Compliance Solutions for Investment Advisers

FAQs — Hedge Funds

 

What is an exempt reporting adviser?

An exempt reporting adviser is an investment adviser that, although exempt from SEC registration, still has an obligation to report certain information on Part 1 of Form ADV.

How are exempt reporting advisers exempt from SEC registration?

Either through the private fund adviser exemption to SEC registration or the venture capital adviser exemption to SEC registration.

How does an investment adviser qualify for the private fund adviser exemption to SEC registration?

An investment adviser with its principal place of business in the U.S. may rely on the private fund adviser exemption if the adviser (i) acts solely as an investment adviser to one or more “qualifying private funds” and (ii) manages private fund assets of less than $150 million.  An adviser with its principal place of business outside of the U.S. may rely on the private fund adviser exemption if (i) the adviser has no client that is a U.S. Person (as defined in Regulation S under the Securities Act of 1933) except for one or more “qualifying private funds” and (ii) all assets managed by the adviser from a place of business in the U.S. are solely attributable to private fund assets, the total value of which is less than $150 million.

How does an adviser qualify for the venture capital adviser exemption to SEC registration?

Under certain circumstances, an adviser advising solely venture capital funds may be exempt from SEC registration.

What are the reporting requirements for an exempt reporting adviser?

Form ADV requires exempt reporting advisers to complete the following items in Part 1A (and all attendant schedules):

Item 1 – Identifying Information

An investment adviser must provide basic identifying information, such as its full legal name, place of business, and the name of a contact person for regulatory matters.

Item 2.B – SEC Reporting by Exempt Reporting Advisers

An investment adviser is required to identify the registration exemption it is relying on.

Item 3 – Form of Organization

An investment adviser is asked to identify and disclose the form of its organization, (e.g., a corporation, partnership, limited liability company, etc.)

Item 6 – Other Business Activities

An investment adviser is asked to disclose any other business activities that it provides for clients (e.g., a registered security-based swap dealer, trust company, etc.).

Item 7 – Financial Industry Affiliations and Private Fund Reporting

An investment adviser must indicate the type of related persons that it may have and whether it is an adviser to any private fund.

Section 7.B.(1) of Schedule D – Private Fund Reporting

A private fund adviser must complete Section 7.B.(1) of Schedule D to provide information, including the size, structure and operations of each private fund that it advises.

Item 10 – Control Persons

The investment adviser is required to identify every person that directly or indirectly controls (management or policies) the investment adviser.

Item 11 – Disclosure Information

An investment adviser must provide information about its disciplinary history as well as the disciplinary history of any of its affiliates.

Is an exempt reporting adviser required to draft and file Part 2A of Form ADV?

No.

If an investment adviser is relying on the private fund adviser or venture capital adviser exemption, when is it required to file as an exempt reporting adviser?

Within 60 days of relying on the exemption.

Are exempt reporting advisers required to update its Form ADV?

Yes. An exempt reporting adviser, like a registered investment adviser, is required to amend its Form ADV: (i) at least annually, within 90 days of the end of its fiscal year; and (ii) more frequently for material changes.

How often is an exempt reporting adviser required to update their regulatory assets under management?

An exempt reporting adviser relying on the private fund adviser exemption must annually assess the value of the private fund assets it manages in accordance with the Form ADV instructions to determine whether it may continue to rely on the private fund adviser exemption and must report such amount in its annual updating amendments to its Form ADV.

What if an exempt reporting adviser reports more than $150 million in private fund assets in its annual amendment filing?

If an exempt reporting adviser reports in its annual updating amendment that it has $150 million or more of private fund assets under management, the adviser is no longer eligible for the private fund adviser exemption.

What if an exempt reporting adviser goes over the $150 million private fund asset threshold during the year?

An increase above $150 million of an exempt reporting adviser’s private fund assets under management during a calendar year does not require the exempt reporting adviser to register during such calendar year.

How long does an exempt reporting adviser have to transition to full investment adviser registration if it is no longer eligible for the exemption?

If an exempt reporting adviser no longer qualifies for the private fund adviser exemption due to an increase in its private fund regulatory assets under management, the adviser must apply for registration within 90 days after filing the annual updating amendment.

How long does an exempt reporting adviser have to transition to full registration if the reason it is no longer eligible for the exemption is because it seeks to advise a managed account?

No transition period is available to an exempt reporting adviser relying on the private fund adviser exemption that seeks to advise a managed account.  An exempt reporting adviser relying on the private fund adviser exemption must register prior to advising any client that is not a private fund.

Are exempt reporting advisers subject to examination by the SEC?

While the SEC does have the legal authority to conduct such an examination, the SEC has indicated that they do not anticipate doing so (absent cause).

Are exempt reporting advisers subject to all the same compliance requirements as are investment advisers registered with the SEC?

While it is an excellent idea for any entity managing money to enact compliance policies and procedures, exempt reporting advisers are not required to adopt and implement compliance policies and procedures or codes of ethics.

 

Important Information

The information contained in this Frequently Asked Questions is only a summary and is not intended to be a comprehensive analysis of the rules and regulations applicable to registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. For more information, please see our Terms of Use.

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