U.S. Regulations of Hedge Funds: United States Regulation Of Hedge Funds

by Hammer, Douglas L.

• ISBN13: 9781590312971
• ISBN10: 159031297X
• Format: Paperback
• Copyright: 2006-03-30
• Publisher: Natl Book Network

Summary

This authoritative resource surveys federal securities laws and rules applicable to the organization, capitalization and operations of private U.S. domestic investment partnerships that invest and trade mainly in the public securities markets.

Table of Contents

Introduction	1	(8)
The Nature of Hedge Funds	1	(2)
Organization	3	(1)
Regulatory Prospects	4	(3)
A Note on Conventions	7	(2)
Investment Adviser Registration and Regulation	9	(52)
Federal Definition of ``Investment Adviser''	9	(6)
Exclusions from the Investment Adviser Definition	10	(1)
Investment Advisers Exempt from Registration	11	(4)
Federal and State Registration of Advisers	15	(6)
Mandatory SEC Registration	15	(1)
Optional SEC Registration	16	(1)
``Assets under Management''	17	(1)
Transition Between State and SEC Registration	18	(1)
State Regulation of ``Investment Adviser Representatives''	19	(1)
National de Minimis Exemption	20	(1)
State Notice Filings	20	(1)
State Requirements	21	(1)
Registration	21	(1)
Recordkeeping	21	(1)
Custody	22	(1)
Fiduciary Duty	22	(1)
Inspections	22	(1)
SEC and State Registration Processes	22	(2)
Federal	22	(2)
State Laws	24	(1)
Reporting Requirements and Annual Fees	24	(2)
Federal	24	(1)
States	25	(1)
Surprise Inspection by Accountant	25	(1)
Filings Required under the Exchange Act	25	(1)
Disclosure of Financial and Disciplinary Information	26	(1)
Fiduciary Duties; Policies and Procedures	26	(9)
General Duty	26	(2)
ERISA	28	(1)
Compliance Programs for SEC-Registered Investment Advisers	28	(1)
Code of Ethics	29	(1)
Insider Trading	30	(1)
Privacy	30	(2)
Anti-Money Laundering	32	(1)
Proxy Voting	32	(3)
Books and Records Requirements under the Advisers Act	35	(3)
General Rule	35	(2)
Custody	37	(1)
Past Performance Records	37	(1)
Storage Media; Electronic Records	37	(1)
Commodity Trading Activities	38	(20)
General	38	(1)
Jurisdiction of the CFTC	39	(1)
Commodity Pool Operators	40	(5)
Commodity Trading Advisers	45	(2)
CTA and CPO Registration	47	(4)
Disclosure Requirements	51	(1)
Required Reports to Clients and Pool Participants	51	(1)
Reports of Substantial Market Positions	52	(1)
Recordkeeping Requirements	52	(1)
Exemptions from Certain Disclosure, Recordkeeping and Reporting Requirements	53	(4)
Anti-Fraud Provisions	57	(1)
Other Considerations	57	(1)
Anti-Money Laundering	58	(3)
Registered and Unregistered Investment Advisers	58	(1)
Notice Provision for Unregistered Investment Advisers	59	(1)
Commodity Trading Advisers	60	(1)
Exclusions from Investment Company Act Requirements	61	(26)
Summary of Registration Requirements	61	(1)
Key Limitations on Registered Investment Companies	61	(1)
Consequences of Failure to Register and to Comply with Limitations	62	(1)
Section 3(c)(1) Exclusion	62	(12)
General Statement of Rule	62	(1)
Determination of Beneficial Ownership	62	(8)
Integration	70	(4)
Non-U.S. Funds	74	(1)
Public Offering Prohibition	74	(1)
Section 3(c)(7) Exclusion	74	(9)
General Statement of the Rule	74	(1)
Permitted Owners of 3(c)(7) Funds	75	(7)
Integration of Separately Managed Accounts	82	(1)
Non-U.S. Funds	82	(1)
Corporate Taxation	83	(1)
Exchange Act Reporting Obligations	83	(1)
Converting 3(c)(1) Fund to 3(c)(7) Fund	83	(2)
Procedure	83	(1)
Additional Investments by Grandfathered Investors	84	(1)
Integration with New 3(c)(1) Fund	85	(1)
Limitations on Investments by Registered Investment Companies in Hedge Funds	85	(2)
Fund Structures	87	(24)
Introduction	87	(1)
Pooled Investment Vehicle---Limited Partnership, Limited Liability Company or Corporation	88	(3)
Limited Liability	88	(1)
Tax Efficiency	88	(2)
Flexibility of Governance: The General Partner Makes the Rules	90	(1)
Basic Structure of a U.S. Hedge Fund---Limited Partnership	91	(7)
Parties	91	(5)
Basic Documents	96	(2)
Offshore Hedge Funds	98	(13)
Why Organize an Offshore Hedge Fund?	98	(4)
Typical Offshore Hedge Fund Structure (Side-by-Side Structure)	102	(1)
Basic Documents	103	(1)
Different Capital Structures to Accommodate Performance Fees	104	(1)
Other Service Providers	105	(1)
Jurisdiction of Organization	105	(1)
Master-Feeder Structure	106	(5)
Private Offerings	111	(32)
Application of Securities Act to Hedge Funds	111	(1)
Registration Requirements under the Securities Act	112	(1)
Exemptions from Registration	112	(17)
Private Offering Exemption under Securities Act Section 4(2)	113	(7)
Regulation D	120	(9)
Regulation S	129	(11)
Offshore Transaction	130	(1)
No Directed Selling Efforts to United States	131	(2)
Additional Requirements	133	(2)
Substantial U.S. Market Interest	135	(1)
Category 2	136	(1)
Category 3	136	(4)
Concurrent Regulation D and Regulation S Offerings	140	(1)
Consequences of Failure to Register	140	(3)
Disclosure Obligations	143	(40)
Introduction	143	(1)
Public Offering and Mutual Fund Disclosure Obligations	144	(16)
Securities Act	144	(15)
Company Act	159	(1)
Plain English Requirements	159	(1)
Disclosure Obligations in Connection with Private Offerings and Regulation D	160	(2)
Private Offering under Securities Act Section 4(2)	160	(1)
Regulation D Offerings	161	(1)
Anti-Fraud Provisions	162	(5)
Exchange Act Provisions	162	(3)
Securities Act Provisions	165	(2)
Disclosure Obligations under the Advisers Act	167	(3)
Part II of Form ADV	167	(1)
Disclosure of Material Facts about Financial Condition	167	(1)
Disclosure of Legal and Disciplinary Proceedings	168	(1)
Proxy Voting Regulations	169	(1)
Finders and Solicitors	170	(1)
Disclosure Obligations under the CEA	170	(9)
Disclosure Requirements	171	(1)
Required Reports to Clients and Pool Participants	172	(1)
Reports of Substantial Market Positions	173	(1)
Exemptions from Certain Disclosure and Reporting Requirements	173	(5)
Anti-Fraud Provisions	178	(1)
Privacy Regulations	179	(4)
State Blue Sky Regulation	183	(30)
Introduction	183	(2)
Pre-NSMIA State Blue Sky Regulation	185	(19)
1956 Uniform Securities Act	185	(10)
Other State Securities Laws	195	(9)
NSMIA	204	(3)
State Securities Registration under NSMIA	204	(2)
NSMIA and Broker-Dealer and Agent Registration	206	(1)
Amendments to the 1956 Uniform Securities Act following NSMIA	206	(1)
2002 Uniform Securities Act	207	(6)
Offers and Sales of Securities within a State	207	(1)
Securities Registration under the 2002 Uniform Securities Act	208	(1)
Broker-Dealer and Agent Registration under the 2002 Uniform Securities Act	209	(1)
Consequences of Failure to Register under the 2002 Uniform Securities Act	210	(3)
Marketing Activities	213	(20)
Introduction	213	(1)
Private Offering Exemption	213	(7)
Limitation on Manner of Offering and Qualification of Persons Solicited	213	(2)
Relationship between Hedge Fund and Person Making Communication	215	(1)
Relationship between Person Making Communication and Offeree	216	(2)
Timing	218	(1)
Subject Matter	219	(1)
Number of Persons Solicited	219	(1)
Sophistication of Offerees	219	(1)
Disclosure Requirements	220	(1)
Marketing Activities Outside of the United States	220	(2)
Regulation S; Directed Selling	220	(1)
Private Offering; Marketing to Non-U.S. Investors	221	(1)
Non-U.S. Exchange Listing	221	(1)
Advisers Act Regulation of Content	222	(11)
Fraudulent, Deceptive or Manipulative Advertising	223	(3)
General Anti-Fraud Provisions	226	(1)
Holding Out to the Public	227	(1)
``Brochure Rule''	228	(1)
Solicitation Disclosures	228	(1)
Broker Requirements	229	(1)
Record Retention	229	(4)
Websites	233	(8)
Introduction	233	(1)
Preserving Private Offering Exemption	233	(3)
Online Marketing by Affiliated Brokers	234	(1)
Third Party Websites	234	(1)
Self-Qualification	235	(1)
Advisers Act Rules	236	(1)
Access Rules	236	(1)
Advertising Rules	236	(1)
Hyperlinks	237	(1)
Adoption of Another's Content	237	(1)
Guidelines	238	(1)
Other Regulations	238	(1)
NASD Guidance	238	(1)
State Laws	238	(1)
Offshore Offerings via the Internet	239	(2)
Avoiding Broker Registration	241	(8)
Exchange Act	241	(6)
Rule 3a4--1 Safe Harbor Exemption from Broker Registration	241	(2)
Non-Safe Harbor Cases	243	(2)
Solicitors	245	(1)
Dealer Registration	246	(1)
Avoiding State Registration	247	(2)
Generally	248	(1)
Employees as ``Agents''	248	(1)
New York	248	(1)
Erisa Considerations	249	(18)
Introduction	249	(1)
Plan Asset Regulations---Look-Through Rule	249	(2)
Definition of Equity Interest	250	(1)
Twenty-five Percent Test	250	(1)
``Operating Company'' Exception	251	(1)
Grandfather Rule	251	(1)
Fiduciary Duty	251	(4)
Exclusive Purpose; Plan Documents	252	(1)
Standard of Prudence	252	(1)
Diversification	253	(1)
Proxy Voting	253	(1)
Penalties and Co-Fiduciary Liability	254	(1)
Prohibited Transactions	255	(9)
Specific Transactions Prohibited	255	(1)
Fiduciary Self-Dealing	256	(1)
Prohibited Transaction Exemptions	256	(6)
Directed Brokerage in Exchange for Referrals	262	(1)
Participant-Controlled Accounts	262	(1)
Caution	263	(1)
Penalties	263	(1)
Other ERISA Rules Applicable to Hedge Funds	264	(3)
Bonding Requirements	264	(1)
Foreign Security Custody Rules	264	(1)
Indemnification	265	(1)
Reporting Requirements	265	(2)
Custody	267	(6)
SEC-Registered Investment Advisers	267	(2)
Definition of Custody	267	(1)
Qualified Custodian	268	(1)
Notice to Clients	268	(1)
Account Statement Delivery Requirement	268	(1)
Alternative Procedure for Hedge Funds	269	(1)
State-Registered Investment Advisers	269	(2)
Unregistered Investment Advisers	271	(2)
Trading Activities and Reporting	273	(44)
Consequences of Large Shareholdings	273	(10)
Exchange Act Section 13(d) Filing Requirements	273	(5)
Exchange Act Section 16(a) Filing Requirements	278	(3)
Exchange Act Section 16(b) Short-Swing Profits	281	(1)
Exchange Act Section 13(f) Filing Requirements	282	(1)
State Anti-Takeover Statutes	282	(1)
Issuer's Takeover Defenses	283	(1)
Trading Restricted Securities and Control Securities	283	(6)
Securities Act Rule 144	284	(3)
``Section 4(1-1/2)''	287	(2)
Purchasing Shares in Public Offerings	289	(5)
NASD New Issue Rule	289	(5)
Regulation M	294	(1)
Short Selling Rules	294	(7)
Short Sale Rule	295	(1)
``Net Long'' or ``New Short'' Determination	295	(2)
Prohibition of Naked Short Sales	297	(1)
NASD Short Sale Rule	297	(1)
After-Hours Trading	298	(1)
Exemptions from Short Sale Rule	299	(1)
Regulation SHO Pilot Program	299	(1)
Exchange Act Section 16(c) Short Sale Prohibition	299	(1)
Covering Short Sales from Publicly Offered Stock	300	(1)
Prohibition on Covering Short Sales with Restricted Securities	300	(1)
Related Party Trades Involving Investment Adviser and its Other Clients or its Affiliated Broker	301	(4)
Broker Transactions	301	(1)
Principal Transactions	302	(1)
Agency Cross Transactions	302	(1)
Cross Transactions	303	(1)
Cross Transactions under ERISA	304	(1)
NASD Rules on Registered Representative/Investment Adviser	304	(1)
Other Considerations	305	(1)
Personal Trading	305	(2)
Report Personal Trades	306	(1)
Written Policy	307	(1)
Investment Company Act Section 17(j)	307	(1)
Policies and Procedures Regarding Insider Trading	307	(5)
Insider Trading	308	(3)
Penalties for Insider Trading	311	(1)
Order Aggregation	312	(1)
In General	312	(1)
Aggregation of Trades for Clients and Investment Adviser Personnel	312	(1)
Other Trade Allocation Issues	313	(1)
Trading Errors	314	(3)
Brokerage Allocation Practices	317	(10)
Best Execution	317	(1)
Soft Dollar Arrangements	318	(6)
Definition	318	(1)
Disclosure Duty in General	318	(1)
Section 28(e) Safe Harbor	319	(1)
Soft Dollar Arrangements outside Section 28(e)	320	(3)
Prohibited Soft Dollar Arrangements	323	(1)
Reciprocal Brokerage	324	(3)
Fees and Special Profit Allocations	327	(12)
Management Fee	327	(1)
Performance Fees and Allocations	328	(6)
Implications of Performance Fee versus Allocation	328	(1)
Features	329	(2)
Rules	331	(3)
Performance Fee Computation Methods for Offshore Hedge Funds	334	(2)
Equalization of Shares	335	(1)
Classes and Series	335	(1)
Monthly Accrual	335	(1)
Rough Justice	336	(1)
Other Fees Charged by Hedge Funds	336	(1)
Soft Lock-Up Fees	336	(1)
Fees on Special Withdrawals	337	(1)
Excessive Fees	337	(1)
Rescission Remedy	338	(1)
Tax Considerations	339	(40)
Federal Income Tax Treatment as a Partnership	339	(2)
Election to Be Taxed as Partnership	339	(1)
Publicly Traded Partnerships	339	(2)
Issues on Formation of Hedge Fund---Capital Contributions	341	(3)
Tax Basis	341	(1)
Special Issues on Contribution of Securities	341	(3)
Allocations of Profits and Losses for Tax Purposes	344	(9)
Pass-Through Tax Treatment	344	(1)
Special Incentive Profit Allocation	344	(1)
Ordinary Income	345	(1)
Qualifying Dividends	345	(1)
Capital Gains and Losses	345	(1)
Gain or Loss from Short Sales	346	(1)
Constructive Sale Transactions	346	(1)
Wash Sales	347	(1)
Section 1256 Contracts	347	(1)
Deduction Items	348	(2)
Hedge Funds Are Not Engaged in Passive Activities	350	(1)
Aggregate Allocations versus Layering	350	(1)
Unrelated Business Taxable Income	351	(1)
Marking to Market	352	(1)
Withdrawals	353	(4)
Distribution of Cash	353	(1)
Distribution of Securities in Kind	353	(1)
Sale of Interests	354	(1)
Section 754 Election	355	(1)
``Fill-Up'' or ``Stuffing'' Provisions	356	(1)
Divisions and Combinations of Hedge Funds	357	(2)
Division of Hedge Funds	357	(1)
Combination of Hedge Funds	358	(1)
Dissolution	359	(1)
Offshore Hedge Funds	360	(10)
General	360	(1)
Classification of Entity	360	(1)
U.S. Trade or Business	361	(1)
U.S. Ownership	362	(4)
Withholding Taxes on Certain U.S. Income	366	(2)
Unrelated Business Taxable Income	368	(1)
Master Fund Structure	369	(1)
U.S. Estate Taxes on Non-U.S. Individuals	370	(1)
U.S. Taxation of General Partner/Investment Adviser	370	(8)
In General	370	(1)
Types of Income	370	(1)
Limited Partnerships and Limited Liability Companies	371	(4)
S Corporation Structure	375	(1)
Self-Employment Taxes	376	(1)
Fee Deferral by Investment Adviser	377	(1)
State Taxation Issues	378	(1)
Performance Advertising	379	(10)
Introduction	379	(1)
Disclosure of Past Performance	379	(3)
Inclusion of Advisory Fees	380	(1)
Model Results	381	(1)
Specific Recommendations	382	(3)
Selected Past Specific Recommendations	383	(1)
Required Disclosures	384	(1)
Portfolio Holdings and Other Current Recommendations	384	(1)
Other Issues	385	(2)
Recordkeeping Requirements	385	(1)
CFA Institute Standards	385	(1)
NASD Rules Governing Hedge Fund Sales	386	(1)
Commodity Funds	386	(1)
Portability of Performance	387	(2)
Performance Results from Previous Advisory Firms	387	(1)
CFA Institute Standards	388	(1)
Index	389	(18)
About the Authors	407