Investment advisers must comply with the provisions of the Investment Advisers Act of 1940. Exempt Reporting Advisers are the investment advisers that don’t need to register with the SEC or state regulators. But you should file regular reports to the Securities and Exchange Commission via the IARD/FINRA system.
Advisers rely on two exemptions to claim their ERA status:
- Advisers to venture funds, or
- Private fund advisers with $150 million or less in regulatory assets under management
You may be asking, “should I be an exempt reporting adviser?” Here’s what you must know:
Requirements of Federal ERAs
All the compliance requirements, such as the anti-fraud requirements, apply to ERAs, irrespective of registration status. ERAs should file Part 1A of Form ADV within 90 days of the fiscal year-end for the firm.
You should disclose the corporate form of organization, principal place of business, and business activities. Mention the type of exemption the ERA is relying upon. Give the contact information of the chief compliance officer.
Identify all the persons that directly or indirectly control the ERA or policies. If there have been any disciplinary events of the employees in the past, disclose that history.
Describe the services or products offered other than investment advice. You must give substantial information on the private funds managed, asset values, and organizational structure.
Should the ERA Comply with the Policies?
As an ERA, you are not expected to adopt the policies and procedures manual. Furthermore, the SEC does not inspect any ERA’s records, nor perform routine compliance examinations. However, an independent indication of suspected wrongdoings can trigger such inspection.
So, it is in the firm’s best interests to follow these best practices. Besides, filing the truncated Form ADV is not cumbersome as ADV Part 2 requires narrative descriptions.
When Can You File as a Private Fund Adviser?
You must file as a private fund adviser under any of the three following situations:
When taking advantage of the Investment Advisers Act Final Rule 203(l): In this situation, the ERA can file “venture capital fund adviser exemption.” The investment adviser gets exemption from SEC registration by acting as an adviser to venture capital funds solely.
When filing exemption under Section 203(m): The investment adviser files “private fund adviser exemption” of the Advisers Act. Here, the ERA will act as adviser solely to private funds in the United States. The private funds have assets under management less than $150 million.
When seeking exemption as a small adviser: The ERA files “small adviser exemption” in the Investment Advisers Act. Section 203A(a)(1)(A). They are still required to submit the Form ADV. This provision prohibits advisers with less than 25 million assets under management from registering with the SEC. However, this may vary in different states, based on whether they use the NASAA model rule.
A registration analysis should be performed to know whether a fund organizer meets the exemption criteria. Rather than having doubts like should I be an exempt reporting adviser, consult with expert ERA compliance services. They provide assistance in all aspects of ERA registration, from set-up to reporting.