ANALYSIS
US LAUN
CH
TIPS
ADVICE F
OR GET
TING S
TART
ED
While the regulatory burden involved with hedge funds has intensiﬁed, the
process of launching a fund is still manageable
BY ALEX CARDNO
8 hedge-compliance.com MAR 2015
D
espite a healthy number of US fund
launches already in 2015, many acknowledge that the regulatory burden
has intensified for domestic managers
looking to launch funds.
This has been brought about in part
by the Dodd-Frank Act of 2010, among other changes,
and the complementary introduction of Form PF following.
Meanwhile, a recent focus on cyber-security has added fresh considerations for managers at the fund launch
stage, with US regulators beginning to prioritise the issue.
For hedge fund managers contemplating a launch,
one of the most significant changes in Dodd-Frank has
been the removal of an exemption with the SEC in March
2012, which led to a mass wave of registrations from the
industry by the following winter.
In turn, hedge fund managers have had to respond by
upping their compliance infrastructure ahead of launching a fund, instead of building it up as the fund grows.
As the GC of one $8bn AuM hedge fund explains: “It
used to be if you were launching that you did not have to
register with the SEC but that has changed.
“On a regulatory basis, you used to be able to build up
assets and be able to afford staff for regulatory issues, but
now you have to launch with it in mind because of regulatory expectations.”
High expectations
And expectations of regulators have never been higher,
claims Barry Schwartz, partner at ACA Compliance
Group, noting his observations on recent regulatory examinations.
“Twelve months ago there was half the scrutiny there
is now,” he says. “SEC examiners are much more familiar
with the compliance environment and the risks and conflicts on the industry that money managers encounter.”
The legislative requirement to register is embedded in
the Investment Advisers Act of 1940, which stipulates
that any advisory firm or person that advises other funds
for compensation falls within the definition of ‘investment adviser’, and if they have $100m or more in AuM
they are required to register with the SEC unless they
qualify for an exemption.
“The one exemption from the Advisers Act registration that managers can rely on is if their clients are private funds, they can advise up to $150m before they
register with the SEC,” explains Kevin Scanlan, partner
at Dechert.
For managers launching under that size, instead of the
SEC they will be required to register with one or more
states. US hedge fund managers are screened differently
by each state, with regulated adviser rules.
“The SEC expects that when you become registered,
you have a compliance infrastructure in place,” explains
Donald Babbitt, director of compliance consulting at Kinetic Partners.
“That actually happens about threeTwelve months ago there was
quarters of the time but it has definitely
half the scrutiny there is now.
become a priority to consider.”
At the fund level, most hedge funds
SEC examiners are much more
make use of regulation D under the
familiar with the compliance
Securities Act of 1933, which provides
environment and the risks and
exemptions from registration under
rules 504, 505 and 506 and allows such
conﬂicts on the industry that
hedge funds to offer and sell securimoney managers encounter
ties without having to register with the
Barry Schwartz, ACA
SEC.
Under regulation D (unless a manCompliance Group
ager relies on the JOBS Act to solicit),
they cannot advertise to the public,
and with rule 502, all investors in a new fund must be accredited individuals with $1m or more of assets besides
their house. If these requirements are met, a fund can
then file a Form D with the SEC.
A fund that is launching also needs to be mindful of
complying with either the 3(c)(1) or a 3(c)(7) exemption under the Investment Company Act of 1940.
The former exemption prohibits managers from offering a fund as a public company and stipulates a fund
must have no more than 100 US investors (‘beneficial
owners’).
Under 3(c)(7), a more popular option due to scaling
considerations, a fund still is not permitted to make a
public offering of its securities, but can have up to 2,000
beneficial owners if all are qualified purchasers.
Manager considerations
NOTABLE US
HEDGE FUND
LAUNCHES:
“At the manager level, funds must decide whether to only
focus on investing in securities or invest in both securities and derivatives/futures,” says Kay Gordon, partner at
Drinker Biddle & Reath.
In the case of most hedge funds a manager will use both,
so they must also comply with the rules laid down by fu-
Banbury
Partners
Folger
Hill
Melvin
Capital
Pagoda Asset
Management
Saferidge Capital
Partners
Founded: April 2014 in New
York by Baker Burleson and
Stormy Scott, both previously
with ‘Tiger cub’ ﬁrms
Founded: August 2014 by
ex-SAC Capital Advisors COO
Sol Kumin in New York
Founded: April 2014 by
SAC’s Gabriel Plotkin in
New York
Founded: May 2014 by
Highbridge Capital Management portfolio manager
Adam Bernstein in New York
Founded: May 2014 in New
York by Paul Saferstein, who
spent eight years with Asian
Century Quest Capital
MAR 2015 hedge-compliance.com 9
ANALYSIS
Form PF ﬁlings in the US
Form PF
Section 1a
Form PF
Section 1a
Information about you and your related persons
(to be completed by all Form PF filers)
Page 1 of 42
Form PF
Section 1a
Information about you and your related persons
(to be completed by all Form PF filers)
Page 2 of 42
Section 1a: Information about you and your related persons
2.
Check the box that indicates what you would like to do:
A. If you are not a large hedge fund adviser or large liquidity fund adviser:
Submit your first filing on Form PF
for the period ended:
Submit an annual update
for the period ended:
Amend a previously submitted filing
for the period ended:
Submit a final filing
Request a temporary hardship exemption
B. If you are a large hedge fund adviser or large liquidity fund adviser:
Submit your first filing on Form PF
for the [1st, 2nd, 3rd, 4th] quarter, which ended:
Submit a quarterly update (including fourth quarter updates)
for the [1st, 2nd, 3rd, 4th] quarter, which ended:
Amend a previously submitted filing
for the [1st, 2nd, 3rd, 4th] quarter, which ended:
Transition to annual reporting
Submit a final filing
Request a temporary hardship exemption
Legal name
SEC 801-Number
Legal name
SEC 801-Number
Form PF
Section 1b
Item A. Reporting fund identifying information
5.
(g) Other private funds ...........................................
(c) NFA identification number of the reporting fund, if applicable ........
(d) LEI of the reporting fund, if applicable.............................................
6.
Check “yes” below if the reporting fund is the master fund of a master-feeder arrangement and
you are reporting for all of the funds in the master-feeder arrangement on an aggregated basis.
Otherwise, check “no.”
(See Instruction 5 for information regarding aggregation of master-feeder arrangements. If you
respond “yes,” do not complete a separate Section 1b, 1c, 2b, 3 or 4 with respect to any of the
feeder funds.)
Yes
No
7.
(a) Check “yes” below if the reporting fund is the largest fund in a parallel fund structure and
you are reporting for all of the funds in the structure on an aggregated basis. Otherwise,
check “no.”
(See Instruction 5 for information regarding aggregation of parallel funds. If you respond
“yes,” do not complete a separate Section 1b, 1c, 2b, 3 or 4 with respect to any of the other
parallel funds in the structure.)
Yes
No
(h) Funds and accounts other than private funds
(i.e., the remainder of your assets under
management).....................................................
Telephone contact number (include area code and,
if outside the United States, country code):
Item C. Miscellaneous
Date:
4.
Signature on behalf of related persons:
I, the undersigned, sign this Form PF on behalf of, and with the authority of, the related
person(s) identified below.
To the extent that Section 1 or 2 of this Form PF is filed in accordance with a regulatory
obligation imposed by CEA rule 4.27, each related person identified below and I all accept
that any false or misleading statement of a material fact therein or material omission
therefrom shall constitute a violation of section 6(c)(2) of the CEA.
Large trader
ID suffix, if any
You may use the space below to explain any assumptions that you made in responding to
any question in this Form PF. Assumptions must be in addition to, or reasonably follow
from, any instructions or other guidance relating to Form PF. If you are aware of any
instructions or other guidance that may require a different assumption, provide a citation
and explain why that assumption is not appropriate for this purpose.
Question
number
If you responded “yes” to Question 7(a), complete (b) through (e) below for each other parallel
fund in the parallel fund structure.
Description
(b) Name of the parallel fund..................................................................
Name of each related person on behalf of which
this individual is signing:
(c) Private fund identification number of the parallel fund ....................
Name of individual:
(e) LEI of the parallel fund, if applicable................................................
(d) NFA identification number of the parallel fund, if applicable ..........
Signature:
Item B. Assets, financing and investor concentration
Email address:
8.
Telephone contact number (include area code and,
if outside the United States, country code):
Large trader
ID suffix, if any
3.
Provide a breakdown of your regulatory assets under management and your net assets
tures regulator the CFTC, and register with the self-regulatory association it outsources compliance to, the NFA.
The CFTC oversees commodities trading and covers
futures, whereas for managers dealing purely with securities it falls to the SEC.
Alongside the CFTC and NFA registration, these managers are subject to additional reporting requirements,
including PQR and PR. They may also face on-site visits
from the regulator.
Form ﬁlling
For managers that are launching and already have $150m
AuM-plus to advise on, Dodd-Frank has added another
layer of complication in the guise of Form PF, which was
introduced in August 2012.
The legislative basis for Form PF is Rule 204(b)-1 of
the Investment Advisers Act. In short, the purpose of
Form PF is to allow regulators to gather risk exposure information.
According to the initiative, introduced by Dodd-Frank,
Form PF must be filed periodically with the SEC by investment advisers, and must also be completed by Commodity Pool Operators and CTAs, which are registered
with the SEC and CFTC, in a joint initiative between the
two regulators.
“Form PF also means you need to be clear in the disclosure who is going to be responsible for filing fees and
expenses,” says the GC at a $10bn-plus firm.
This, according to regulatory consultants, has added an
extra burden at launch stage for managers of all sizes.
Alongside the growing requirements of regulators,
hedge fund managers are also dealing with heightened
compliance expectations from investors.
“There is a huge focus on fees and expenses now, because transparency is sometimes lacking for investors,”
adds Schwartz.
Compliance expectations are also heightening on the
capital-raising side. As David Frank, CEO and managing
Gross asset value of reporting fund..........................................................................
(This amount may differ from the amount you reported in response to question 11 of Form
ADV Section 7.B.1. For instance, the amounts may not be the same if you are filing Form PF
on a quarterly basis, if you are aggregating a master-feeder arrangement for purposes of this
Form PF and you did not aggregate that master-feeder arrangement for purposes of Form
ADV Section 7.B.1. or if you are aggregating parallel funds for purposes of this Form PF.)
Date:
Item B. Information about assets of private funds that you advise
10 hedge-compliance.com MAR 2015
(a) Name of the reporting fund ...............................................................
(b) Private fund identification number of the reporting fund .................
(e) Securitized asset funds ......................................
Signature:
Page 4 of 42
Subject to Instruction 5, you must complete a separate Section 1b for each private fund that you advise.
(d) Real estate funds ...............................................
Name of individual:
Information about the private funds you advise
(to be completed by all Form PF filers)
Section 1b: Information about the private funds you advise
(c) Private equity funds ..........................................
(f) Venture capital funds ........................................
Title:
Large trader
ID, if any
Net assets under
management
(b) Liquidity funds ..................................................
Email address:
(b) Provide the following information for each of the related persons, if any, with respect to
which you are reporting information on this Form PF:
NFA ID
Number, if any
Page 3 of 42
(a) Hedge funds ......................................................
Title:
(This should be your full legal name. If you are a sole proprietor, this will be your last,
first, and middle names. If you are a SID, enter the full legal name of your bank.
Please use the same name that you use in your Form ADV.)
Large trader
ID, if any
Regulatory
assets under
management
I, the undersigned, sign this Form PF on behalf of, and with the authority of, the firm. In
addition, I sign this Form PF on behalf of, and with the authority of, each of the related
persons identified in Question 1(b) (other than any related person for which another
individual has signed this Form PF below).
To the extent that Section 1 or 2 of this Form PF is filed in accordance with a regulatory
obligation imposed by CEA rule 4.27, the firm, each related person for which I am signing
this Form PF, and I all accept that any false or misleading statement of a material fact therein
or material omission therefrom shall constitute a violation of section 6(c)(2) of the CEA.
(a) Provide your name and the other identifying information requested below.
NFA ID
Number, if any
Signatures of sole proprietor or authorized representative (see Instruction 11 to Form PF).
Signature on behalf of the firm and its related persons:
Item A. Information about you
1.
Information about you and your related persons
(to be completed by all Form PF filers)
under management as follows:
(If you are filing a quarterly update for your first, second or third fiscal quarter, you are
only required to update row (a), in the case of a large hedge fund adviser, or row (b), in the
case of a large liquidity fund adviser.)
9.
Net asset value of reporting fund..............................................................................
partner of Stonehaven points out, US managers seeking
to retain a capital raising firm must conduct due diligence
on their broker dealers, including their policies, procedures, licences, registrations, documentation process and
regulatory history of both the firm and registered representatives.
“Broker dealers vary greatly in their adoption of best
practices relating to capital raising, and their degree of
proficiency can materially impact
managers,” says Frank.
There is also a lot of talk
Wedded to this are renewed conemerging about cyber-security
cerns over cyber-security. As the GC
insurance. The marketplace is
of the $10bn-plus hedge fund firm
evolving as to what is useful to points out, more attention is being
paid to any cyber-security testing or
protect against risks of cyber-at- third-party analysis to demonstrate
tack and this needs to be clear that a fund is ahead of the curve.
“There is also a lot of talk emerging
for managers launching a fund about cyber-security insurance,” the
General counsel, $10bn-plus
GC adds. “The marketplace is evolving
as to what is useful to protect against
hedge fund ﬁrm
risks of cyber-attack and this needs to
be clear for managers launching a fund.”
And according to the GC of the $8bn manager, regulatory focus is intensifying around high-speed algorithm
trading and long/short equity as regulators focus more
on strategies that are perceived as carrying a risk of insider trading.
Despite heightening regulation, the US has already
seen a glut of new launches from managers of all sizes
so far in 2015 and while many acknowledge that there is
more to think about at launch stage, there are not many
who suggest it has actually become harder to launch.
“There is more to consider but it is not harder,” concludes the GC of the $100bn manager. “You need to get
the trading documentation up and running and there are
many more considerations, but overall launching a fund
is not harder.”