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Introduction and Overview of 40 Act Liquid Alternative Funds
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The requirements for ’40 Act Funds are governed by
the rules and regulations of the ICA, and each fund is
registered as a security with the SEC as required by
the Securities Act of 1933.
The rules specific to the ’40 Act and ’33 Act cover all
necessary business requirements for a public fund,
and shouldbe reviewed indetail withyour legal counsel
and compliance consultant. For recommendations
on specialist service providers, please contact us at
prime.advisory@citi.com. The sections below cover
some of the main business requirements, but this is
not an exhaustive list and should be regarded as a
high-level overview of key considerations.
Registration and Regulatory Filings
Unless they qualify for an exemption, securities
offered or sold to the public in the United States must
be registered by filing a registration statement with
the SEC.
The prospectus, which is the document through which
an issuer’s securities are marketed to a potential
investor, is included as part of the registration
statement. The SEC prescribes the relevant forms
on which an issuer’s securities must be registered.
Among other things, registration forms call for:
A description of the securities to be offered
for sale;
Information about the management of the issuer;
Information about the securities (if other than
common stock); and
Financial statements certified by independent
accountants.
Registration statements and the incorporated
prospectuses become public shortly after they
are filed with the SEC. The statements can be
obtained from the SEC’s website using Electronic
Data Gathering and Retrieval (EDGAR). Registration
statements are subject to SEC examination for
compliance with disclosure requirements.
Each new fund requires a fund sponsor to file the
needed regulatory materials and, in the case of
mutual funds, this fund sponsor must also underwrite
the creation of the share classes to be offered by
the fund. These sponsors are either independent or
affiliated with a broker-dealer or bank in the United
States; as of the end of 2012, therewere approximately
776 financial firms offering investment management
services to fund investors. One cost-effective fund
sponsor model is called the series trust, and offers
a management solution in which the fund sponsor
arranges for a third party to provide certain services
through a turnkey set-up; the overall cost is spread
across the different funds in the trust.
Key Service Providers
Once created, funds are required by the ’40 Act to
assign both a custodian and a fund administrator
to support the activities of the fund. For alternative
funds that employ portfolio leverage or use short
sales of securities or derivatives, a prime brokerage
account is also typically required. The requirement
for the fund to have a dedicated custodian is often
a new relationship for a traditional hedge fund
manager, who is more accustomed to private fund
requirements for which the required service providers
are typically just the prime broker and external
fund administrator.
In addition to the custodian, the fund must also assign
an independent board of directors to oversee the
activities of the fund and approve key fund documents
and reports. This function is linked to the fund’s
administration and is often provided as a service by
the public fund administrators in the United States.
As public funds are all onshore, the board of directors
need to be resident within the United States.
The ’40 Act fund also requires an independent
transfer agent and investor services provider who
can process share purchases and redemptions, and
provide reporting to the end investor or the wealth
adviser overseeing the portfolio. These services are
typically bundled with the fund administration and
can in some cases also be bundled with the custodian
services for the fund.
In summary, an alternative ’40 Act fund requires the
same range of service providers as a private hedge
Section IV: Requirements for 40 Act Liquid
Alternative Funds
Footnote / Reference source: Investment Company Institute: 2013 Investment Company Factbook