Alternatives to the General Proficiency Requirement for Associated Persons of Commodity Pool Operators and Commodity Trading Advisors

    Recent amendments to U.S. Commodity Futures Trading Commission (CFTC) rules have required many hedge fund firms to confront the prospect of registering with the CFTC as a commodity pool operator (CPO) and/or commodity trading advisor (CTA).  Notably, the CFTC in February announced the rescission of Rule 4.13(a)(4), a CPO registration exemption that for years has allowed hedge funds to trade without limitation in CFTC-regulated “commodity interests” (i.e., futures contracts, options on futures, retail f/x transactions and, effective October 12, 2012, many types of swaps).  Going forward, most U.S. hedge fund firms that operate funds for which they cannot rely on the alternative CPO registration exemption in Rule 4.13(a)(3) – which imposes significant limits on a fund’s commodity interest trading – will have little choice but to register with the CFTC.  For firms registered as investment advisers with the U.S. Securities and Exchange Commission, many aspects of the CFTC registration process, as well as certain ongoing recordkeeping, reporting and disclosure obligations, will be familiar.  But one area where the CFTC requirements for registered CPOs and CTAs depart significantly from the norms of SEC investment adviser regulation is the general requirement that a CFTC registrant’s marketing personnel (so-called “associated persons” or APs) satisfy certain proficiency testing requirements – in general, timely passage of the “Series 3” examination.  In a guest article, Sean Finley, Jared Gianatasio and Nathan Greene summarize the scope of a CPO’s or CTA’s personnel who will be APs generally subject to the Series 3 proficiency requirement and highlight several exemptions and proficiency testing alternatives that can offer relief from that requirement.  Finley is a partner, Gianatasio is a senior associate and Greene is a partner and Co-Practice Group Leader in Shearman & Sterling LLP’s Asset Management Group.

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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.34 (Sep. 6, 2012)

    Report Finds Hedge Fund Assets Continued to Grow in First Half of 2012, Particularly for the Largest Single-Manager Hedge Funds

    In August 2012, PerTrac, Inc. issued a semi-annual update to a full-year analysis of the composition and size of the single-manager hedge fund and fund of hedge funds industry.

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  • From Vol. 5 No.32 (Aug. 16, 2012)

    Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part Two of Two)

    Over the past several years, U.S. investors have broadened their alternative investment horizons by exploring investment opportunities with Asia-based fund managers.  Asia-based fund managers provide a unique perspective on alternatives which translates to differing investment strategies that appeal to U.S. investors seeking uncorrelated returns or “alpha.”  Nonetheless, Asia-based fund managers that seek to attract U.S. investor capital must recognize the intricate regulations that govern investment manager and fund operations in the U.S. and other jurisdictions, such as the Cayman Islands where many funds are organized to attract U.S. investors.  This is the second article in a two-part series designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. investors.  The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP.  This article describes in detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers are concerned with or should consider when soliciting U.S. taxable and U.S. tax-exempt investors.  The first article described the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers.  See “Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).

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  • From Vol. 5 No.32 (Aug. 16, 2012)

    CFTC Issues Responses to Frequently Asked Questions Concerning Registration Exemption Eligibility and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors

    On August 14, 2012, the staff of the Commodity Futures Trading Commission (CFTC) Division of Swap Dealer and Intermediary Oversight issued responses to a number of questions raised by market participants in the aftermath of recent amendments to CFTC rules and regulations, which impacted the registration status and compliance obligations of many commodity pool operators (CPOs) and commodity trading advisors, particularly in light of the elimination of the Rule 4.13(a)(4) CPO registration exemption.  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).  These responses provide answers to registration and compliance questions in a variety of areas.  This article summarizes the guidance that is most pertinent to hedge fund managers.

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  • From Vol. 5 No.28 (Jul. 19, 2012)

    CFTC Expands Relief from Registration for Eligible Commodity Pool Operators and Commodity Trading Advisors through December 31, 2012

    On July 13, 2012, the Division of Swap Dealer and Intermediary Oversight of the U.S. Commodity Futures Trading Commission (CFTC) published a no-action letter issued on July 10, 2012 (no-action letter) that grants certain eligible commodity pool operators (CPOs) of newly launched pools and commodity trading advisors (CTAs) relief from having to register with the CFTC through December 31, 2012.  The relief comes on the heels of the CFTC’s February 9, 2012 adoption of a number of rule amendments, including the rescission of the Rule 4.13 exemption from CPO registration relied upon by many hedge fund managers, which became effective on April 24, 2012.  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); “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).  This article describes the no-action relief granted to CPOs and CTAs; outlines the steps that CPOs and CTAs must take to claim such exemptive relief; and highlights the ramifications stemming from the no-action relief granted.

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  • From Vol. 5 No.19 (May 10, 2012)

    Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part Two of Two)

    On February 9, 2012, the Commodity Futures Trading Commission (CFTC) amended the CFTC Rules to rescind an exemption from commodity pool operator (CPO) registration heavily relied upon by hedge fund managers.  This development, in combination with statutory changes to the Commodity Exchange Act enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, will require many hedge fund managers to register as CPOs.  This article is the second part of a two-part series by Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, providing an overview of the current regulatory landscape of CFTC regulations impacting CPOs.  Part one of this series focused on the managers of private funds and their CPO registration and compliance obligations.  In particular, part one discussed: the regulatory framework governing commodity pools and CPOs and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance.  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).  This part two focuses on the funds (i.e., commodity pools) operated or controlled by registered CPOs.  Specifically, this article discusses: general fund disclosure and reporting obligations applicable to CPOs; the exemptions from certain of those disclosure and reporting obligations available under CFTC Rules 4.7 and 4.12; and the reporting obligations applicable to funds operating under those exemptions.

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  • From Vol. 5 No.18 (May 3, 2012)

    How Do New Commodities Regulations Impact Hedge Fund Managers with Respect to Registration, Marketing, Trading, Audits and Drafting of Governing Documents?

    On February 9, 2012, the U.S. Commodity Futures Trading Commission (CFTC) rescinded an exemption from commodity pool operator (CPO) registration found in CFTC Rule 4.13(a)(4) that was previously heavily relied upon by many hedge fund managers.  The rescission of that exemption also narrowed the availability of an exemption from commodity trading adviser (CTA) registration found in CFTC Rule 4.14(a)(8) which was also relied upon heavily by many hedge fund managers.  As such, many hedge fund managers will need to register as CPOs or CTAs with the CFTC, become members of the National Futures Association (NFA) and become subject to CFTC and NFA regulations.  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).  Bearing this in mind, law firm Kleinberg, Kaplan, Wolff & Cohen, P.C. (KKWC) and hedge fund administrator CACEIS jointly hosted a webinar (Webinar) on April 19, 2012 to outline changes in the regulatory regime for CPOs and CTAs.  During the Webinar, Martin D. Sklar, a Member of KKWC, and Darren J. Edelstein, an Associate at KKWC, shared their expertise on numerous topics, including a discussion of the remaining exemptions from CPO and CTA registration for hedge fund managers; the steps taken to register a CPO or a CTA and its respective principals and associated persons; the various CFTC and NFA regulations impacting CPOs and CTAs; and the reporting requirements applicable to registered CPOs and CTAs, including completion and filing of Form CPO-PQR and CTA-PR.  The Hedge Fund Law Report interviewed Sklar and Edelstein following the Webinar to conduct a deeper dive into some of the topics discussed during the Webinar, including a discussion of: the Rule 4.13(a)(3) de minimis exemption; which hedge fund management entities should register as CPOs and CTAs; what marketing, trading and other regulations affect registered CPOs and CTAs; whether and to what extent registered CPOs and CTAs are subject to CFTC and NFA audit; whether hedge fund managers must add additional disclosures or change their subscription documents to allow them to comply with CFTC and NFA regulations; and the biggest challenges hedge fund managers face with respect to registering as a CPO or CTA and becoming subject to CFTC and NFA regulations.

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  • From Vol. 5 No.9 (Mar. 1, 2012)

    National Futures Association COO Dan Driscoll Discusses Registration, Reporting and Related Challenges Facing Hedge Fund Managers with Strategies Involving Commodities or Derivatives

    Hedge fund managers with strategies that involve commodities or derivatives are facing complicated new registration and reporting requirements.  On the registration side, on February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules that rescinded the CFTC Rule 4.13(a)(4) exemption from commodity pool operator (CPO) registration that has been heavily relied upon by many hedge fund managers and their affiliates.  See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  As a result, many hedge fund managers will either have to qualify for another exemption from CPO registration (most likely the Rule 4.13(a)(3) exemption for de minimis commodity interest trading activity), or register as a CPO.  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).  On the reporting side, with the adoption of new CFTC Rule 4.27(d), CPOs that manage private funds and that are dually registered with the SEC as investment advisers and with the CFTC as CPOs will need to complete Form PF, which requires detailed information about the private funds managed by the adviser/CPO.  See “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  With these registration, reporting and related challenges in mind, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will identify and address critical issues and pitfalls with respect to Form PF.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  For more information, click here.  To register, click here.  (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)  One of the anticipated speaking faculty members for the Form PF session at the RCA Symposium is Dan Driscoll, the Chief Operating Officer of the National Futures Association (NFA).  We recently interviewed Driscoll, who spoke with The Hedge Fund Law Report about Form PF and other issues related to CFTC and NFA regulation of hedge fund managers.  Specifically, our interview covered topics including: interpretational and operational issues related to qualification for the Rule 4.13(a)(3) de minimis exemption from CPO registration; the applicability of the relief granted under Rule 4.7 to hedge fund managers; the NFA examination and enforcement paradigm, including questions about how registrants are targeted for examination, what are the focus areas for NFA audits and how audits can lead to NFA enforcement activity; prospective NFA regulation of swap dealers and major swap participants; and Form PF, including issues related to the use of Form PF data for NFA enforcement activity, interpretation and confidentiality.

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  • From Vol. 5 No.8 (Feb. 23, 2012)

    Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part One of Two)

    In light of recent CFTC rule amendments repealing the exemption from CPO registration most commonly relied upon by managers of private funds (Rule 4.13(a)(4)), now, more than ever before, it is critical for managers who operate or control private funds to understand: (1) if they must become a registered CPO; and (2) what it means for the operation of their firms and their funds if they do.  See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  In this article – the first of a two-part series – Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, provides an overview of the current regulatory landscape of Commodity Futures Trading Commission (CFTC) regulation of commodity pool operators (CPOs).  Specifically, McShea discusses: the regulatory framework governing commodity pools and CPOs, and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance.  This article also provides a quick-reference compliance checklist for registered CPOs.  Part two of this series will discuss exemptions available to the funds (i.e., commodity pools) operated by registered CPOs that provide relief from some of the disclosure and periodic reporting obligations to which the funds would otherwise be subject.  For additional insight from McShea, see “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Two of Three),” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).

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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.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.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)

    PerTrac’s Eighth Annual “Sizing the Hedge Fund Universe” Study Identifies Trends Regarding AUM, Domicile, Currency and Performance Information Reporting for Single Manager Hedge Funds, Funds of Funds and Commodity Trading Advisors

    In its recently released study entitled “Sizing the 2010 Hedge Fund Universe” (Study), software and services provider PerTrac analyzed information from ten leading global hedge fund databases to identify trends with respect to assets under management, domicile, currency and performance information reporting by single manager hedge funds, funds of funds and commodity trading advisors.  The Study generally found that the overall number of entities that existed and reported performance information to databases increased during 2010 over 2009, but that the growth was unevenly distributed among the types of entities under analysis.  Moreover, the Study highlighted the significant number of small managers, and thus, from a regulatory perspective, implicitly emphasized the increased importance of state-level hedge fund adviser registration.  See “Connecticut Welcomes You! Federal Financial Regulatory Reform Restores Connecticut’s Authority over Hedge Fund Advisers,” The Hedge Fund Law Report, Vol. 3, No. 30 (Jul. 30, 2010).  This article summarizes the key findings of the Study.  Also, where relevant, this article includes links to other articles in The Hedge Fund Law Report offering concrete guidance to managers on the legal and regulatory implications of the business trends identified by the Study.  See, e.g., “Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).

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  • From Vol. 4 No.5 (Feb. 10, 2011)

    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

    On January 26, 2011, the U.S. Commodity Futures Trading Commission (CFTC) proposed amendments to Part 4 of its regulations promulgated under the Commodity Exchange Act (CEA) governing Commodity Pool Operators (CPOs) and Commodity Trading Advisers (CTAs).  The CFTC announced a joint effort with the U.S. Securities and Exchange Commission (SEC) proposing the adoption of a new rule on reporting for investment advisers required to register with the SEC that advise one or more private funds and that are also CPOs or CTAs required to register with the CFTC (dual registrants).  This joint endeavor, mandated by Section 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), would obligate dual registrants to file newly-created Form PF with the SEC in order to satisfy both Commissions’ filing requirements.  In an effort to harmonize its rules with this regulatory scheme, the CFTC separately announced a proposed amendment requiring all registered CPOs and CTAs to electronically file newly-created Forms CPO-PQR and CTA-PR with the National Futures Association (NFA) pursuant to § 4.27 of the CFTC regulations, forms substantively identical to Form PF.  The CFTC has also proposed further changes to its regulations that it deemed necessary in the wake of recent economic turmoil and the new regulatory environment engendered by the Dodd-Frank Act.  These proposed amendments would: (1) rescind the exemption from registration for CPOs provided in §§ 4.13(a)(3) and (a)(4) of its regulations; (2) revise § 4.7 so that CPOs may no longer claim an exemption from certifying certain annual reports; (3) incorporate the definition of “accredited investor” promulgated by the SEC in Regulation D into § 4.7; (4) reinstate the criteria for claiming an exclusion from the definition of CPO provided in § 4.5; (5) require any CPO or CTA seeking exemptive relief pursuant to §§ 4.5, 4.13 and 4.14 to annually renew their request with the NFA; and (6) require an additional risk disclosure statement under §§ 4.24 and 4.34 for any CPO or CTA engaged in swap transaction.  The CFTC intends to promulgate these new rules in an effort to provide effective oversight of the commodity futures and derivatives markets and to manage the risks, especially systemic risks, posed by any pooled investment vehicles under its jurisdiction.  This article provides a detailed summary of the CFTC’s proposed amendments.

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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.28 (Jul. 15, 2010)

    Key Legal Considerations in Connection with Loans from Hedge Funds to Hedge Fund Managers

    Can there be circumstances in which it makes business and legal sense for a hedge fund manager to cause one of its managed hedge funds to lend money or other assets to the manager?  The visceral response from most hedge fund legal and compliance professionals generally – and from those surveyed by The Hedge Fund Law Report on this question specifically – is: rarely, if at all.  However, this is a question that merits attention from hedge fund managers for at least three reasons.  First, even if loans from funds to managers are imprudent or prohibited in most circumstances, there may be some circumstances in which such loans may be permissible; and in a still-tight credit environment for most hedge funds and managers, it is important to be aware of the risks and benefits of all credit options.  Second, it is more important to understand why such loans may be ill-advised than merely to understand that such loans may be ill-advised, in particular because the explanation touches on many other aspects of the hedge fund-manager relationship (including fiduciary duty, principal trading and others).  Third, a wide range of transactions, some of them nonintuitive, may constitute loans from a hedge fund to a manager.  For example, if an affiliate of the manager lends securities to the fund and that loan is secured by cash, does the “loan” of securities from the affiliate to the fund constitute a “loan” of cash from the fund to the manager?  As discussed more fully below, the SEC’s standard document request letter for investment adviser examinations asks for documentation of loans from funds to advisers, and registered hedge fund managers will be subject to such examinations.  Therefore, it is important for hedge fund managers to appreciate the full range transactions that may constitute loans for examination purposes.  The goal of this article is to provide a fuller answer to that initial question – can there be circumstances in which it makes business and legal sense for a hedge fund manager to cause one of its managed hedge funds to lend money or other assets to the manager?  To do so, this article begins by enumerating examples of circumstances in which a hedge fund may make or be construed to have made a loan to its manager.  As indicated, some of those circumstances may be indirect, roundabout or non-obvious, and our point is not to provide an exhaustive list, but rather to suggest that many fact patterns that do not look like loans may be deemed (by the SEC or investors) to be loans.  The article then goes on to address the chief legal concerns in connection with loans from funds to advisers, including concerns relating to fiduciary duty, SEC examinations, ERISA, principal trading, advisory boards, commodity pool operators, disclosure and manager defaults.  The article includes concrete suggestions for structuring loans from hedge funds to managers in a way that may, in appropriate circumstances, pass muster with regulators and investors.

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  • From Vol. 2 No.47 (Nov. 25, 2009)

    New CFTC Rules Significantly Amend Reporting Requirements Applicable to Commodities-Focused Hedge Fund Managers

    On November 9, 2009, the Commodity Futures Trading Commission (CFTC) adopted several amendments to its regulations applicable to commodity pool operators (CPOs).  These Final Rules specify detailed information that must be included in periodic account statements and annual reports for commodity pools with more than one series or class of ownership interest; clarify that periodic account statements must disclose either the net asset value (NAV) per outstanding participation unit in the pool, or the total value of a participant’s interest in the pool; extend the time period for filing and distributing annual reports of commodity pools that invest in other funds; codify existing CFTC staff interpretations regarding proper accounting and financial statement presentation of certain income and expense items in financial reports; streamline annual reporting requirements for pools ceasing operation; establish conditions for use of International Financial Reporting Standards in lieu of U.S. Generally Accepted Accounting Principles and clarify and update several other requirements for periodic and annual reports to be prepared and distributed by CPOs.  The Final Rules become effective on December 9, 2009 and apply to commodity pool annual reports for fiscal years ending December 31, 2009 or later.  The amended rules will have a significant effect on the regulatory environment in which commodities-focused hedge fund managers operate.  Accordingly, this article offers a detailed explanation of the amendments and the resulting new reporting obligations applicable to CPOs.

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  • From Vol. 2 No.33 (Aug. 19, 2009)

    Third Circuit Holds that a Commodity “Feeder Fund” Must Register as a Commodity Pool Operator, Even Though the Feeder Fund Itself Does Not Trade in Commodities

    On July 13, 2009, the U.S. Court of Appeals for the Third Circuit affirmed a district court decision holding that Equity Financial Group – a “feeder fund” that invested in underlying funds that traded commodities, but that did not itself trade commodities – along with its president and sole shareholder and lawyer violated the Commodity Exchange Act (CEA) by failing to register as a commodity pool operator (CPO) and engaging in other fraudulent conduct.  The case, which appears to be one of first impression, confirms a view long held by the Commodity Futures Trading Commission (CFTC): that investors in commodity markets are exposed to the same risk whether they invest directly or indirectly, and thus direct and indirect investors are entitled to the same degree of regulatory protection.  See, e.g., “Michigan Couple Ordered to Pay More Than $3.1 Million for ‘Private Hedge Fund’ Fraud,” The Hedge Fund Law Report, Vol. 1, No. 9 (Apr. 29, 2008).  For hedge fund managers, the decision’s impact may be mitigated by various exceptions from CPO registration that may be available to them; those exceptions are discussed more fully below.  However, hedge funds that are required to register and elect not to take advantage of an exception or are not eligible for an exception are well advised to review the obligations that registration as a CPO entails.  These obligations include, among others, disclosure, record keeping and operating requirements.  See “Should Hedge Funds Register as Commodity Pool Operators?,” The Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009).  This article details the factual background and legal analysis in the Equity Financial Group case; discusses exclusions and exemptions from CPO registration that generally are available to hedge fund managers; addresses whether managed accounts are a viable means of structuring around the holding in the Equity Financial Group case; and highlights various consequences of CPO registration.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    Should Hedge Funds Register as Commodity Pool Operators?

    A common mistaken belief among many is that hedge funds are unregistered and unregulated investment vehicles.  While certain exemptions exist under the Investment Company Act of 1940 for registration, a hedge fund that trades in commodity options and futures contracts may be required to register as a commodity pool operator (CPO).  In a guest article, Ernest Edward Badway and Amit Shah, Partner and Associate, respectively, at Fox Rothschild LLP, discuss the questions that a hedge fund should consider in evaluating whether to register as a CPO, including what a commodity pool is, who must register as a CPO, registration exemptions, registration requirements, compliance requirements and more.

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  • From Vol. 1 No.24 (Nov. 12, 2008)

    CFTC Approves New National Futures Association Rules Mandating Forex-Specific Risk Disclosure Statement, Periodic Account Statements and Annual Reports

    The Commodity Futures Trading Commission has approved new National Futures Association Compliance Rules 2-41 and 2-42, effective November 30, 2008. The new rules change the disclosure and reporting regimes for hedge funds and others that trade foreign exchange – we explain how.

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