“Exempt reporting advisers” ? new SEC class with oxymoron for a name

Private fund managers have been able to avoid registering with the SEC by limiting the number of funds they advised to fewer than 15. Now, thanks to Dodd-Frank, this exemption has been replaced with a general requirement that advisers meeting certain assets under management (AUM) thresholds must register with the SEC. This comes with a few twists, of course. 

The SEC has created a new classification of exempt reporting advisers (ERAs) for private fund advisers under $150 million in AUM and venture capital advisers.

Although exempt from full SEC registration, the new ERAs will be subject to completing and filing a smaller subset of information on Form ADV Part 1, the Investment Advisers Act anti-fraud provisions, pay to play requirements, insider trading-related rules and may be subject to specific recordkeeping requirements. (The SEC has indicated that they may introduce recordkeeping rules specific to ERAs at a future date.)

Dare we mention that ERAs may potentially still be subject to SEC examinations?

To add confusion to the mix, each ERA must look into the laws of the state(s) where they have a place of business and or investors. If required to register with a state, ERAs have to submit the entire Form ADV and adhere to applicable state regulations.

Investment adviser representatives may also be subject to registration requirements and the requirements may vary dependent on whether the adviser is federally or state registered.

Exempt reporting adviser filing requirements


ERAs must complete and file a specific subset of Form ADV Part 1. This subset is as follows:

Item 1: Identifying Information.
ERAs are required to disclose general identifying information including principal place of business, name and contact information of their chief compliance officer, website if applicable, registration status with any foreign financial regulatory authority, and whether they are public reporting companies under the Securities Exchange Act of 1934.

Item 2B: Identification of Exemption.
ERAs are required to identify the exemption on which they are relying.

Item 3: Form of Organization.
ERAs are required to disclose their legal form (e.g., limited liability companies), the state or country under which they are organized and the month in which their fiscal year ends.

Item 6: Other Business Activities.
ERAs are required to disclose other businesses in which they are actively involved (e.g., broker-dealer, commodity pool operator, futures commission merchant or major security-based swap participant) and whether they sell products or provide services other than investment advice to their advisory clients.

Item 7A and Section 7A of Schedule D: Related Persons.
ERAs are required to provide information about whether their related persons, including foreign affiliates, are financial industry participants (e.g., broker-dealer, other investment adviser or futures commission merchant).

Item 7B and Section 7B of Schedule D: Private Funds.
ERAs are required to disclosure significant information about the private funds they advise. Non-United States advisers are not required to complete Schedule D for any private fund that, during the adviser’s last fiscal year, was not a United States person, beneficially owned by a United State person, or offered in the United States.

Item 10: Control Persons.
ERAs are required to disclose the identity of every person who directly or indirectly controls the adviser. Control is defined as the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities. All persons owning more than 25 percent of the adviser’s voting interests are considered to be control persons.

Item 11: Disclosure Information.
ERAs are required to disclose significant disciplinary history of the adviser or its employees.

Important dates and calculation of regulatory AUM

The deadline for the initial ERA filing is March 30, 2012. When determining regulatory AUM, an ERA can select AUM on any day within 90 days prior to filing. Once filed as an ERA, an adviser is only required to review AUM annually thereafter for the purposes of determining continued filing status as an ERA. The ERA will then be required to file an annual amendment within 90 days of year end.

When calculating AUM, all of the private fund assets of an adviser with a principal office and place of business in the United States are considered to be assets under management even if the adviser has offices outside of the United States.

A non-U.S. adviser, however, need only count private fund assets it manages at a place of business in the United States toward the $150 million asset limit under the private adviser exemption — not to be confused with the foreign private adviser exemption.

Annual updating amendments and other than annual updating amendments

There are two amendments to Form ADV Part 1 that an ERA will need to consider.
The first is the required annual updating amendment, which is required to be completed within 90 days of each calendar year end; the second is the other-than-annual amendment, which is required to be amended promptly if any part of Items 1, 3 or 11 changes or if Item 10 changes materially.

Form ADV-NR (non-resident)

Non-resident general partners or managing agents of ERAs must make a one-time filing by mail of Form ADV-NR with the SEC. Form ADV-NR requires non-resident general partners or managing agents to furnish the SEC with a written, irrevocable consent and power of attorney that designates the SEC as an agent for service of process, and that stipulates and agrees that any civil suit or action against such person may be commenced by service of process on the SEC.

Non-resident ERAs are required to use Form ADV-NR in the same way and for the same purpose as it is currently used by registered investment advisers. The collection of information is necessary for the SEC to obtain appropriate consent to permit it and other parties to bring actions against non-resident partners or agents for violations of the federal securities laws.

Policies and procedures

ERAs are not specifically required to comply with Rule 206(4)-7, the compliance program rule under the Investment Advisers Act of 1940. However, ERAs are subject to a number of IA rules that apply to both registered and unregistered investment advisers including, but not limited, to pay-to-play and insider trading regulations. Having policies and procedures in place to address various firm risks is a best practice. Both investors and regulators want to see strong controls in place.

Don’t take the “exempt” out of ERA and think it means much. An ERA’s requirements are still significant.