Transitioning from an Exempt Reporting Adviser to a Registered Investment Adviser: Five Steps to Follow

Registering with the Securities and Exchange Commission (SEC) is something most advisers are familiar with – but what happens when you’re transitioning from an exempt reporting adviser (ERA) to a registered investment adviser (RIA)?

From an expanded Form ADV to annual reviews, the exempt reporting adviser SEC requirements vary significantly from RIA requirements.

In this guide, we’ll lay out five steps you can take to successfully update your firm’s information and transition to an RIA.

The Exempt Reporting Adviser Transition: 5 Steps to Register as an RIA

There are five steps you can use to update your registration and transition into an RIA status. Note that the below is not all-inclusive of RIA registration or reporting requirements, but offers a foundational guide to getting started.

Step 1: Determine your eligibility

If you’re uncertain where the line is between an ERA and an RIA, you’ll want to sort that out first to determine whether your transition is necessary.

The vast majority of ERAs fall under one of two main federal exemptions: the Private Fund Adviser Exemption or the Venture Capital Fund Adviser Exemption.

Either of these could become inapplicable if:

You will be taking on separately managed accounts (SMAs), in addition to the current funds*
You have $150M or more of private fund AUM
You otherwise fail to meet any and all exemption requirements.

*Note that advisers must promptly register with the appropriate regulator (SEC or state) prior to taking on its first SMA. SMAs in the RIA space means any account managed outside a pooled investment. Broker-dealers (and reps) use the term separately managed account (SMA) to mean an account managed by a third-party outside the firm.

Once you become ineligible for the exemption provided by the Dodd Frank Act, you must comply with all applicable laws and rules requiring registration with the SEC as well as notice filing requirements within 90 days of ineligibility of the exemption. You may continue to act under the previous regulatory rules during the 90-day transition period.

Also be aware that the 90-day transition period is not available to advisers that have failed to comply with all SEC reporting requirements applicable to an ERA, or that have accepted a client that is not a private fund.

Step 2: File your final ERA report and submit an updated Form ADV

Next, you’ll need to submit a final report as an ERA to the Financial Industry Regulatory Authority’s (FINRA) IARD system.

Then you’ll need to fill out and submit an updated Form ADV. While ERAs are only required to submit a Form ADV 1A, RIAs must generally fill out all parts of the form. Note that your Form ADV will need to be updated throughout the year if you or your firm undergo any material changes. You’ll also pay any necessary fees at the time of registration.

As you register with the SEC, it’s a good idea to check with your state regulatory bodies to ensure you are correctly registered.

Step 3: Designate a Chief Compliance Officer

Under Rule 206(4)-7 of the Advisers Act, you must designate a Chief Compliance Officer (CCO) at your firm.

Your CCO can be any member of your team, but is traditionally someone in an executive role or other high-level position, as they need a holistic view of your firm and the authority necessary to implement and enforce compliance processes.

Keep in mind that while CCOs are in charge of creating, distributing and enforcing compliance, they are not solely responsible for your firm’s compliance successes or failures. The SEC expects compliance to be interwoven with each team member’s daily functions.

Step 4: Develop Policies and Procedures, a Code of Ethics and record-keeping processes

RIAs are required to develop and follow written policies and procedures specific to their firm, which will be reasonably designed to detect and prevent compliance violations.

You’ll also need to create a Code of Ethics for your firm, which outlines the principles and standards that guide their professional conduct.

Per Rule 204A-1, “requires an adviser’s code of ethics to set forth standards of conduct and require compliance with federal securities laws. Codes of ethics must also address personal trading: they must require advisers’ personnel to report their personal securities holdings and transactions, including those in affiliated mutual funds, and must require personnel to obtain pre-approval of certain investments.”

Additionally, Rule 204-2 of the Adviser Act requires RIAs to maintain certain books and records relating to their investment advisory business, including:

Advertising and performance records
Records related to Code of Ethics including personal securities trading
Policies and procedures adopted and implemented under the Compliance Rule
An archive of all written communications received and sent by the firm
A copy of each brochure, brochure supplement and Form CRS (for SEC-registered firms), and each amendment or revision to the brochure, brochure supplement and Form CRS (for SEC-registered firms), that satisfies the requirements of Part 2 or Part 3 of Form ADV.
Trial balances and financial statements
Documentation of the firm’s annual compliance program review

Step 5: Plan for your annual review

As an RIA, you must complete and document an annual review. This requirement ensures RIAs are regularly testing their compliance program; however, it does not mean that testing should only be conducted annually. Regular testing throughout the year ensures programs are functioning effectively to meet all requirements and mitigate potential risk points.

For more information on the annul review process, download the COMPLY™ 2024 Annual Review Guide.

With these five steps in place, you can successfully transition from an ERA to RIA and register with the SEC.

Get Registered

Considering starting a your own RIA firm? Download The Ultimate New Registration Toolkit to help you navigate the intricacies of registration… from start to finish!

Want to feel confident in your firm’s compliance? Click here to connect with a member of the COMPLY team and learn more about how we can help you register with confidence.