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. Investment advisers can claim ERA status with the SEC in two ways, either using the Private Fund Adviser Exemption or the Venture Capital Fund Adviser Exemption.
ERAs should also check with the state(s) where they have a place of business for any state-specific filing requirements.
Filing Requirements
If you’re considering applying for one of these exemption statuses, you must file an initial exempt reporting Form ADV within 60 days of starting an advisory relationship with your first fund.
In the event your exemption no longer applies, you are required to promptly register as a registered investment adviser (RIA) firm with either the SEC or state regulators. For example, if you chose to begin managing separately managed accounts (SMAs), your exemption status would no longer apply and you would need to register as an RIA before taking on your first SMA retail client.
Related: Transitioning from an ERA to an RIA
Post-Filing Requirements
Compliance requirements for ERAs are similar to those for RIAs in some ways, albeit with a number of exceptions that include the following:
Limited Compliance Examinations
The SEC has the legal authority to examine an ERA’s books and records, though it generally has limited authority to conduct a “for cause” examinations, in which the SEC believes there is wrongdoing.
That said, the SEC brought more enforcement actions against ERAs in 2022 than in the previous three years combined. Recent action should serve as a reminder that ERAs are still subject to rules outlined in the Investment Advisers Act of 1940 (Advisers Act), including certain disclosure obligations, fiduciary responsibilities toward clients (meaning private funds, in the case of many ERAs), and anti-fraud provisions.
Truncated Form ADV Part 1A
ERAs have to submit an abbreviated Form ADV, but are not required to prepare or deliver a firm brochure to clients (Form ADV Part 2A). Once filed with the state (see below) or SEC, ERAs must update their Form ADV annually within 90 days of the firm’s fiscal year end. Form ADV may need to be updated more frequently depending on material developments.
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. Under this rule, issuers (here, the private funds managed by the ERA) are exempt from registration with the SEC and state regulators, but they must file a Form D with the SEC and state regulators shortly after the first sale of securities is made.
Blue Sky filings are required as a result of Blue Sky Laws, which mandate that private funds (and other issuers) must register their offerings, provide the financial details of the investment, and disclose which entities are involved.
Code of Ethics
While ERAs are not required to establish a Code of Ethics or maintain a Policies & Procedures Manual, it is a best practice that helps ensure the firm’s compliance program comports with relevant investment advisory standards.
When establishing your own Code of Ethics, keep in mind that it should outline compliant standards of conduct and address employee trading practices, such as ensuring team members report personal securities holdings and transactions and obtain pre-approval before buying or selling certain investments.
Other Areas of Compliance
As noted above, ERAs are not required to comply with all of the regulations that RIAs must follow. However, specific areas of compliance are still applicable to ERAs and include:
- Anti-Fraud Provisions
- Fiduciary Duty
- Pay-to-Play Regulations
- AML, specifically as it pertains to OFAC
- Principal and Cross Trades
- Duty to Supervise
- Insider Trading
- Whistleblower Protections
- Privacy Rules (both federal and state)
While other areas of compliance may not be codified into rules that specifically apply to ERAs, it is recommended that firms incorporate the following into their Policies and Procedures as a best practice:
- Proxy Voting Rules
- Record Keeping
- Advertising Rules
- Custody Rules
- Solicitor/Promoter Rules
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