Post on 03-Feb-2022
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
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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
UpdATEd OvERviEw OF SEC & CFTC REGiSTRATiOn FOR HEdGE FUndS
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
UpdATEd OvERviEw OF SEC & CFTC REGiSTRATiOn FOR HEdGE FUndS
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
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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
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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.
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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.
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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).
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• 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
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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.
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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.
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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).
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• 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
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
“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
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
“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
| 15 | UpdATEd OvERviEw OF SEC & CFTC REGiSTRATiOn FOR HEdGE FUndS
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.
BAnk OF AmERiCA mERRill lynCH HEdGE FUnd COnSUlTinG
CTFC Registration
| 17 | UpdATEd OvERviEw OF SEC & CFTC REGiSTRATiOn FOR HEdGE FUndS
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.
BAnk OF AmERiCA mERRill lynCH HEdGE FUnd COnSUlTinG
CTFC Registration
| 19 | UpdATEd OvERviEw OF SEC & CFTC REGiSTRATiOn FOR HEdGE FUndS
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
| 21 | UpdATEd OvERviEw OF SEC & CFTC REGiSTRATiOn FOR HEdGE FUndS
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:
U.S.ChrisThroop646.855.0612chris.throop@baml.com
EMEAMartinDonnelly+44(0)207.995.7462martin.donnelly@baml.com
Asia/PacificMattDallimore+852.2161.7672matthew.dallimore@baml.com
BAnk OF AmERiCA mERRill lynCH HEdGE FUnd COnSUlTinG
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