A s 2006 begins, it is an appropriate time to compliance policies, - PDF document

G Investment Management Alert January 2006 End-Of-Year Matters and Compliance Issues requirements with respect to books and records, A s 2006 begins, it is an appropriate time to compliance policies, advertising, custody, alert you of changes in the law that may disclosure, proxy voting, codes of ethics, affect your business and to remind you of performance fees, and reporting and inspection by issues about which you should be aware to assure the Commission. The details with respect to the your fund’s compliance with applicable law, adoption of the final rules and these requirements regulation and best practices. Please contact a are described in a previous Investment member of Lowenstein Sandler’s Investment Management Alert, available at Management Group if you have any questions http://www.lowenstein.com/new/InvMngt1104.pdf. regarding the information detailed below or if you Therefore, if you have not already taken the would like further guidance. necessary steps, please contact a member of the Registration of Hedge Fund Advisers as Investment Management Group immediately if Investment Advisers you believe you may be required to register as an Rule 203(b)(3)-2 was adopted by the Securities investment adviser. You may wish to read the section below regarding investment advisers to and Exchange Commission (the “Commission”) in October 2004. The Rule, along with corresponding become familiar with the applicable requirements. amendments to a number of related rules under the Private Investment Funds Investment Advisers Act of 1940, as amended (the Compliance Policies. As we have noted in prior “Advisers Act”), requires that hedge fund managers Investment Management Alerts, the line between affected by the rule register with the Commission registered investment advisers and unregistered and be in compliance with all requirements of the advisers has continued to blur and more and more Advisers Act by February 1 of this year. As a result unregistered funds are adopting best practices and of the changes taking effect on that date, many improving their existing compliance policies. hedge fund advisers previously exempt from Whether or not your firm will be required to registration requirements are now registered or register as an investment adviser, you should review about to be registered with the Commission. your compliance policies to verify that they are Among other things, the Advisers Act has specific adequate and that your firm is adhering to them. This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G Fee Deferrals for Offshore Funds. Recent federal Privacy Notices. Investment advisers and legislation and IRS guidance applies to the deferral investment funds must have privacy policies in of management and performance fees. If you place. In addition to being distributed at the time of currently defer such fees or are contemplating such subscription, privacy policies must be distributed at deferral, please contact us to discuss the issues least once per year and more often if there are any relating thereto. changes to the policy. We believe that the best time for the annual distribution of the policy is with New Issues Certifications. If you purchase “new the annual financial statements and/or tax reports. issues” (defined by NASD Rule 2790 to mean an equity security issued in an initial public offering) Beneficial Ownership Reporting Requirements. If your broker (or, if you are a funds of funds that your fund (including, for this purpose, affiliated invests in funds that invest in new issues, the investment funds) acquires more than five percent underlying funds) will require that you certify each (5%) of a class of equity securities of an issuer year as to whether the fund is a “restricted person” registered under the Securities Exchange Act of within the meaning of the rule. To do so you must 1934, as amended (the “1934 Act”) (i.e., most obtain a recertification from investors in your fund publicly-traded companies), you must monitor and as to whether they are restricted persons. Please comply with the reporting requirements of the contact us if you require documentation to obtain Williams Act by filing a Schedule 13D or a such recertifications from your investors. Schedule 13G. A Schedule 13D must be amended upon any material change in the facts contained Updating of Offering Documents. Offering therein, including the acquisition or disposition of documents should be reviewed from time to time to securities in an amount equal to one percent or verify that they contain a current, complete and more of the class being reported. If, on the other accurate description of your fund’s strategy, hand, you have filed a short-form Schedule 13G management, soft dollar and brokerage practices, and the information reflected in the schedule is and current law and regulation, and to ensure that different at December 31 than that previously they reflect current disclosure trends. We would be reported, you are required to amend the schedule by happy to assist you in reviewing and, if necessary, February 14 of the following year. In addition, if updating your offering documents to reflect the fund (again, including affiliated funds) acquires changes in law, regulation, and disclosure practices a greater than ten percent (10%) interest in such a relevant to investment funds. company, there is an obligation to file reports of Blue Sky and Local Securities Matters. You should beneficial ownership on Forms 3, 4, and/or 5, as continue to inform us prior to making any offer or well as corresponding potential liability for short- sale of an interest in the fund in any new swing profits under Section 16 of the 1934 Act. jurisdiction. Offers to U.S. persons may trigger Furthermore, quarterly reports of equity holdings by filing obligations in a given offeree’s state of institutional investment managers are required on residence. Offers to foreign persons may require Form 13F where certain equity assets under filings in the country of a given offeree’s residence.

G management total One Hundred Million Dollars made by entities must be analyzed to verify that ($100,000,000) or more. If the fund (together with they will not subject the fund to regulation as an all affiliated investment funds) reaches this investment company by exceeding the 100- threshold, please let us know and we will provide investor limit. In addition, if an entity invests more an overview of how and when to file Form 13F. than forty percent (40%) of its total assets in the fund, regulators will “look through” such entity for Registered Commodities Pool Operators. If your purposes of counting beneficial owners. fund is a commodities pool, you must prepare an Furthermore, if an entity is created for the purpose annual report for each pool in accordance with the of investing in a 3(c)(1) fund, then the regulators rules of the Commodity Futures Trading will also “look through” the entity, regardless of its Commission and file such report with the CFTC percentage ownership. and the National Futures Association. In addition, you must update your disclosure documents ERISA Compliance. If the aggregate amount periodically, as you may not use any document invested in the fund by benefit plan investors (i.e., dated more than nine months prior to the date of employee benefit plans, IRAs, government plans, its intended use. Furthermore, documents that are church plans, and entities the underlying assets of materially inaccurate or incomplete must be which include plan assets) were to equal or exceed corrected and the correction must be distributed to twenty-five percent (25%) of the aggregate pool participants within twenty-one (21) days of investments in the fund, the fund would be subject discovering the defect. to various ERISA requirements. You should monitor on an ongoing basis the level of Investment Company Act Compliance. If your investments by benefit plan investors and, to the fund is a 3(c)(1) fund – that is, it relies on the extent your fund approaches the twenty-five exemption from registration as an investment percent threshold, you should contact us to discuss company because it has 100 or fewer investors, you the application of ERISA rules and the alternatives must continually monitor the number of investors for compliance. and the attribution rules under the Investment Company Act of 1940, as amended. The attribution Registered Investment Advisers rules provide that, in the case of an investor that is Annual Updating Amendments to Form ADV. itself relying upon Section 3(c)(1) or Section An adviser who is registered with the Commission 3(c)(7) (for example, a “fund of funds”), and that must amend its Form ADV at least annually, within holds more than ten percent (10%) of the equity ninety (90) days of the end of the adviser’s fiscal interests in the fund, the fund must “look through” year. Your annual updating amendment must this investor and count as the hedge fund’s own update all items on the form. Part 1A, however, investors each of the partners or shareholders of must be updated electronically on the SEC’s IARD this investor. Therefore, potential investments system and must specify that it is an annual greater than ten percent (10%) of the fund’s equity updating amendment. In addition to the annual