Navigating the complex regulations around investment advisor registration can be daunting for new firms. Many financial startups wrongly assume that maintaining an “exempt reporting advisor” (ERA) status absolves them of major compliance obligations.
However, while ERAs avoid full SEC registration, they remain subject to provisions of the Investment Advisers Act.
Failure to meet required filing, reporting, and recordkeeping rules, even as an ERA, can lead to significant penalties. In this blog, we cover exactly what’s required to operate legally, mitigating risk while allowing you to focus on growing your business.
Who Can Register as an Exempt Reporting Advisor?
Several exemptions exist, allowing certain advisors managing private funds to register as ERAs with the SEC instead of full-fledged Registered Investment Advisors (RIAs). Two common exemptions include:
The Private Fund Adviser Exemption
This applies to advisors who solely advise private funds and have less than $150 million in assets under management across those funds. Defining a “private fund” can be complex, but it essentially refers to funds avoiding registration under the Investment Company Act by limiting investors. This includes vehicles like hedge, private equity, and venture capital funds.
Advisors working exclusively with private funds below the $150 million threshold can skip RIA registration and fulfill simplified SEC reporting as an ERA. However, advising even one separately managed account alongside your private funds can eliminate this exemption.
The Venture Capital Fund Adviser Exemption
Advisors who solely advise qualifying venture capital funds also need not register as RIAs. The SEC defines a venture capital fund as investing primarily in qualifying portfolio companies to provide operating and business expansion capital.
These funds offer investors the chance to gain exposure to early-stage startup investments and small businesses with high growth potential. Advisors focused entirely on this niche can operate as ERAs.
The Main Obligations of an Exempt Reporting Advisor
While avoiding full registration, taking the ERA route still involves notable compliance requirements, including:
Within 60 days of reaching your first advisory agreement, new ERAs must be completed and filed electronically in Form ADV Parts 1A and 1B. This provides regulators with key information on your ownership, business activities, services, fees, and disciplinary history.
Filing Form ADV appropriately as an ERA takes precision. A compliance lawyer can handle this process seamlessly, providing properly formatted responses across each section.
ERAs must update their Form ADV each year within 90 days of their fiscal year-end. You must also promptly update the SEC regarding any material changes to your business or advisory services during the year.
Keeping regulators informed regarding major developments like new fund launches, increases in assets under management, or advisory agreement changes is crucial. Your lawyer tracks filing deadlines and submit necessary amendments on your behalf.
While less stringent than registered advisors, ERAs must maintain organized records available for SEC examination. This includes communications, investment recommendations, fund marketing documents, performance data, and other operational information.
Your compliance team helps craft compliant record retention procedures tailored to your ERA activities. They also conduct mock audits to ensure you avoid deficiencies if the SEC requests documents.
The SEC maintains the authority to examine an ERA’s books, records, and business activities. In recent years, the SEC has ramped up enforcement scrutiny of ERAs through targeted exams. Their focus extends beyond fraudulent activities to recordkeeping and filing deficiencies.
They prepare clients for the exam process while interfacing with SEC staff to provide requested documents in an organized, compliant fashion.
Limited Provisions of the Advisers Act Still Apply
While avoiding full investment advisor registration, ERAs remain subject to certain Advisers Act rules, including:
Restrictions on Political Contributions – SEC “Pay-to-Play” rules limiting political contributions apply equally to RIAs and ERAs. Your compliance lawyer ensures your policies and procedures address these restrictions appropriately.
Insider Trading Prohibitions – ERAs must enact policies preventing misuse of material non-public information, similar to registered advisors. Your compliance team can tailor comprehensive policies and training to mitigate insider trading risks.
Recent SEC Amendments – Changes effective in 2022 impose new preferential treatment and restricted activity conditions on ERAs, which compliance advisors can explain in detail.
Is Full SEC Registration as an RIA Better for Your Business?
As your ERA business evolves, registering as a full RIA may become optimal for accessing new markets and revenue streams. For example, advising even one separately managed account requires transitioning from ERA to RIA status.
Compliance teams like those at My RIA Lawyer in Georgia guide firms through registration, preparation, and filing of all necessary documents. They become your fully outsourced compliance partner, maintaining your registrations, fulfilling filing obligations, conducting audits, and interfacing with regulators during exams.
The path to RIA registration has nuances, but their team simplifies each step.
Don’t Navigate ERA Compliance Alone
Operating as an exempt reporting advisor allows certain investment managers to avoid full SEC registration. However, ERAs remain subject to the Advisers Act and SEC oversight provisions.
Missteps in meeting filing, reporting, or recordkeeping rules can spur regulatory action. An experienced compliance lawyer at My RIA Lawyer can help you set up and maintain robust ERA compliance programs aligned with SEC expectations. Their team provides the confidence and freedom to grow your advisory firm.
If you have questions or need support on the ERA framework, don’t hesitate to contact them today to ensure regulatory obligations don’t slow your progress.