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Compliance Update for California Hedge Funds April 11, 2011 Presented by Bart Mallon Mallon P.C. OVERVIEW 1. 2. 3. 4. 5. New Investment Adviser Registration Rules Overview of Registration Process Compliance Requirements Recent Regulatory Actions / Other Items Questions & Answers NEW REGULATIONS - SEC New Regulations Requiring Registration • Not Finalized (out by July 21, 2011) Asset Threshold • • • • Under $100M AUM – State Registration (if required by state) $100M AUM w/ SMA clients – SEC Registration $100-$150M AUM w/ only Hedge Fund clients – no SEC registration requirement (may be subject to state registration) $150M AUM w/ only Hedge Fund clients – SEC Registration Timing Issues • Likely no registration requirement until 1st Quarter 2012 Other New Regulations • • • • New Exempt Reporting Adviser – less than $150M, VC fund managers New Form ADV Part 2 – update was due March 31 New Form PF Custody Issue – PCAOB Registered & Inspected Audit Firm • • Annual Audit or Quarterly Reporting & Surprise Examination NEW REGULATIONS - CALIFORNIA Current CA Exemption – (CCR Section 206.204.9) • Has AUM of $25M or • Manager to Venture Capital fund Overview of NASAA Proposed Regulation • Not subject to disqualification (criminal, civil, regulatory) • Solely advise Section 3(c)(7) funds • File condensed Form ADV • Fees California Invitation for Comments • • • Asks about 3(c)(7) or 3(c)(1) managers Should they all be “qualified clients” Questions - statutory disqualification; asset threshold; annual audit, NASAA proposal CALIFORNIA REGISTRATION PROCESS IA Representative • • • • • Provides advice/ makes recommendations Manages accounts or portfolios of clients Solicits, offers, or negotiates for the sale or sells investment advisory services, or Supervises employees who perform any of the foregoing Silent owners with 25% or more ownership (reporting on ADV) License Requirement • • Series 65 or Series 66 (if you already have the Series 7) Other: Certified Financial Planner (CFP), Chartered Investment Counselor (CIC), Chartered Financial Consultant (ChFC), Personal Financial Specialist (PFS), or Chartered Financial Analyst (CFA) Regulatory Fees - Firm - $125, Individual - $25 • Exams – depends on exam (usually around $125) Timing – usually 6-12 weeks, depends on number of items Net worth/ Custody Issue • • • • Net Worth Requirement - Discretionary Authority - $12,000; Custody - $42,000 Gatekeeper – disbursements agreement with third party If “custody” and no gatekeeper – $42,000 & surprise examination If “custody” and gatekeeper - $12,000 & no surprise examination Common Pitfalls • • Disclosure issues Review of IA contract COMPLIANCE REQUIREMENTS Compliance Manual/ Code of Ethics (CCR Section 260.238.1) • • • • • Professional standards of conduct (fiduciary duty) Insider trading policies (protection of material, non-public information) Personal trading policies Privacy policy Soft Dollars Books and Records (CCR Section 260.241.3) • • • • • Records – client, fund, firm financial, trading, employee, advertising, compliance Easily accessible May be maintained by any electronic storage media available so long as such records are available for immediate and complete access Held for 5 years, first 2 years in an easily accessible place Must preserve for at least 3 years after the termination Periodic Compliance Obligations • • Daily, Monthly, Quarterly Annually • • • • • ADV Annual Updating Amendment / Annual Fees Annual review of compliance policies and procedures; code of ethics Annual notice of privacy policy Custody requirement (annual report or audit confirmation to state) Fund specific - Blue sky filings, Form D amendment REGULATORY ACTIONS/ OTHER ISSUES Futures – Registration, Recent CFTC Proposal Expert Networks/ Insider Trading • SEC Action • MA Action Pay to Play Form ADV Part 2 Side-Letter Deals • Mock Audit • Compliance program in place QUESTIONS FROM AUDIENCE THANK YOU FOR JOINING For further information, please feel free to contact any of the following groups: Patke & Associates Ron Niemaszyk 300 Village Green Dr., Ste 210 Lincolnshire, IL 6006 Phone: 847-382-1627 Woodfield Fund Administration Frank Franiak 3601 Algonquin Road, Suite 900 Rolling Meadows, IL 60008 Phone: 847-385-2203 Mallon P.C. Bart Mallon 150 Spear Street, Suite 825 San Francisco, CA 94105 Phone: 415-868-5345