RIA Compliance and Practice Management Blog

An Overview of Exempt Reporting Adviser (ERA) Compliance Requirements

Posted by RIA in a Box

Oct 1, 2020 1:38:29 PM

Exempt reporting adviser compliance requirementsThe U.S. Investment Advisers Act of 1940 (the "Advisers Act"), as amended by the Dodd-Frank Act, not only required registration of thousands of investment advisers, but also implemented a new category for a narrow class of advisory firms: the Exempt Reporting Adviser.1

Exempt Reporting Advisers ("ERAs") are investment advisers that are not required to register as an adviser with the U.S. Securities Exchange Commission ("SEC") or state regulators, but must still pay fees and report public information via the IARD/FINRA system. Federally, the two exemptions that advisers can use to claim ERA status with the SEC are (i) the Private Fund Adviser Exemption or (ii) the Venture Capital Fund Adviser Exemption.

As of October 1, 2020, according to SEC public filings, there are 4,557 exempt reporting advisers which have filed an abbreviated Form ADV with the SEC. This compares to 2,378 ERA firms in 2013. Thus, over the past seven years, the number of ERA firms has nearly doubled. Since 2014, the number of SEC-registered ERAs has surpassed the number of private fund advisers registered with the SEC as RIA firms.

Note: RIA in a Box LLC is not a law firm and does not provide legal advice. We strongly advise that all companies consult with proper legal counsel for all matters related to Rule 506 of Regulation D. This overview is provided for general information purposes only and should not be relied upon to take any action. 

An investment adviser relying on either exemption must generally complete its initial exempt reporting adviser Form ADV filing within 60 days of claiming the exemption. The applicable date for this will typically be date on which the firm commences the advisory relationship with its first fund. If either exemption will become inapplicable because the adviser is for example planning to also manage separately managed accounts ("SMAs"), then the investment adviser must promptly register as registered investment adviser ("RIA") firm with the appropriate regulator (SEC or state) prior to taking on its first SMA.

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Post Registration Compliance Requirements for Exempt Reporting Advisers

  • Compliance Examinations: The SEC has the legal authority to examine an ERA’s books and records but has not traditionally conducted regular examinations of exempt reporting advisers. Instead, the SEC has generally limited its examinations to those "for cause" in which the SEC believes or has reason to believe there is wrongdoing.
  • Form ADV Part 1A: ERAs have to submit an abbreviated Form ADV, but are not required to prepare or deliver a brochure to clients. Once registered, advisers must update the form at least once a year within 90 days of the firm's fiscal year end and more frequently in certain circumstances based on material developments in accordance with the Form ADV instructions. 
  • Regulation D and State Blue Sky Filings: Rule 506 of Regulation D is a “safe harbor” for the private offering exemption of Section 4(a)(2) of the Securities Act. Issuers relying on Rule 506 of Regulation D are exempt from registration with the SEC and state regulators, but they must file a Form D with the SEC and state regulators after the first sale of securities is made.
  • Code of Ethics: Under rule 204A–1, commonly referred to as the Code of Ethics Rule of the Advisers Act, investment advisers are required to adopt and maintain a Code of Ethics. The rule requires an adviser’s Code of Ethics to layout standards of conduct and require compliance with Federal securities laws. In addition, a firm's code of ethics must also address personal trading. A firm's code of ethics has to require personnel to report their personal securities holdings and transactions, and require personnel to obtain pre-approval before buying or selling certain investments. 
  • Policies Regarding Material Non-Public Information (MNPI): Since ERAs are subject to Section 204 of the Advisers Act, they must implement written policies and procedures reasonably designed to prevent the misuse of material non-public information (MNPI). Additionally, compliance requirements that apply to all advisers regardless of registration status would apply to federally-filed ERAs such as the SEC’s “pay to play” provisions and the USA PATRIOT Act’s anti-fraud requirements. While ERAs may not be required to adopt a traditional RIA policies & procedures or compliance manual; ERAs should still strongly consider adopting relevant written policies and procedures. All advisory firms should note that once a compliance manual or other internal procedures are implemented, those procedures should be followed regardless of whether or not their adoption was strictly required in the first place.
  • Record Keeping Obligations: Section 204 of the Advisers Act requires investment advisers to make and keep such records and to make and circulate such reports as instructed by the SEC. ERAs could be subject to SEC recordkeeping requirements and the SEC has the authority to examine such records. 

It's important to note that the SEC has taken regulatory action against exempt reporting advisers. In a recent regulatory action against an exempt reporting adviser, the SEC alleged that the adviser failed to follow key elements of the fund's partnership agreement related to conflicts of interest, failure to make capital calls, use of affiliated entities, and audited financial statements. Many of these compliance risk areas are highlighted in the SEC's recent private fund adviser risk alert. As this recent regulatory action highlights, regardless if operating as an exempt reporting adviser or as a registered investment adviser, advisers to private funds need to ensure they doing as they promised to in all fund agreements and relevant documents. Exempt reporting advisers should strongly consider implement a robust compliance program to ensure regulatory compliance.

Earlier this month, we announced the official release of our new Private Fund Platform, a customized version of our industry-leading MyRIACompliance® online RIA compliance software platform. The new platform has been designed to address the unique regulatory requirements faced by private fund advisers including venture capital, private equity, and hedge fund managers. The new private fund platform provides tools to help manage and automate compliance processes and streamline regulatory filings, all in a centralized location saving private fund advisers time and money and providing them reassurance they are meeting all compliance requirements. The new platform is designed for SEC-registered private fund advisers and exempt reporting advisers (ERAs).  Learn how RIA in a Box can help address the unique regulatory requirements faced by ERA's by clicking the below link to schedule a demo of our new platform. 

Learn more about our ERA Registration and Compliance Services

Footnotes

1ERAs are investment advisers that generally rely on either the Private Fund Adviser Exemption (Advisers Act Section 203(m)) or the Venture Capital Fund Adviser Exemption (Advisers Act Section 203(l)). See www.sec.gov/rules/final/2011/ia-3222.pdf.

Topics: RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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