Can a CPO give a non-registered person performance allocation $$ from commodity pool?

C

canadian_dude

QUESTION - If I start and operate a commodity pool, am I allowed to give a percentage of any performance allocation I earn from the pool to an individual who put me in contact with rich people that became the "seed" investors for the pool? I want to give him 10% of my allocation on a continuing basis, but he is NOT a futures industry professional, he is a movie producer and has no registration with the NFA as an "associated person".

Is what I am proposing to do legal by NFA standards? And if not, how can I alter the plan to make it conform?


BACKGROUND - Some of you may remember me asking questions about starting a hedge fund many months ago, proving a track record, etc. And despite some people advising me against "going pro", I still want to do it.

A lot has happened to me lately. I no longer live in Canada, I currently have an address in Miami (South) Beach and will soon have a permanenet address and residency status in the Bahamas. I have also met a movie producer here in Miami who wants to partner with me on the creation of a start-up hedge fund. But I have many questions about this in terms of the regulatory nature of this industry.

I plan to use the services of one of the hedge fund start-up companies locally in Miami, probably Turnkey Hedge Funds, although there is at least one other that I know about. So I know where I can get professional help. I also recently passed the Series 3 exam (89% score), so I could get registered as a CPO now with the NFA.

I have made a lot of money trading both Nasdaq and S&P emini futures, and would like to run a commodity pool that also trades S&P emini futures. My main problem is that I don't personally know any millionaires. That's where my association with this movie producer comes in. He know hundreds of millionaires in the entertainment world (movies, television, music, distribution, etc) He has meetings his rich people practically every day.

He and I would like to go into a partnership together. Basically he puts me in initial contact with some of the rich people he knows, and I would take it from there. We would like to raise $5 million initially to start a commodity pool, which I would manage and trade on a regular basis. The movie producer would have absolutely no involvment beyond the initial introduction, since he would not be registered with the NFA.

As a reward for allowing me to tap into his vast network of rich clients to get this fund off the ground, I am more than willing to give me 10% of any performance allocation I would earn from ALL FUNDS invested in the pool at any time (not just the initial funds from seed investors).

But is this legal? Would we be violating NFA rules in such an arrangements? If so, how can I alter the structure of the arrangement to make it conform to NFA standards? Can I give him a direct payout from all my future performance allocation earnings? Or can I make him a "silent partner" ina company that owns the commodity pool, thereby entitling him to a percentage of any profits that pool makes for its "owners"?

Thanks for any expertise you can lend in this area.
 
CONGRATULATIONS!!!

I remember when I passed the series 3 exam!

To me it was one of the hardest things that I have ever accomplished in my life!!!



....anyway. To answer your question. Based on what I was told by our complience dept back at the firm I worked for when I was a Commodites Broker.......In order to pay a commission to someone that person had to be a registered person with the NFA and preferrably passed the series 3 exam. Based on the NFA's definition of an AP- associated peson.

However, there is another way to do this LEAGALLY!!!


........When you set up your Company all you have to do is make him a non active board member of your company.

Let me explain. If you know that he is going to give you X amount of people or X amount a capital to start your fund and you want to pay him a residual income from that business then that FUND should only contain the business that he referrs to you.

Any outside money that results in another venture or from your own efforts outside of him should be another fund alltogether to keep things separate and without conflict of interest.:D
 
Quote from T-REX:

........When you set up your Company all you have to do is make him a non active board member of your company.

Let me explain. If you know that he is going to give you X amount of people or X amount a capital to start your fund and you want to pay him a residual income from that business then that FUND should only contain the business that he referrs to you.

Any outside money that results in another venture or from your own efforts outside of him should be another fund alltogether to keep things separate and without conflict of interest.:D
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OK, that might work OK. Under that scenario, I would give him 50% of my performace allocation for the people that he DIRECTLY referred to me on an ongoing basis. And he would have no interest at all in a "twin pool" I would set up that makes exactly the same trades, but contains customers he had no DIRECT interest in referring. The twin pool would attract capital based on the performance of the original pool, and from people invested in the first pool referring their rich friends to me.

But in that case, I would have these follow-up questions:

1. Am I allowed to pay him a percentage on new funds his contacts add to the original pool? For example, let's say he refers me a Joe Smith, and Joe invests $100,000 in the beginning. But Joe likes the performance he's getting, and 2 years later he invests an additional $1 million. Am I allowed to pay my partner his share of PA (performance allocation) on the additional $1 million contribution? Or am I only allowed to pay him a share of the PA on the original $100,000 his contact invested. Because I would want to pay him for ALL capital his contacts contribute, now and in the future.

2. Am I allowed to set up a twin pool that makes the exact same trades as the original pool? I read somewhere that a CPO is not allowed to set up an identical pool if the purpose of doing so is to get around the maximum number of investors per pool requirments (either 100 or 500 investors, depending on the type of pool). But this is not being done to get around that rule. So I assume I would be allowed to set up that twin pool?

3. Is he allowed to continue to refer his contacts to me, even after the fund starts trading? Remember, my friend does NOT have his Series 3, and would NOT be registered with the NFA. I have already told him he is NEVER allowed to act as a sales force for these funds, he can only refer them to me, and I have to do the selling. But would he be allowed to refer new contacts to me in the future, and have their capital added to the original pool?

Thanks for the info.
 
But in that case, I would have these follow-up questions:

1. Am I allowed to pay him a percentage on new funds his contacts add to the original pool? For example, let's say he refers me a Joe Smith, and Joe invests $100,000 in the beginning. But Joe likes the performance he's getting, and 2 years later he invests an additional $1 million. Am I allowed to pay my partner his share of PA (performance allocation) on the additional $1 million contribution? Or am I only allowed to pay him a share of the PA on the original $100,000 his contact invested. Because I would want to pay him for ALL capital his contacts contribute, now and in the future.
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A) Remember, as a non active board member he is intitled to divident payments and other benefits. A good Corporate Attorney could help you set that up.

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2. Am I allowed to set up a twin pool that makes the exact same trades as the original pool? I read somewhere that a CPO is not allowed to set up an identical pool if the purpose of doing so is to get around the maximum number of investors per pool requirments (either 100 or 500 investors, depending on the type of pool). But this is not being done to get around that rule. So I assume I would be allowed to set up that twin pool?

A) This would depend on whether or not you got grief from the NFA? Normally, the NFA is pretty easy going as long as you don't have any arbitration filings against you and no one (i.e. clients) complain about it or unless during a routine audit the NFA does not like something that they see. Remember the CFTC & the NFA mainly crack down on Broker Fraud and embezzlement type cases and ofcourse consumer complaints. So keep your nose clean and you should not have any problems. Mutual Funds have dozens if not hundreds of Funds set up many of which mimick the other. All you have to do is change the name of the fund and the content of the strategy description.

Example: ABC Fund is a "TREND FOLLOWING" system
EFG Fund is a "Swing Trade" system.

Both system can legally trade the same vehicles but "may" have different time horrizons. .....I think you can see where I'm going with this???

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3. Is he allowed to continue to refer his contacts to me, even after the fund starts trading? Remember, my friend does NOT have his Series 3, and would NOT be registered with the NFA. I have already told him he is NEVER allowed to act as a sales force for these funds, he can only refer them to me, and I have to do the selling. But would he be allowed to refer new contacts to me in the future, and have their capital added to the original pool?


A) This one is a little tricky. There is nothing wrong with talking to buddies out on the golf course about who is your broker/banker/lawyer etc. As long as he does not hold himself out to the public as an AP he is fine. He can not under ANY circumstances hold himself out to the public as a AP or CTA or CPO without being registered with the NFA/NASD. The products you solicite to clients will determine your States Blue Sky laws on the topic. Normally if you are trading Futures or SSF's you will need to be series 3 registered and take a proficiency exam. If you are already series 3 licensed and have not taken the proficiency exam - I STRONGLY URGE YOU TO DO SO RIGHT NOW!!
Even if right now you have no mind to trade SSF's as of Jan 04 it will no longer be FREE and you will have to take an actual exam!!!
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Good Luck.:D
 
Quote from T-REX:

Normally if you are trading Futures or SSF's you will need to be series 3 registered and take a proficiency exam. If you are already series 3 licensed and have not taken the proficiency exam - I STRONGLY URGE YOU TO DO SO RIGHT NOW!!
:D
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I will not be trading SSF (single stock futures), I will only be trading one thing and that is the S&P emini contract. I trade these contracts and hold them for a length of time as short as 24 hours, and as long as several weeks without changing direction.

I have been informed by industry pro's that the only thing I need to be a CPO and trade the emini S&P's for the pool is my Series 3 and NFA registration. I passed the Series 3 exam last week (89% score and am now looking into how to go about registering with the NFA and what type of business structure myself and potential partner will need to effect our profit sharing plan, without violating any NFA rules.
 
Quote from canadian_dude:



I will not be trading SSF (single stock futures), I will only be trading one thing and that is the S&P emini contract. I trade these contracts and hold them for a length of time as short as 24 hours, and as long as several weeks without changing direction.

I have been informed by industry pro's that the only thing I need to be a CPO and trade the emini S&P's for the pool is my Series 3 and NFA registration. I passed the Series 3 exam last week (89% score and am now looking into how to go about registering with the NFA and what type of business structure myself and potential partner will need to effect our profit sharing plan, without violating any NFA rules.
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Thats cool too. AS for me though I like to have all my ducks lined up because you never know what opportunities may come in the future. For example: What if a client wants to give you $10mil to trade QQQ SSF's (ONLY) ????
I for one would take his $10mil and trade QQQ SSF's because I will not want to turn away such a large amout of business knowing that my business model wont tap out until I reach $30mil!

In short All I'm saying is don't limit yourself when the NFA is letting you in the door for "free" per say. I like to do things when its cheap and easy not later on when the rules have changed.

Good luck.:)
 
I recently researched much this same issue for a client. The potential difference is that my client was looking to have a silent partner. I cannot tell from your posts whether you will only be sharing revenue or will also share ownership.

If sharing ownership, the CFTC (the NFA said this was a CFTC question) was very clear. Membership in the NFA and a Series 3 was required for the partner.

I am not as confident as the other posters that your plan does not cause issues, even if your plan is to only share revenues. Plus, your "partner" may come under the rules associated with Investment Advisers since he is making introductions.

If your partner sends out an e-mail to his list of contacts that says, "Go talk with X; he has an interesting investment opportunity," this could be construed by the SEC as a general solicitation. Assuming you had done a Reg D, Rule 506 offering, that general solicitation would blow your exemption from registration of the Pool as a security with the SEC.

Get good counsel and/or talk to the NFA yourself. My experience is that they are remarkably helpful: 312-781-1410. There's no need to get yourself tied up in regulatory knots for something that can be so easily addressed.
 
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