The Hedge Fund Law Report

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

Articles By Topic

By Topic: Commodities

  • From Vol. 10 No.7 (Feb. 16, 2017)

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

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

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  • From Vol. 9 No.34 (Sep. 1, 2016)

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

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

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  • From Vol. 9 No.10 (Mar. 10, 2016)

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

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

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  • From Vol. 9 No.8 (Feb. 25, 2016)

    Hedge Fund Managers Face Imminent NFA Cybersecurity Deadline

    The NFA’s recent Interpretive Notice on cybersecurity is poised to become effective in a matter of days. NFA members, including hedge fund managers registered with the NFA as commodity pool operators or commodity trading advisers, are now required to adopt an Information Systems Security Program. See “NFA Notice Provides Cybersecurity Guidance to Hedge Fund Managers Registered As CPOs and CTAs” (Nov. 19, 2015). To help NFA members prepare for the impending deadline, the NFA recently held a “Cybersecurity Workshop” featuring a number of senior NFA personnel and industry experts. Among other topics discussed during the presentation, panelists offered an overview of the requirements set out in the Notice and insight into what NFA examiners will look for after the notice takes effect. This article summarizes the panelists’ discussion of these issues. For more on CFTC and NFA requirements applicable to hedge fund managers, see our three-part CPO Compliance Series: “Conducting Business With Non-NFA Members (NFA Bylaw 1101)” (Sep. 6, 2012); “Marketing and Promotional Materials” (Oct. 4, 2012); and “Registration Obligations of Principals and Associated Persons” (Feb. 7, 2013).

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  • From Vol. 9 No.4 (Jan. 28, 2016)

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

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

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  • From Vol. 8 No.45 (Nov. 19, 2015)

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

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

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  • From Vol. 8 No.24 (Jun. 18, 2015)

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

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

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  • From Vol. 8 No.22 (Jun. 4, 2015)

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

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

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  • From Vol. 8 No.14 (Apr. 9, 2015)

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

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

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  • From Vol. 8 No.7 (Feb. 19, 2015)

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

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

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  • From Vol. 7 No.42 (Nov. 6, 2014)

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

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

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  • From Vol. 7 No.35 (Sep. 18, 2014)

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

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

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  • From Vol. 7 No.4 (Jan. 30, 2014)

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

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

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  • From Vol. 6 No.45 (Nov. 21, 2013)

    Akin Gump Partners Discuss Non-U.S. Enforcement, Insider Trading in Futures, Failure to Supervise Charges and Other Evolving Insider Trading Challenges for Hedge Fund Managers

    Akin Gump Strauss Hauer & Feld LLP recently hosted its “Private Investment Funds Conference: 2013 Trends and Developments” in New York City.  During a panel discussion entitled “Beyond the Headlines: Current Issues in Insider Trading Enforcement,” Akin Gump partners discussed new enforcement and prosecution tactics; the risks of gathering research through sell-side analysts, buy-side firms, expert networks, political intelligence firms, channel checking firms and meetings with current and former employees of companies; insider trading beyond U.S. borders; CFTC regulation of insider trading; whistleblowers; and five strategies for effectively mitigating insider trading risks.  The discussion was moderated by former federal prosecutor James Joseph Benjamin Jr., an Akin Gump partner and head of the firm’s securities enforcement and litigation practice group.  The other panelists were Akin Gump partners Michael A. Asaro, a former SEC staff attorney and Assistant U.S. Attorney, who practices in the areas of government investigations and enforcement proceedings; Douglas A. Rappaport, who handles civil litigation and regulatory and compliance matters; and Steven F. Reich, a white collar defense litigator with experience that includes serving as an Associate Deputy U.S. Attorney General and in the White House counsel’s office.  This article summarizes the key takeaways from the panel discussion.  See also “Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation,” The Hedge Fund Law Report, Vol. 5, No. 42 (Nov. 9, 2012); and “How Can Hedge Fund Managers Understand and Navigate the Perils of Insider Trading Regulation and Enforcement in Hong Kong and the People’s Republic of China,” The Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013).

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  • From Vol. 6 No.44 (Nov. 14, 2013)

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

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

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  • From Vol. 6 No.43 (Nov. 8, 2013)

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

    Sidley Austin LLP recently presented a conference entitled “Private Funds 2013: Developments and Opportunities.”  At the conference, Sidley partners offered updates, market color and practice recommendations on hedge and private equity fund structuring, regulation, operations and transactions.  The Hedge Fund Law Report is covering the conference in a three-part article series.  The first article covered the sections of the conference addressing fund structuring developments, single-investor funds, first loss capital arrangements, side letter terms, hard wiring of feeder funds for ERISA purposes, liquidity terms, fee terms, founder share classes and expense allocations and caps.  See “Sidley Austin Private Funds Conference Addresses Recent Developments Relating to Fund Structuring and Terms; SEC Examinations and Enforcement Initiatives; Seeding Arrangements; Fund Mergers and Acquisitions; CPO Regulation; JOBS Act Implementation and Compliance; and Derivatives Reforms (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).  This second installment addresses recent developments in SEC examinations and enforcement (including a discussion of compliance policy violations, valuation practices and allocation of investment opportunities); insider trading issues (including the use of political intelligence firms, expert networks and deputized directors); the SEC’s new policy requiring admissions of wrongdoing and best practices for compliance; seeding arrangements; and fund manager mergers and acquisitions (including a discussion of key terms and negotiating points for such transactions).  The third article in this series will describe regulatory developments impacting fund managers, including commodity pool operator registration and regulation, implementation and compliance with the JOBS Act and derivatives reforms.

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  • From Vol. 6 No.43 (Nov. 8, 2013)

    KPMG/AIMA/MFA Survey Quantifies the Impact of the AIFMD, FATCA, Form PF and Adviser/CPO Registration on Hedge Fund Manager Compliance Budgets

    KPMG International, in cooperation with the Alternative Investment Management Association and the Managed Funds Association, recently published a report detailing findings from its survey of 200 hedge fund managers around the world who have, in the aggregate, approximately $910 billion in assets under management.  The survey generally covered the impact of recent regulatory changes on managers’ compliance expenditures, operations and product offerings.  Specifically, the survey analyzed how size and geography impact manager compliance costs; key regulatory drivers of recent increases in manager compliance expenditures; manager projections for expenditures on outside service providers; impact of regulatory developments on manager operations (including whether regulatory changes would cause a manager to stop doing business or move from a jurisdiction); and manager predictions about future offerings of registered products such as funds organized pursuant to the EU’s Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, or funds registered pursuant to the U.S. Investment Company Act of 1940 (mutual funds).  See “Are Alternative Investment Strategies Within the Spirit of UCITS?,” The Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012); “Citi Prime Finance Report on Liquid Alternatives Describes a Massive Capital Raising Opportunity for Hedge Fund Managers Willing to Go Retail (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  This article summarizes key findings of the survey.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

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

    Sidley Austin LLP recently hosted a conference in its New York office entitled “Private Funds 2013: Developments and Opportunities.”  At the conference, Sidley partners discussed various structuring, regulatory, operational and transactional developments impacting private funds and their managers.  The Hedge Fund Law Report is publishing a three-part series of articles covering the most important insights arising out of the conference.  In this first installment, we summarize the parts of the conference dealing with recent developments in fund structuring, single-investor funds, first loss capital arrangements, side letter terms, hard wiring of feeder funds for ERISA purposes, liquidity terms, fee terms, founder share classes and expense allocations and expense caps.  The second article in the series will discuss recent developments in SEC examinations and enforcement (including a discussion of compliance policy violations, valuation practices, allocation of investment opportunities, insider trading issues, use of political intelligence firms and expert networks, the SEC’s new policy requiring admissions of wrongdoing and best practices for compliance); seeding arrangements; and fund mergers and acquisitions (including a discussion of key terms and negotiating points for such transactions).  The third article will provide an update on regulatory developments impacting fund managers, including recent issues involving commodity pool operator registration and regulation, implementation and compliance with the JOBS Act and derivatives reforms.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

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

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

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  • From Vol. 6 No.31 (Aug. 7, 2013)

    Federal Court Disallows Peak Ridge Hedge Fund from Proceeding Against Its Futures Commission Merchant with a Breach of Contract Counterclaim Relating to a Dispute Over Margin Requirements

    On July 22, 2013, the United States District Court for the Southern District of New York disallowed Peak Ridge Master SPC LTD o/b/o the Peak Ridge Commodities Volatility Master Fund Segregated Portfolio (Peak Ridge), an energy hedge fund, from proceeding with its breach of contract counterclaim against its futures commission merchant (FCM), Morgan Stanley & Co., Incorporated (Morgan Stanley).  Morgan Stanley sued Peak Ridge in November 2010, alleging that Peak Ridge breached the customer agreement governing its natural gas futures trading account, causing Morgan Stanley to terminate the account and to sue for recovery of $40.6 million in losses it incurred from taking over and liquidating the account.  See “Morgan Stanley Sues Commodities Hedge Fund Peak Ridge for Alleged Failure to Satisfy Margin Calls,” The Hedge Fund Law Report, Vol. 3, No. 45 (Nov. 19, 2010).  Peak Ridge counterclaimed for $30 million in damages, arguing that Morgan Stanley breached the customer agreement by wrongfully terminating the trading account; liquidating it in a commercially unreasonable manner; and engaging in an interested transaction with an affiliate.  See “Peak Ridge Hedge Fund Alleges that Morgan Stanley Breached Its Prime Brokerage Agreement with the Fund by, Among Other Things, Tripling Margin Requirements over Ten Months,” The Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010). On March 15, 2013, the Court granted in part and denied in part Morgan Stanley’s motion to dismiss Peak Ridge’s counterclaims.  Peak Ridge then filed a motion for reconsideration, claiming that the Court had overlooked a telephone conversation in which Morgan Stanley allegedly gave Peak Ridge the opportunity to cure the margin default that had given rise to Morgan Stanley’s original notice of default.  The Court denied Peak Ridge’s motion for reconsideration.  This article summarizes the Court’s legal analysis and ruling on the motion.  For further discussion on how the Dodd-Frank Act will impact relationships between hedge fund customers and their FCMs, including the likely impact on margin requirements, see “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).

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  • From Vol. 6 No.21 (May 23, 2013)

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

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

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  • From Vol. 6 No.19 (May 9, 2013)

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

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

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  • From Vol. 6 No.15 (Apr. 11, 2013)

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

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

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  • From Vol. 6 No.14 (Apr. 4, 2013)

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

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

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  • From Vol. 5 No.47 (Dec. 13, 2012)

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

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

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  • From Vol. 5 No.46 (Dec. 6, 2012)

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

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

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  • From Vol. 5 No.46 (Dec. 6, 2012)

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

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

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  • From Vol. 5 No.42 (Nov. 9, 2012)

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

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

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  • From Vol. 5 No.41 (Oct. 25, 2012)

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

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a comprehensive new regulatory framework for swaps and security-based swaps which would bring many market participants within the ambit of CFTC regulation, including requiring numerous entities to register with the CFTC.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  Hedge fund managers were principally concerned that the inclusion of swaps as “commodity interests” would cause their hedge funds to be treated as “commodity pools,” which in turn could subject the hedge fund manager to compliance and registration obligations as a commodity pool operator (CPO) or a commodity trading advisor (CTA).  This concern was amplified when the CFTC and SEC jointly adopted rules refining the definition of the term “swap” and related terms, on August 13, 2012.  Specifically, the August 13 rules required hedge fund managers to determine whether their swaps-related activities would subject them to CFTC regulation and require them to register as a CPO or CTA by October 12, 2012, the effective date of the rules.  In light of the complexity of the definitions and the business arrangements to which the definitions applied, many hedge fund managers struggled to arrive at a conclusive determination.  See “CFTC Issues Responses to Frequently Asked Questions Concerning Registration Exemption Eligibility and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors,” The Hedge Fund Law Report, Vol. 5, No. 32 (Aug. 16, 2012).  Fortunately for managers grappling with this issue, on October 11 and 12, 2012, the CFTC issued two no-action letters relevant to the registration obligations of hedge fund managers that trade swaps.  This article summarizes the key practical points arising out of the two no-action letters for hedge fund managers that trade foreign exchange and other swaps and foreign exchange forwards.

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  • From Vol. 5 No.34 (Sep. 6, 2012)

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

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

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  • From Vol. 5 No.32 (Aug. 16, 2012)

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

    On August 14, 2012, the staff of the Commodity Futures Trading Commission (CFTC) Division of Swap Dealer and Intermediary Oversight issued responses to a number of questions raised by market participants in the aftermath of recent amendments to CFTC rules and regulations, which impacted the registration status and compliance obligations of many commodity pool operators (CPOs) and commodity trading advisors, particularly in light of the elimination of the Rule 4.13(a)(4) CPO registration exemption.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  These responses provide answers to registration and compliance questions in a variety of areas.  This article summarizes the guidance that is most pertinent to hedge fund managers.

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  • From Vol. 5 No.28 (Jul. 19, 2012)

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

    On July 13, 2012, the Division of Swap Dealer and Intermediary Oversight of the U.S. Commodity Futures Trading Commission (CFTC) published a no-action letter issued on July 10, 2012 (no-action letter) that grants certain eligible commodity pool operators (CPOs) of newly launched pools and commodity trading advisors (CTAs) relief from having to register with the CFTC through December 31, 2012.  The relief comes on the heels of the CFTC’s February 9, 2012 adoption of a number of rule amendments, including the rescission of the Rule 4.13 exemption from CPO registration relied upon by many hedge fund managers, which became effective on April 24, 2012.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012); “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  This article describes the no-action relief granted to CPOs and CTAs; outlines the steps that CPOs and CTAs must take to claim such exemptive relief; and highlights the ramifications stemming from the no-action relief granted.

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  • From Vol. 5 No.19 (May 10, 2012)

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

    On February 9, 2012, the Commodity Futures Trading Commission (CFTC) amended the CFTC Rules to rescind an exemption from commodity pool operator (CPO) registration heavily relied upon by hedge fund managers.  This development, in combination with statutory changes to the Commodity Exchange Act enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, will require many hedge fund managers to register as CPOs.  This article is the second part of a two-part series by Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, providing an overview of the current regulatory landscape of CFTC regulations impacting CPOs.  Part one of this series focused on the managers of private funds and their CPO registration and compliance obligations.  In particular, part one discussed: the regulatory framework governing commodity pools and CPOs and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  This part two focuses on the funds (i.e., commodity pools) operated or controlled by registered CPOs.  Specifically, this article discusses: general fund disclosure and reporting obligations applicable to CPOs; the exemptions from certain of those disclosure and reporting obligations available under CFTC Rules 4.7 and 4.12; and the reporting obligations applicable to funds operating under those exemptions.

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  • From Vol. 5 No.18 (May 3, 2012)

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

    On February 9, 2012, the U.S. Commodity Futures Trading Commission (CFTC) rescinded an exemption from commodity pool operator (CPO) registration found in CFTC Rule 4.13(a)(4) that was previously heavily relied upon by many hedge fund managers.  The rescission of that exemption also narrowed the availability of an exemption from commodity trading adviser (CTA) registration found in CFTC Rule 4.14(a)(8) which was also relied upon heavily by many hedge fund managers.  As such, many hedge fund managers will need to register as CPOs or CTAs with the CFTC, become members of the National Futures Association (NFA) and become subject to CFTC and NFA regulations.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Bearing this in mind, law firm Kleinberg, Kaplan, Wolff & Cohen, P.C. (KKWC) and hedge fund administrator CACEIS jointly hosted a webinar (Webinar) on April 19, 2012 to outline changes in the regulatory regime for CPOs and CTAs.  During the Webinar, Martin D. Sklar, a Member of KKWC, and Darren J. Edelstein, an Associate at KKWC, shared their expertise on numerous topics, including a discussion of the remaining exemptions from CPO and CTA registration for hedge fund managers; the steps taken to register a CPO or a CTA and its respective principals and associated persons; the various CFTC and NFA regulations impacting CPOs and CTAs; and the reporting requirements applicable to registered CPOs and CTAs, including completion and filing of Form CPO-PQR and CTA-PR.  The Hedge Fund Law Report interviewed Sklar and Edelstein following the Webinar to conduct a deeper dive into some of the topics discussed during the Webinar, including a discussion of: the Rule 4.13(a)(3) de minimis exemption; which hedge fund management entities should register as CPOs and CTAs; what marketing, trading and other regulations affect registered CPOs and CTAs; whether and to what extent registered CPOs and CTAs are subject to CFTC and NFA audit; whether hedge fund managers must add additional disclosures or change their subscription documents to allow them to comply with CFTC and NFA regulations; and the biggest challenges hedge fund managers face with respect to registering as a CPO or CTA and becoming subject to CFTC and NFA regulations.

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  • From Vol. 5 No.17 (Apr. 26, 2012)

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

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

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  • From Vol. 5 No.9 (Mar. 1, 2012)

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

    Hedge fund managers with strategies that involve commodities or derivatives are facing complicated new registration and reporting requirements.  On the registration side, on February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules that rescinded the CFTC Rule 4.13(a)(4) exemption from commodity pool operator (CPO) registration that has been heavily relied upon by many hedge fund managers and their affiliates.  See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  As a result, many hedge fund managers will either have to qualify for another exemption from CPO registration (most likely the Rule 4.13(a)(3) exemption for de minimis commodity interest trading activity), or register as a CPO.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  On the reporting side, with the adoption of new CFTC Rule 4.27(d), CPOs that manage private funds and that are dually registered with the SEC as investment advisers and with the CFTC as CPOs will need to complete Form PF, which requires detailed information about the private funds managed by the adviser/CPO.  See “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  With these registration, reporting and related challenges in mind, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will identify and address critical issues and pitfalls with respect to Form PF.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  For more information, click here.  To register, click here.  (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)  One of the anticipated speaking faculty members for the Form PF session at the RCA Symposium is Dan Driscoll, the Chief Operating Officer of the National Futures Association (NFA).  We recently interviewed Driscoll, who spoke with The Hedge Fund Law Report about Form PF and other issues related to CFTC and NFA regulation of hedge fund managers.  Specifically, our interview covered topics including: interpretational and operational issues related to qualification for the Rule 4.13(a)(3) de minimis exemption from CPO registration; the applicability of the relief granted under Rule 4.7 to hedge fund managers; the NFA examination and enforcement paradigm, including questions about how registrants are targeted for examination, what are the focus areas for NFA audits and how audits can lead to NFA enforcement activity; prospective NFA regulation of swap dealers and major swap participants; and Form PF, including issues related to the use of Form PF data for NFA enforcement activity, interpretation and confidentiality.

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  • From Vol. 5 No.8 (Feb. 23, 2012)

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

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

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  • From Vol. 5 No.7 (Feb. 16, 2012)

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

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

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  • From Vol. 4 No.45 (Dec. 15, 2011)

    CFTC Position Limit Rules Challenged in Lawsuit by ISDA and SIFMA

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

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  • From Vol. 4 No.30 (Sep. 1, 2011)

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

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

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  • From Vol. 4 No.26 (Aug. 4, 2011)

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

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

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  • From Vol. 4 No.21 (Jun. 23, 2011)

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

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

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  • From Vol. 4 No.15 (May 6, 2011)

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

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

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  • From Vol. 4 No.5 (Feb. 10, 2011)

    CFTC Proposes New Reporting and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers and Jointly Proposes with the SEC Reporting Requirements for Dually-Registered CPO and CTA Investment Advisers to Private Funds

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

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  • From Vol. 3 No.48 (Dec. 10, 2010)

    Peak Ridge Hedge Fund Alleges that Morgan Stanley Breached its Prime Brokerage Agreement with the Fund by, Among Other Things, Tripling Margin Requirements over Ten Months

    On November 8, 2010, Morgan Stanley & Co. Incorporated (Morgan Stanley) filed suit against commodities hedge fund Peak Ridge Master SPC LTD, claiming $40.6 million in damages resulting from losses stemming from bad bets on natural gas.  See “Morgan Stanley Sues Commodities Hedge Fund Peak Ridge for Alleged Failure to Satisfy Margin Calls,” The Hedge Fund Law Report, Vol. 3, No. 45 (Nov. 19, 2010).  On November 29, 2010, Peak Ridge Master SPC Ltd. (obo The Peak Ridge Commodities Volatility Master Fund Segregated Portfolio (CVF)), brought counterclaims against Morgan Stanley, alleging that Morgan Stanley acted in a commercially unreasonable manner by, among other things: (1) tripling CVF’s margin requirements over a period of ten months; (2) giving notice of default and seizing the account without making a margin call or allowing any opportunity to cure; (3) assigning the fund’s management to a conflicted trader who mismanaged the fund, causing significant losses; and (4) selling its remaining open positions to a competitor, a Morgan Stanley affiliate, that recognized an immediate $23 million gain from the acquisition.  Morgan Stanley’s suit claimed $40.6 million in damages for losses caused by CVF’s failure to meet contractually required margin calls.  CVF’s Counterclaim seeks at least $30 million in damages.  In its Counterclaim, CVF accuses Morgan Stanley of terminating the fund's account to further Morgan Stanley’s own interests.  This article reviews CVF’s presentation of the sequence of events from the inception of the relationship between the parties through the disputed seizure and subsequent liquidation, and details CVF’s breach of contract counterclaim.

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  • From Vol. 3 No.45 (Nov. 19, 2010)

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

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

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  • From Vol. 3 No.39 (Oct. 8, 2010)

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

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

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  • From Vol. 3 No.36 (Sep. 17, 2010)

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

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

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  • From Vol. 3 No.3 (Jan. 20, 2010)

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

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

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  • From Vol. 2 No.47 (Nov. 25, 2009)

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

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

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  • From Vol. 2 No.33 (Aug. 19, 2009)

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

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

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    Should Hedge Funds Register as Commodity Pool Operators?

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

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  • From Vol. 1 No.27 (Dec. 9, 2008)

    Who Should Regulate Energy Markets?

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

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  • From Vol. 1 No.12 (May 20, 2008)

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

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