The Hedge Fund Law Report

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

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By Topic: Foreign Exchange

  • From Vol. 7 No.47 (Dec. 18, 2014)

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

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

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  • From Vol. 7 No.20 (May 23, 2014)

    Bankruptcy Court Rules on Whether Funds Held by Bankrupt Futures Commission Merchant for Retail Forex and OTC Metals Trading Are “Customer Property” Entitled to Priority Distribution

    Peregrine Financial Group, Inc. (PFG) was a registered futures commission merchant (FCM) and a “Forex Dealer Member” of the National Futures Association (NFA).  In July 2012, after discovering the theft of client funds, PFG filed for bankruptcy protection.  Later that year, PFG’s bankruptcy trustee (Trustee) sought permission to distribute “customer property” to PFG customers who traded “commodity contracts.”  Such customers are entitled to priority in distributions from a commodities broker bankruptcy.  The Trustee did not include in the proposed distribution PFG customers who engaged in retail foreign exchange (retail forex) and over-the-counter spot metals (OTC metals) transactions.  As a result, Secure Leverage Group, Inc. and other customers of PFG that had accounts with PFG for trading in retail forex and OTC metals commenced an adversary proceeding.  They sought a declaration that their retail forex and OTC metals trading constituted “commodity contracts” within the meaning of the U.S. Bankruptcy Code and that, accordingly, they were entitled to share in the proposed priority distribution of “customer property.”  Jockeying over “customer” status is not unique to bankruptcies of FCMs; similar issues arise in SIPA liquidations as well.  See “U.S. District Court Rules on Whether a Party to a Repurchase Agreement with a Broker-Dealer That Enters Liquidation Is a ‘Customer’ of the Broker-Dealer under SIPA,” The Hedge Fund Law Report, Vol. 7, No. 18 (May 8, 2014).

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  • From Vol. 7 No.16 (Apr. 25, 2014)

    How Can a Hedge Fund Manager Craft an Effective Program for Foreign Exchange Trading Surveillance, Compliance and Monitoring?

    Foreign exchange (FX) trading is a multi-trillion dollar market in which hedge funds are regular participants.  As in other financial markets, there is always the potential for manipulation and other abuses.  A recent program sponsored by NICE Actimize gave an overview of the FX markets, discussed regulation of those markets and provided valuable insights into how hedge funds and others that engage in FX trading may develop effective compliance and monitoring programs.  See also “CFTC and SEC Propose Rules to Further Define the Term ‘Eligible Contract Participant’: Why Should Commodity Pool and Hedge Fund Managers Care?,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 4 No.21 (Jun. 23, 2011)

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

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

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  • From Vol. 4 No.4 (Feb. 3, 2011)

    IRS Enhancing Its Scrutiny of Tax Shelter Disclosures by Hedge Funds

    In late 2010, the IRS Office of Chief Counsel issued a memorandum indicating that some common “protective” disclosures that are made by hedge funds and other investment partnerships are inadequate.  This could result in significant penalties for a fund as well as its investors.  In a guest article, Joseph Pacello, a Tax Partner at Rothstein Kass, discusses: the legal and accounting background of the IRS memorandum, including relevant tax disclosure requirements; the IRS Office of Chief Counsel’s analysis in the memorandum; penalties for failure to properly disclose a reportable transaction; and the likely impact of the IRS memorandum for both funds of funds and direct trading funds.

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  • From Vol. 1 No.29 (Dec. 24, 2008)

    NFA Letter to CFTC Broadens Marketing Restrictions Applicable to Forex Dealer Members

    The use by or on behalf of a Forex Dealer Member (FDM) of the National Futures Association (NFA) of hypothetical performance results in the context of promotional materials has long been a controversial subject.  A new NFA letter to the CFTC tweaks the rule book in this area, applying to off-exchange hypotheticals the same restrictions that have applied for more than a decade to on-exchange hypotheticals.  We detail the substance of the amendments, and changes they may require in the presentation of performance information and other policies and procedures of FDMs.

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  • From Vol. 1 No.24 (Nov. 12, 2008)

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

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

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