updated overview of sec & cftc registration for hedge funds

Updated Overview of SEC & CFTC Registration for Hedge Funds

Table of Contents

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To the reader: This document is designed to provide a high-level overview of some of the key implications

of registration for hedge fund managers.

All information provided herein is not for discussion purposes only, and is not intended to be nor should it

be construed or used as investment, tax or legal advice. All recipients should consult with their legal counsel,

tax, financial and other advisors with respect to any information provided herein.

Given the continuously evolving nature of the new regulations, hedge fund managers should be following

the situation closely.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Registration Implications Chart . . . . . . . . . . . . . . . . . . . . . . . . 3

Overview of SEC Registration . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Filings – Form ADV Overview . . . . . . . . . . . . . . . . . . . . . . 9

Filings – Form PF Overview . . . . . . . . . . . . . . . . . . . . . . . . 10

Overview of CFTC Registration . . . . . . . . . . . . . . . . . . . . . . . 12

CFTC Registration Calculations Chart . . . . . . . . . . . . 13

Filings – Form CPO-PQR . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

UpdATEd OvERviEw OF SEC & CFTC REGiSTRATiOn FOR HEdGE FUndS

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introduction

BAnk OF AmERiCA mERRill lynCH HEdGE FUnd COnSUlTinG

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)

has driven sweeping changes to the U.S. financial services industry. In particular,

a large number of hedge fund managers who formerly were not required to be

SEC and/or CFTC registered may now be subject to registration.

This document is intended to provide an overview

of some of these requirements and some practical

suggestions as to how they may be met. Given

the complexity of the changes and requirements

all managers should be consulting with their legal

counsel and developing a comprehensive program

tailored for their business.

Regarding SEC registration, Dodd-Frank identified

a number of very specific requirements relating

to AUM and exposure to U.S. investments and

investors, which determine the need for a non-

U.S. investment manager to seek SEC registration.

This process may be complex and time consuming.

Additionally, being an SEC registered firm brings

with it a number of regulatory and filing

requirements to be met by the manager on

a recurring basis.

Furthermore, the CFTC rescinded Rule 4.13(a)(4)

under the Commodity Exchange Act. Hedge fund

managers traditionally used Rule 4.13(a)(4) to

claim an exemption from CFTC registration as a

commodity pool operator (CPO). As of December 31,

2012, managers must rely upon another rule to

remain exempt from CFTC registration. The “de

minimis” exemption in Rule 4.13(a)(3) is the most

common such exemption pertinent to hedge funds.

Fortunately for hedge fund managers, many of the

new requirements are already being demanded by

investors so that much of the legwork required for

SEC and/or CFTC registration may be contained in

due diligence requests. Given that the information is highly duplicative, managers should look to complete both sets of documents with the same resources to the greatest extent possible.

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introduction


High-Level SEC and CFTC Registration Implications

As the SEC and CFTC have not yet built consistency around processes and documentation, many implications of

SEC and CFTC registration are different. Furthermore, while much of the ongoing regulatory obligations remain

similar, the initial registration process varies greatly due to different product reporting requirements.

The chart below highlights some of the processes and implications around registration.1

Registration Implications Examples

SEC Registered as Inv. Adviser

CFTC Registered as a CPO2

Registration Process

Requisite Membership Not Required NFA

Electronic Filing IARD NFA EasyFile

Proficiency Requirements Not Required Series 3 for associated persons Series 3 and 30 for branch managers

Fund/Pool Disclosure Document Not Required Generally Required

Re-certification Not Required Not Required (note 4.13(a)(3) exempt pools must annually re-affirm exemption)

Fund/Pool Obligations

Performance Disclosure Not Required Required (CFTC Rule 4.25)

Designation of a CCO Required (Advisers Act Rule 206(4)-7)

Not Required

Audited Financial Statements

Annually Required(Advisers Act Rule 206(4)-2)

Annually Required (CFTC Rule 4.22)

Record Retention 5 years with at least 2 years of accessibility(Advisers Act Rule 204-2)

5 years with at least 2 years of accessibility(NFA Compliance Rule 2-9)

Business Continuity and Disaster Recovery

Required(Advisers Act Rule 206(4)-7)

Required(NFA Compliance Rule 2-38)

Code of Ethics/ Personal Account Trading

Required(Advisers Act Rule 204A-1)

Required(NFA Compliance Rule 2-9)

Regulatory Reporting

Reporting Requirements Form ADV and Form PF for non-exempt advisers CPO-PQR and Annual Registration Update

Submission Deadline 90 days after fiscal year end for Form ADV60/120 days after fiscal quarter/year end depending on RAUM for Form PF

60/90 days after calendar quarter/year end depending on aggregated (gross) pool AUM for Form CPO-PQR

1 Processes, obligations, or reporting examples required by both the SEC and CFTC does not imply that they possess the same requirements. Please consult legal counsel for specific rules.

2 Note that some of the below requirements are inapplicable to a registered CPO regarding pools that it operates pursuant to exemptions provided by CFTC Rules 4.13(a)(3) and 4.7.

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The initial section will focus on SEC registration and key components on understanding the process, maintaining

the requirements, and recognizing other implications, such as Form PF.

An SEC-registered investment adviser is subject to the Investment Advisers Act of 1940 (the “Advisers Act”),

which has been amended to include the applicable provisions from Dodd-Frank. Key steps and considerations

include, but are not limited to:

Step 1: Understanding if Your Investment Management Entity Is Required to Register

With the elimination of the Private Adviser

Exemption (less than 15 clients during the past

12 months and did not hold themselves out to the

general public), hedge fund managers with the

required amount of assets under management as

described in Step 3 below may need to register as

investment advisers. Certain entities are exempt

from full registration. Key exemptions include:

• Foreign Private Adviser

• Private Fund Adviser with <$150M in AUM –

Note that the AUM calculation may be different

than expected by many fund managers

• Family Offices

• Venture Capital Advisers

Step 2: Calculating Your “RAUM”

Properly calculating AUM for regulatory purposes

may be quite a bit different than many managers

expect. A new measure of AUM has been introduced:

Regulatory AUM or “RAUM.” RAUM is calculated on

a gross basis so leverage, repos, and short proceeds

must be included.

Examples of included assets that may be missed are:

• All assets – whether compensation is received

or not

• Previously optional assets such as assets of

non-U.S. clients

• Short sales

• Leverage

• Un-called capital commitments

• Repo-ed assets

• Side pockets

• All accounts that the adviser has continuous

and regular supervisory or management services

(note that sub-advisers only have to report their

portion of a fund)

Step 3: Determining Your Filing Level

For managers with at least $150mm in regulatory

AUM attributable to private funds (e.g., 3(c)(1) or

3(c)(7)) an annual filing is required on Form PF from

all private fund advisers within 120daysafterfiscalyear-end.

A quarterly filing on Form PF is required from

Large Hedge Fund Advisers ($1.5bn in RAUM) within

60 days after the end of the relevant fiscal quarter.

SEC Registration


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SEC Registration


For managers who advise both Private Funds and

Separately Managed Accounts:

• Regulatory AUM > $110mm: must register with

the SEC

• Regulatory AUM $100–$110mm: may register

with the SEC (and probably will want to since

approaching the minimum threshold)

• Regulatory AUM $25mm–$100mm: defers to

state registration requirements

– In NY – there is no state examination program,

so NY-based managers must register with

the SEC

– In CT and most other states – register with

the state

• Regulatory AUM <$25mm: SEC registration not

permitted unless located in WY; state registration

may be required.

Step 4: Registration Process

Registration should be thought of as not just a

one-time activity, but a true transformation of how

the business is run. On an ongoing basis, registered

investment advisers are required to make certain

reporting filings, capture and document conflicts,

have a compliance program, monitor personal

trading, manage and test a disaster recovery plan.

Here is a brief summary of some of the key areas

that registration impacts. We will explore some of

the more complex areas in further detail later in

this document:

FilingsA registered investment adviser will be required to

file a number of different forms, either as part of a

one-time process or on a regular basis, depending

on their size. Filings are explained in detail later in

this paper:

• Form ADV: A two-part form that comprises public

information about the funds and investment

adviser, and the registration application itself.

• Form PF: A brand-new filing that is periodically

required by registered investment advisers (exact

frequency dependent on RAUM). This provides

significant information around the exposures of

the fund to U.S. institutions, risk data and other

exposure information.

ComplianceA registered investment adviser is required to

introduce and maintain a formal and process-driven

compliance program. This is required to be reviewed

at least annually by a designated Chief Compliance

Officer (CCO), and should be designed to detect and

prevent violations of the Advisers Act and all other

applicable federal and state laws and regulations.

Later in this guide, the detailed aspects of a

compliance program are described, but some key

aspects of a compliance program include:

• Written policies and procedures – with

annual review

• Code of ethics

• Identification of existing and potential conflicts

of interest – and a mechanism to identify and

manage on an ongoing basis

• A “competent” and “supervised” CCO in place

to manage the overall process

SEC Registration

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Examination RightsThe SEC has the authority to request and examine a

registered investment manager’s books and records.

In fact, the SEC has the authority to conduct periodic

inspections of all records of the private fund that

are maintained by a registered investment adviser.

In addition the books and records of private funds

advised by the investment adviser are also considered

to be books and records of the investment adviser.

Performance Fees, Investment Advisory Contracts and Fund InvestorsPerformance fees are subject to Rule 205-3 of the

Advisers Act. The charging of performance fees

under typical hedge fund practices (e.g., “2&20”)

cannot be charged to any investors in the fund that

are not “qualified clients.”

Dodd-Frank not only changed the AUM standards that

define the overall level of registration requirements,

but also changed the definition of both “accredited

investor” as well as “qualified client.” Note that pre-

existing investments were grandfathered.

• The “accredited investor” definition has

been updated to exclude the value of the

investors primary residence from the $1mm

net worth requirement.

• The “qualified client” definition has been updated

to $1mm under management by the investment

adviser or that the investment adviser “reasonably

believes” that the client has a net worth of

≥$2mm (excluding primary residence) at the

time the contract is signed (note also that

qualified purchasers are also qualified clients).

• The requirements are now indexed every five

years to inflation.

In addition to changes in the definitions of

accredited investor and qualified client, regulators

have signaled that additional AML and KYC

requirements are on the horizon.

Investment managers should be closely looking at their investor bases as well as preparing AML and KYC processes and procedures.

Safeguarding Customer AssetsThe Investment Adviser Act is modified by adding

Section 223, which requires registered investment

advisers “to take such steps to safeguard client

assets over which the adviser has custody”

“including, without limitation, verification of

such assets by an independent public accountant, as the [SEC] may, by rule, prescribe.”

Representative Registration Process TimelineThe registration process is highly dependent upon

the size of the firm, complexity of the trading

strategy/products, current level of preparedness

and level of internal focus.

Key steps to get registered (and representative

timeframes) include:

• Development and review of the Form ADV:

1–4 weeks

• Gap analysis of existing compliance program:

1–2 weeks

• Address key gaps in compliance program:

4–10 weeks

• Training on new processes, controls, etc.:

1–2 weeks

• SEC review and approval of Registration:

4–7 weeks


SEC Registration

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Ways to AccelerateA large number of professional service firms,

including the public accounting/consulting firms and

specialized hedge fund compliance boutiques, have

emerged to serve the growing compliance needs of

hedge funds. Typically these firms can provide:

• Templates of various manuals

• “Best practices” process flows

• Testing of compliance program

• Software for tracking trading disclosures and

filings calendar

Advisers must ensure however that these various templates are appropriately customized to fit the specifics of their businesses.

Step 5: Ongoing Compliance Obligations

Guidelines around the establishment of a robust

compliance program are specified in the Advisers

Act and are defined within Rule 206(4)-7.

These requirements break down into three

core elements:

• Appointment of a Chief Compliance Officer (CCO) – This individual is responsible

for designing, controlling, administering and

monitoring the procedures that make up the

compliance program.

• Compliance Program – Design and adoption

of written policies and procedures that are

reasonably designed to prevent violations of

the Advisers Act.

• Annual Review – A review of the written

policies and procedures should take place on an

annual basis. You should consider any compliance

matters that arose during the year, changes in

business activities undertaken, and any changes

in regulation that may require updates to

the procedures.

Appointment of a Chief Compliance Officer“An Adviser’s Chief Compliance Officer (‘CCO’) should

be competent and knowledgeable regarding the

[Advisers Act] and should be empowered with full

responsibility and authority to develop and enforce

appropriate policies and procedures for the firm.”3

CCOs of registered investment advisers are generally

not required to maintain any securities licenses with

FINRA or the SEC.

A CCO appointed in accordance with Rule 206(4)-7

may not necessarily be subject to SEC sanction for

a failure in supervisory duty provided that:

• Procedures are designed to prevent and detect

Advisers Act violations, and that there is a system

in place to implement them, and

• The CCO had reasonably discharged his

supervisory responsibility in accordance with

said procedures.

Compliance ProgramAdvisers are required to develop and implement

written policies and procedures designed to prevent

and detect violations of federal securities laws.

The SEC expects that procedures are formulated

such that risks identified through a review of the

individual firm’s operations are properly addressed.

SEC Registration

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Compliance procedures are expected to address

the following:

• Code of ethics (Rule 204A-1)

• portfolio management processes including

the allocation of investment opportunities

among clients and consisting of portfolios

with investment objectives.

• Accuracy of investor disclosures.

• proprietary trading and personal account trading

by all employees.

• Safeguarding of client assets – from conversion

or inappropriate use.

• Accurate creation of required records

including the maintenance and storage that

prevents unauthorized alteration or destruction

of information.

• privacy protection safeguards – specifically

for protecting client information.

• Trading practices – how best execution

obligations and soft dollar arrangements

are satisfied.

• marketing – advisory services including the

use of solicitors.

• valuations and fee calculations – methodology,

data sources, etc.

• Business continuity/disaster recovery plans –

procedures and testing protocol.

it is important to note that even if an adviser is

not involved in a violation of the Advisers Act, if

their compliance policies are deemed to be not

“reasonably designed” by the SEC, they can still

be charged with violating the Advisers Act.

KeyAreastoNoteWithintheComplianceFramework

1.CodeofEthics/PersonalAccountTradingAn important part of the compliance program is the

implementation of a code of ethics which sets the

standards of conduct expected of your “supervised

persons,” as well as placing structure around

personal account trading.

Again, the SEC does not specify the exact content of

the code of ethics – it should reflect your fiduciary

obligations to your clients and the obligations of the

people you supervise. There are, however, several

requirements that must be included in a code of

ethics:

• “Access persons,” i.e., those individuals with

access to non-public information relating to

client activity or holdings, or who make securities

recommendations to clients, must report all

personal securities transactions to the CCO or

other designated person at least quarterly.

• “Access persons” must report their personal

account holdings upon being appointed, and on

a yearly basis after that. The code must also

require such persons to obtain approval prior to

investment in ipOs, private placements or limited

offerings.

• The CCO or other designated person must review

personal transaction reports.

• violations of the code of ethics should be

reported to the CCO or other designated

person promptly, with a record of such violations

being maintained.


3 Final Rule: Compliance Programs of Investment Companies and Investment Adviser, Investment Adviser Act Release No. 2,204, Investment Company Act Release No. 26,299, 68 Fed. Reg. 74,714, 74,720 n.73 (Dec. 24,2003).

SEC Registration


• provisions requiring the adviser’s supervised

persons to comply with applicable federal

securities laws.

• provisions requiring the adviser to provide

supervised persons with a copy of the code of

ethics and certain proof of their receipt of it and

any amendments to it.

The code or separate policies should also establish,

maintain and enforce written policies and procedures

that are reasonably designed to prevent the misuse

of material non-public information, and include

references to documents that employees must fill

in to fully disclose any outside business interests.

Fundamentally, these processes should mirror those

of an institutional-sized asset manager or bank.

while the scale on which they are implemented and

the resources available to manage them may be

smaller, the complexities of the controls that need to

be put in place are very much the same.

2.RecordRetentionandBooks&RecordsAs a part of ongoing compliance the SEC mandates

that certain records are maintained for all registered

investment advisers (under “the Books and Records

Rule” – Rule 204-2). The rule is quite specific in

terms of what records need to be maintained, and

these include, but are not limited to:

• Advisory business financial and

accounting records;

• Records that pertain to providing investment

advice and transactions in client accounts;

• Records that document your authority to

conduct business in client accounts;

• Advertising and performance records;

• Records related to the code of ethics rule;

• Records regarding the maintenance delivery

of the written disclosure documents (Form Adv

part 2);

• proxy voting records;

• Records related to political contributions

by the adviser’s employees; and

• policies and procedures adopted and

implemented as part of an adviser’s

compliance program.

Generally, these records should be maintained for

five years from the end of the fiscal year in which

they were last amended (although there may be

requirements to keep certain documents for longer

periods). These records must be retained in your

place of business for at least the first 2 years.

Retention of records should not only apply to

documents relating to the adviser and the funds

under management, it is also important that any

methods of electronic communication used within

the organization, such as Bloomberg messaging,

desktop communicator tools and email, are

effectively recorded and are also searchable in the

event of the SEC requiring access to information

contained within them.

3.Pre-andPost-TradeCompliancewhile the levels to which specific pre- and post-

trade compliance checks are employed will be driven

predominantly by the strategy of the manager,

certain limits are placed upon trading activity as a

result of regulatory restrictions, such as the need for

SEC Registration

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filing when a certain ownership threshold in

a given issuer is reached. The use of a pre- and/or

post-trade compliance system or process can help

mitigate risks in this area and flag when such limits

are breached as a direct result of either trading

activity, or market moves. Under the Advisers Act, an

adviser must be able to demonstrate robust controls

around trading, including meeting its best execution

obligations and how it uses soft dollars.

in addition, dodd-Frank authorizes the SEC to

require all managers of private funds, regardless of

registration status, to retain records that could be

used to help assess the adviser’s contribution to

systemic risk.

4.ValuationsAdvisers must be able to demonstrate adherence

to a formalized and documented valuation policy,

which is drafted appropriately to the assets being

traded. The policy should list the different sources

of valuations being used, have the ability to track

abnormal price movements that require further

investigation and demonstrate the rules they have

in place to enforce their pricing hierarchy.

5.PoliticalContributionsAn adviser must have procedures to monitor and in

some circumstances limit the political contributions

of certain employees and maintain records related

to such contributions. Certain political contributions

can impact an adviser’s ability to market to public

pension plans.

6.MarketingProceduresThe Advisers Act prohibits certain types of

advertisements and places limitations on

performance advertising. An adviser should adopt

procedures to address these requirements.

7.ProxyVotingProceduresif the adviser has authority to vote proxies for a

client, it must adopt policies and procedures to

address how it votes proxies in the best interests

of its clients including how the adviser addresses

material conflicts of interest. The adviser must also

describe in its Form Adv part 2A its proxy voting

procedures and how clients may obtain information

about how their proxies were voted.

8.DisasterRecoveryPlanningAdvisers should have a detailed plan in place

covering business disruption and/or failure scenarios

identified through analysis of their operational

structure. The SEC advises that the process should

be both clearly defined and tested on a regular basis.

This will also include evidence of the presence of

remote working facilities.

9.TheAnnualReviewThe written policies and procedures put in place

by the adviser should be formally reviewed at least

annually (although it is highly recommended this

review takes place more frequently). The review

should take into account any compliance matters,

changes in business activities or regulatory

requirements occurring during the preceding

12 months, and identify steps in which these

occurrences have been (or will be) resolved.


SEC Registration


Filings – Form Adv

Form Adv description and initial Registration

SEC Registration of an investment adviser is effectuated by the submission of the Form Adv, which is separated

into two parts (parts 1 and 2). Once registered, your firm is now subject to disclosure obligations and the

Advisers Act requirements including, but not limited to, requirements relating to operations, controls, etc.

Typically,theFormADVwouldbecompletedwiththeassistanceofaprofessionaladviser,suchasacomplianceconsultantorlawyer.

• Part1: Registration with the SEC, and state

securities authorities. AlladvisersregisteringwiththeSECoranyofthestatesecuritiesauthoritiesmustcomplete:

– 1A: manager information such as ownership

and executive officers, among others

– publicly available at www.adviserinfo.sec.gov

• Part2: “Brochures” containing narrative, “plain

English” information about the advisory firm.

– 2A: “Brochure” – including, but not limited to,

information about the advisory firm such as:

– Fee structure

– Services offered

– disciplinary information

– Conflicts of interest

– 2A: PubliclyavailablethroughtheIARDsystem

– 2B: “Brochure Supplement” – including

information about each “supervised person”

who provides advice to clients or has

discretionary authority over client assets

These forms (and instructions to assist with their

completion) are available at: http://www.sec.gov/

about/forms/formadv.pdf

parts 1 and 2A must be filed with the SEC – which

should be submitted at least 45 days prior to intended

registration date for SEC review and approval.

Specifically:

• Section 2A (“Brochures”) are required to be

uploaded to the Form Adv part 1 submission

and these forms will be publicly accessible

through the SEC iApd (“investment Adviser public

disclosure”) system (http://www.adviserinfo.sec.

gov). within 90 days of a registered investment

adviser’s fiscal year end, the adviser is required to

file an annual updated Form Adv.

• Section 2B (“Brochure Supplements”) must

be delivered to clients and maintained in the

manager’s files, but does not have to be filed

with the SEC.

FormADVFilingTimingInitialFiling: must be effective as of the date the

filing thresholds are reached.

PeriodicUpdates• Annual Amendments must be completed 90 days

after the relevant fiscal year-end.

• Other-than-Annual Amendments are required in

the event of any material change, and if certain

information becomes inaccurate, you must

“promptly” amend your Adv filings.

http://www.adviserinfo.sec.gov

http://www.sec.gov/about/forms/formadv.pdf

http://www.sec.gov/about/forms/formadv.pdf

SEC Registration

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Filings – Form pF

To see our overview of the Form PF service provider landscape, please download our white paper available on our Prime

Brokerage Business Consulting Services website (http://corp.bankofamerica.com/business/ci/hedge-fund-consulting).

Form pF represents a key new compliance requirement for hedge fund managers that are registered with the SEC,

and that have private fund clients with at least $150mm in RAUm. while much of the information required for the

form can often be found with your fund’s Fund Administrator, it is critical that you review the form and prepare

a detailed action plan to file. For complex funds with multiple fund administrators, a variety of vendors have

emerged to help consolidate information.

The SEC believes Form pF provides two key benefits:

• information collected through Form pF is

expected to facilitate FSOC’s (Financial Stability

Oversight Council) monitoring of the systemic

risks that private funds may pose and to assist

FSOC in carrying out its other duties under

dodd-Frank with respect to hedge funds and

other nonbank financial companies.

• information may enhance the ability of the SEC

to evaluate and form regulatory policies and

improve the efficiency and effectiveness of

the SEC’s monitoring of markets for investor

protection and market vitality.

The details on this form will not be available to the

public; however, we believe that whether through

information sharing within the government or by

mischance, managers should be prepared for this

information to be made public at any time.

ReportContentForm pF comprises 4 main sections:

• Section 1: Basic information to be completed by all

registered investment advisers that have private

fund clients with at least $150mm in RAUm.

– 1a: General information about the adviser and

about the private funds managed by the adviser

(AUm, asset distribution to private funds)

– 1b: information about each private fund

managed by the adviser (gross/net assets,

borrowings and types of creditors, information

about investor concentration, monthly and

quarterly performance information)

– 1c: information about each hedge fund

managed by the adviser (% of assets managed

systematically, significant counterparty

exposures, clearing practices)

• Section 2: Applies only to larger registered

investment advisers.

– 2a: information at an aggregate level for all

hedge funds managed by the adviser (e.g.,

exposure/market value of assets held, turnover

rate of portfolio, geographical breakdown).

– 2b: information about each qualifying hedge

fund (i.e., a hedge fund with >$500m nAv)

managed by the adviser (exposure/market

value of assets held, portfolio liquidity,

position concentration, collateral practices,

details of relationships with significant

counterparties, risk metrics, investor

information, financing information).


http://corp.bankofamerica.com/business/ci/hedge-fund-consulting

SEC Registration


• Section 3: information about each liquidity fund

managed by a larger registered investment

adviser with at least 1b AUm combined from

liquidity funds and registered money market

funds (e.g., pricing method for nAv, information

relating to each liquidity fund’s portfolio, asset

class exposure, secured or unsecured borrowing

breakdown, investor concentration, gating and

redemption policies).

• Section 4: information about each private equity

fund managed by a larger registered investment

adviser with at least $2b in AUm from private

equity funds (borrowings and guarantees,

leverage/debt-to-equity ratio of controlled

portfolio companies, bridge financing details, and

investment breakdown).

information reported on Form pF will not be

available to the public, but Form pF information may

be used by the SEC in an enforcement action or by

FSOC as a basis for ordering further investigation by

the Office of Financial Research.

ThresholdsforReportingForm pF is filed periodically, the period being

determined by the size of the management company

submitting the report. The size of the manager also

directly determines the version of the report to be

submitted, with a significantly larger report being

required for larger managers.

it should be noted that the RAUm thresholds

referred to below should be measured monthly in

the case of hedge funds and liquidity funds, and as

of the last day of the prior fiscal year in the case of

private equity funds.

Manager’s Regulatory AUM Filing Frequency Initial Filing Due Date Form Size/Contents

$150mm–$1.5bn, or $1bn in liquidity/ money market funds

Annually(no later than 120 days after fiscal year end)

Annual filing from all Private Fund advisers within 120 days after fiscal year end/60 days after fiscal quarter end for advisers with more than $1.5bn in RAUM

“Short form” – Only including Section 1.

$1.5bn–$5bn Quarterly


“Long Form” – Sections 1-4, with Sections 2-4 being completed based on the types of assets held within the fund as described above.

$5bn + Quarterly


“Long Form” – Sections 1-4, with Sections 2-4 being completed based on the types of assets held within the fund as described above.

| 14 | BAnk OF AmERiCA mERRill lynCH HEdGE FUnd COnSUlTinG

Because of amendments to the Commodity Exchange Act by dodd-Frank (and subsequent rulemakings by the

CFTC), more managers are being required to register as commodity pool operators (CpOs).

The following steps focus on understanding the remaining exemptions, preparing for registration, and maintaining

ongoing obligations once registered.

Step 1: Understand if your investment management Entity is Required to Register

Following the rescission of Rule 4.13(a)(4), hedge

fund managers primarily rely on Rule 4.13(a)(3),

the “de minimis exemption,” to seek exemption

from registration as a CpO. while there are other

exemptions, the purpose of this section will

primarily focus on the “de minimis” rule and

registration as a CpO.

The CFTC broadly defines the term “commodity

pool” as any pooled investment vehicle (i.e., a fund)

that trades even a single commodity interest.

To qualify for exemption via Rule 4.13(a)(3), a

commodity pool must meet one of the two

de minimis tests:

• Aggregate initial margin and premiums required

to establish the pool’s commodity interest

positions do not exceed 5% of the pool’s

liquidation value; or

• Aggregate net notional value of the pool’s

commodity interest positions does not exceed

100% of the pool’s liquidation value (note

that notional value refers to the value of the

underlying assets that are the subject of the

swap, futures contract, option, etc.).

Commodity interests under the “de minimis”

calculation include (but are not limited to):

a.Futures contracts and options on futures contracts;

b.Certain foreign exchange (“FX”) products; and

c.CFTC regulated swaps (as more fully

described below).

The SEC and CFTC have jointly released rules that

determine which agency regulates certain types

of swaps. most swaps fall under CFTC jurisdiction

and are now considered “commodity interests” for

purposes of calculating whether a pool meets either

de minimis test above. markets or locations of the

swap instrument or counterparty do not affect the

de minimis tests.

which regulatory body regulates which product is

generally seen as the following:

• CFTC has regulatory authority overswaps and

broad-based security indices (index that has ten

or more component securities)

• SEC has regulatory authority over security-basedswaps or narrow-based security indices (index

that has nine or fewer component securities and

meet certain weighting and other requirements)

• The CFTC and SEC jointly regulate mixedswaps, which have both “swap” and “security-based

swap” components

CFTC Registration


CFTC Registration

CFTC Registration Calculations

ProductsCounts Towards CFTC Registration Calculation

Swaps

Security-based swaps No

Swaps on Commodities or Broad-based Indices (10+ Components)Yes

Mixed swaps

General Product Examples

Credit Default Swaps (CDS)

Single names

NoSingle Loan

Narrow-based index (9 or fewer securities)

Two or More Loans

YesBroad-based index

Broad-based CDS w/ physical settlement

FX

FX ForwardsCFTC Regulated Only - Excluded from Registration Calculation

FX Swaps

Forward Rate Agreements

YesOTC Foreign Currency Options

Non-deliverable Forwards in FX

Currency and Cross-Currency Swaps

Retail Foreign Currency Options

No

Total Return Swaps (TRS)

Single Currency

Single Loan

Narrow-based index (9 or fewer securities)

Quanto equity swaps

Broad-based security index TRS on two or more loans

YesTRS w/ embedded interest rate optionality or non-securities component (price of oil)

Security-based Swap Agreements

Swaps on broad-based security index (10 or more components)

Any swap with an “Optional” component Case-by-case analysis required

Swaps on exempted securities (i.e., U.S. Treasury bonds but excluding municipal securities)Yes

Title VII Instruments

Title VII Instruments on futures

Title VII Instruments on single security futures No

| 16 |

in addition to the de minimis tests, Rule 4.13(a)(3)

also requires that:

• The manager must not market the pool to the

public as a vehicle for trading commodity futures

or commodity options;

• The pool may only have investors that are

accredited investors, “knowledgeable employees”

or “qualified eligible persons” (QEp).

managers that can keep commodity interests

comfortably below one of the thresholds are best

positioned to use this exemption. if the pool is

consistently close to, or above, the threshold, its

manager should consider registration as a CpO. if

the manager puts on a trade that goes above the

threshold, the fund manager must put on a risk-

reducing trade that will bring it below to qualify for the

de minimis exemption until registration is complete.

please note that the manager must register as a CpO

if it operates even one pool that does not qualify for

an exemption. However, the manager may still claim

an exemption on behalf of other pools and operate

those pools as though it were not registered.

Step 2: Registration process

if the pool does not pass the “de minimis” exemption

under Rule 4.13(a)(3) (or any other exemption), then

the manager must register as a CpO with the CFTC.

There are several components, which involve, among

other things, documentation, proficiency testing,

and disclosures.

Registration is done through the nFA (which can

take up to 8 to 12 weeks for application processing

once all requirements are submitted and all testing

completed) and involves the following:

• EstablishOnlineRegistrationAccount. in order to begin the registration process, a

manager must complete an enrollment form online

(available from the following website: http://www.

nfa.futures.org/nFA-registration/begin-enrollment.

HTml). Following nFA approval, the manager may

log on and begin registration.

• RegisteringaManagerasaCPO. – File Form 7-R for the adviser (information

regarding the organization and any disciplinary

history within the firm).

– Pay Application Fee. The manager will be required

to pay an application fee of $200 and nFA

membership dues of $750.

• RegisterIndividualsasPrincipalsandasAssociatedPersonsoftheCPO. – File a Form 8-R for Each Individual Principal/

Associated Person (AP). Generally, any individual

person who solicits orders, customers, or

customer funds on behalf of the CpO, or any

person who supervises such persons must

register as an Ap. However, registration as an Ap

is not required for:

• Certain FinRA registrants (if only solicits pool

participants)

• Supervisory persons of Registrants Engaged

in de minimis Commodity interest Activity:

if a firm trades primarily in securities and

derives no more than 10% of its revenue from

commodity interests, certain persons can be

exempt from registration.

• individuals who conduct Ap activities outside

of the U.S. and do not act as an Ap towards

any U.S. customers

– Submit Fingerprint Cards. Each individual principal

and Ap must submit fingerprint cards.

– Proficiency Testing. All Aps of registered CpOs

must pass the Series 3 Exam, unless exempt

from the proficiency requirement or waived by

the nFA.


CTFC Registration

http://www.nfa.futures.org/NFA-registration/begin-enrollment.HTML




CTFC Registration

• Certain FinRA general securities

representatives are exempt from the

proficiency requirement.

• nFA may waive the examination

requirements for Aps of a CpO if the

applicable pool (a) trades primarily in

securities, (b) commits 10% or less of the

pool’s liquidation value to initial margin

deposits for futures transactions and

premiums for options on futures, and (c)

uses futures and options on futures solely

for hedging and risk management purposes,

among other requirements.

• Aps that, on behalf of sponsor pools, solicit

(or supervise persons who solicit) investors

in such pool(s) that either:

– Exclusively trades swaps subject to

the jurisdiction of the CFTC (automatic

waiver); or

– Trades swaps subject to the jurisdiction

of the CFTC and the CpO would qualify

for the “de minimis exemption” from CpO

registration, were it not for the swaps

transaction (the CpO must ask the nFA

for a waiver via a waiver request letter).

Other examination requirements may also be

required depending on the nature of the person’s

activities (e.g., a branch manager will need to pass

the Series 30 examination in addition to the Series 3).

Step 3: Ongoing Compliance Obligations

1.SupervisoryPoliciesandEthicsTrainingEach registrant must diligently supervise and

train its employees and agents. Each registrant

must have detailed supervisory policies and

procedures in the form of a compliance manual.

These policies and procedures should be tailored to

the size and complexity of the manager. in addition,

each registrant must adopt and implement:

• Awrittenprivacypolicy. To be provided to

individual investors on their initial investment

and annually thereafter.

• Awrittenbusinesscontinuityanddisasterrecoveryplan. As adopted in nFA Compliance

Rule 2-38, each registrant must provide an

adequate and flexible business continuity and

disaster recovery plan (plan) tailored to their

individual needs that revolve around the fund

product and business infrastructure. Anyone dually

registered can use this Plan for both regulators as

long as it exceeds minimum standards, such as

establishing backup facilities, periodic copying of

essential documents, developing a communication

plan, minimizing third-party business interruptions,

maintenance of the Plan on an ongoing basis, etc.

• Awrittenethicstrainingpolicy. The manager

must provide regular ethics training to its Aps.

2.FinancialStatements(AccountStatement&AnnualReport)

As stated in CFTC Rule 4.22, a registered CpO

must periodically distribute an Account Statement

to each participant in each non-exempt pool that

it operates, within 30 calendar days after the last

date of the reporting period. The term “periodic”

specifically means that the Account Statement must

be distributed at least monthly if the pool has net

assets greater than $500,000 at the beginning of

the pool’s fiscal year, or otherwise quarterly.

The Account Statement must incorporate GAAp

accounting methods and consist of two forms:

a Statement of Operations and a Statement of

Changes in net Assets.

| 18 |

The registered CpO must distribute an independently

audited Annual Report to each non-exempt pool

participant within 90 days after the earlier of the

pool’s fiscal year-end. The Annual Report must be

filed through the nFA’s EasyFile system as well.

Any extension must be filed with the nFA not later

than 90 calendar days after the date as of which

the Annual Report was to have been distributed.

please refer to the Rule on the Code of Federal

Regulations website for a complete list of what is

necessary to complete the Account Statement and

Annual Report.

3.Recordkeeping/RetentionSimilar to the SEC recordkeeping rule, registered

CpOs must keep and retain certain records for

compliance purposes. Generally, CFTC Rules 4.23

and 1.31 list the records required to be kept and

further specify that all such records are required

to be maintained for five years and be “readily

accessible” during the first two years.

As long as the pool participant covers any

reasonable reproduction and distribution costs, any

requested books and records must be sent by mail

within five business days. if the CpO’s main place of

business is outside of the United States and a CFTC

or nFA representative requests any required records,

the CpO is responsible for providing the information

within 3 days after the request.

The following focus areas are required by Rule 1.31:

• maintaining original trading cards and order

tickets – Recordkeepers must keep the original

trading cards and customer order tickets to be

maintained for the full five-year period.

• Timeliness of responses to production requests –

Both original records and any form of reproduction

should be stored on micrographic or electronic

storage media.

• Retention of a consultant – Similar to the

SEC rules, recordkeepers who stored their

data in electronic storage must enter into

an arrangement with a third-party technical

consultant. Although this becomes an additional

expense, this is a significant safeguard in

protecting and maintaining confidentiality of data.

• production on CFTC-compatible machine-readable

media – The CFTC requires that recordkeepers

using electronic storage be able to provide

requested records in certain, acceptable file types

that are compatible with CFTC machines.

it is important to note that while the CFTC

recognizes the value of maintaining consistency

with the SEC recordkeeping rules, the regulations

are not completely the same. For those who are

dually registered with the SEC and CFTC, it is

suggested to follow a conservative approach by

applying the more rigorous requirements of the

two compliance rules.

4.DisclosureDocumentsAs mandated under CFTC Rule 4.21, a registered

CpO must deliver a “disclosure document” to

a prospective, non-exempt pool participant no

later than when it delivers the pool subscription

agreement. Such disclosure document must first

be filed with the nFA at least 21 calendar days

before such disclosure document’s first use. Further,

all information contained within the disclosure

document must be current as of the date of the

disclosure document (except for performance

information, which may be current as of no more

than three months prior). in addition, the CpO may

only use the disclosure document for nine months

from when it is dated before updating it, among

other requirements.


CTFC Registration


CTFC Registration

Under CFTC Rule 4.24, disclosure documents must

contain specific information as guided by the nFA,

which includes the following:

a) Certain Required legends

b) Risk disclosure Statement

c) Table of Contents

d) General information regarding the main business

office (name, address, telephone number, etc.)

e) identification and business background of certain

persons

f) principal risk factors (any potential risk factors of

participation in the offered pool)

g) investment structure (percentage of pool’s assets

to be traded in commodity interests, securities,

and other types of interests)

h) Fees and expenses

i) Any possible conflicts of interest

j) Related party transactions (description of any

material transactions or arrangements for which

there is no publicly disseminated price between

the pool and any person affiliated with a person

providing services to the pool)

k) litigation (any adjudication on the merits in favor

of the CpO, employee or service provider involved

does not have to be disclosed)

l) personal trading accounts

m) performance disclosures (past performance must

be disclosed as set forth in CFTC Rule 4.25 and

certain nFA rules)

n) principal-protected pools (a pool that is designed

to limit the loss of the initial investment of its

participants)

o) Transferability and redemption (information

on timing, frequency and manner in which a

participant may redeem)

p) liability of pool participants (the extent to

which a participant may be held liable for

pool obligations in excess of the funds for the

purchase of a pool interest)

q) distribution of profits and taxation

r) inception of trading and other information

(minimum aggregate subscriptions that will

be necessary for the pool to trade commodity

interests, minimum and maximum aggregate

subscriptions for the pool, and maximum

period of time the pool will hold funds prior to

commencement of trading commodity interests)

s) Ownership in pool (the pool must disclose certain

ownership or beneficial interests in the pool)

t) Reporting to pool participants (written

statement that the CpO is required to provide

all participants with monthly or quarterly

statements with an annual report audited by an

independent public accountant)

u) Supplemental information

v) Any additional material information (the CpO has

an obligation to disclose all material information

to existing or prospective pool participants even

if the information is not specifically required by

any CFTC or nFA rule).

As required by nFA Compliance Rule 2-35 and

suggested by the nFA disclosure document Guide,

disclosure documents must be written “using

plain English principles.” The text should meet the

following guidelines:

• document should be written in active voice

• Avoid wordiness and long sentences/paragraphs

• Use tables and bullet points where appropriate

• Organize into short sections with clear titles

and subtitles that are consistent with the table

of contents

• Use “everyday language” to be specific and

concrete

• Avoid highly technical terms and include a glossary

to define any technical terms should they be used

• provide responses without repeating information

| 20 | BAnk OF AmERiCA mERRill lynCH HEdGE FUnd COnSUlTinG

Generally, disclosure documents should stay within

30 pages, whereas multi-advisor pools or principal-

protected pools may be slightly longer.

5.CommunicationswiththePublicandPromotionalMaterial

The nFA Compliance Rule 2-29 and CFTC Rule 4.41

cover all forms of communication, solicitation and

advertising with the public by a CpO.

nFA Rule 2-29 prohibits the CpO from providing any

pool participants with misleading, misstated, non-

indicative information. As a result, all promotional

material is required to be reviewed and approved by

a supervisory Ap who was not involved in preparing

the material. The only exception is if the material

was prepared by the only qualified individual who

can review and approve of such material.

6.OtherRequirementsbytheNFAThe nFA requires that registered CpOs file a

quarterly report on nFA Form pQR with the nFA.

The nFA has proposed amendments that would

combine this filing with the CFTC’s CpO-pQR filing

(discussed below) but such amendments have not

yet been adopted. The report must be filed within 45

days after the end of each quarterly reporting period

through the nFA’s EasyFile system.

• Annual Questionnaire (online questionnaire

regarding basic information about the CpO and its

related entities)

• Annual Compliance Review (The nFA provides

a self-examination on its website for the nFA

member to review its compliance procedures. A

written attestation is needed to represent that

the compliance review has been completed.)

• Audits (onsite audits to determine the

maintenance of books and records and to perform

operational due diligence)

• nFA Bylaw 1101 (nFA Bylaw 1101 prohibits

certain nFA members (including registered CpOs)

from conducting commodities-relating business

with most non-nFA members that are required to

be registered with the CFTC as an FCm, iB, CpO,

or CTA)

7.CFTCRule4.7Even if a manager is unable to meet the 4.13(a)(3)

de minimis limits with respect to its pools, the

manager may still be able to obtain regulatory relief

under Rule 4.7 that limits much of the disclosure,

reporting, and recordkeeping requirements required

of registered CpOs.

Registered CpOs may claim this relief for any pool

that it operates if, among other things, the only

investors in the pool are QEps. There are several

ways for an investor to be a QEp, including being a

“qualified purchaser,” a “knowledgeable employee,”

or a non-U.S. person.

Generally, registered CpOs who wish to avail

themselves of Rule 4.7 must:

• File a claim of exemption electronically with

the nFA; and

• include certain CFTC-mandated legends on

the cover of the pool’s offering memoranda.

Although a pool relying on the Rule 4.7 exemption

does not have to comply with certain CFTC rules

(as a non-exempt pool must), pools operating under

Rule 4.7 still must (among other requirements):

• disclose to investors of all material facts

regarding the offering of interests in the pool;

• provide investors with certain periodic and

annual reports;

• maintain all quarterly and annual reports, as

well as all other books and records prepared in

connection with its activities as a CpO, at its

CTFC Registration


main business offices in accordance with CFTC

recordkeeping rules;

• Comply with all applicable CFTC and nFA rules

(including reporting obligations on nFA Form pQR

and CFTC Form CpO-pQR and nFA Bylaw 1101).

Filings – Form CpO-pQR

According to the CFTC, the purpose of Form CpO-

pQR is to collect information from CpOs that are

solely registered with the CFTC to permit the CFTC

to more effectively oversee participants acting

within its jurisdiction. The information on Form

CpO-pQR is similar though not identical to Form pF.

All registered CpOs are required to file Form CpO-

pQR. please note that if a CpO is also registered

with the SEC as an investment adviser (and thus

required to file Form pF), the CpO may elect to file

Form pF for all pools it, or any “related person,” may

operate. if it makes this election, then the CpO is not

required to file Schedules B and C with the CFTC.

AllregisteredCPOs(eventhosethatare

alsoregisteredwiththeSEC)arerequiredto

completeScheduleAofFormCPO-PQRandfile

itwiththeNFA.

HarmonizationwithFormPF

The CFTC received numerous comments on

harmonizing Forms CpO–pQR with Form pF.

while the CFTC has sought to harmonize to the

extent possible, requirements differ in certain

circumstances. For example, the CFTC and the SEC

use somewhat different metrics for measuring

assets under management for purposes of

determining filing obligations. Additionally, while

Form pF must generally be filed within 120 days

after the fiscal year end of the adviser (or 60 days

after the end of each fiscal quarter for a large

private fund adviser), Form CpO-pQR must be filed

within 90 days after the end of each calendar year

(or within 60 days after the end of each calendar

quarter). As of now, the SEC and the CFTC have yet

to release harmonization rules.

Reporting Thresholds

Aggregated (Gross) Pool AUM

Small CPO (>$150mm)

Mid-sized CPO ($150mm–$1.5bn) Large CPO ($1.5bn+)

Large CPO of Large Pools (a pool that has a NAV of ≥$500mm)

Schedule AAnnually, within 90 days after the end of each calendar year

Annually, within 90 days after the end of each calendar year

Quarterly, within 60 days after the end of each calendar quarter including year-end

Quarterly, within 60 days after the end of each calendar quarter including year-end

Schedule B

NA

Annually, within 90 days after the end of each calendar year (Form PF filers in respect of all pools that it operates only file Schedule A)

Quarterly, within 60 days after the end of each calendar quarter including year-end(Form PF filers in respect of all pools that it operates only file Schedule A)

Quarterly, within 60 days after the end of each calendar quarter including year-end(Form PF filers in respect of all pools that it operates only file Schedule A)

Schedule CPart 1

NA

Part 2 NA

CTFC Registration

Contact Us

| 22 |

For information relating to the content within this guide, or any other areas for which you require

assistance, please contact the Hedge Fund Consulting team at Bank of America merrill lynch.

Our contact details are below — we look forward to hearing from you.

Business Consulting Services Team leadership:

[email protected]

EMEAMartinDonnelly+44(0)[email protected]

Asia/[email protected]


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