Under the Investment Advisers Act of 1940, investment advisers, including advisers to hedge funds and private equity funds (often referred to as “private fund advisers”) must register with the Securities and Exchange Commission. However, certain private fund advisers are exempt from such registration. While being exempt from registration, many of these exempt private fund advisers are still required to file annual reports as an “exempt reporting adviser” using a truncated version of Form ADV (the same form used to register as an investment adviser). In addition, many states also require private fund advisers exempt from registration under state law to file the same annual reports as an exempt reporting adviser.
What is an Exempt Reporting Adviser?
An exempt reporting adviser is an investment adviser that is not required to register with the SEC or with state securities authorities but is required to file an annual report using a truncated version of Form ADV. The requirement to file such annual report arises from the private fund adviser exemption and/or the venture capital adviser exemption.
When is a Private Fund Adviser an Exempt Reporting Adviser?
A private fund adviser is required to file as an exempt reporting adviser in one of three situations.
The first situation is if the private fund adviser is taking advantage of the so-called “venture capital fund adviser exemption” under Section 203(l) of the Investment Advisers Act. The venture capital adviser exemption exempts from SEC registration an investment adviser that acts as an adviser solely to 1 or more venture capital funds (what constitutes a venture capital fund is defined in detail in SEC regulations).
The second situation is if the private fund adviser is taking advantage of the so-called “private fund adviser exemption” under Section 203(m) of the Investment Advisers Act. The private fund adviser exemption exempts from SEC registration an investment adviser that acts as an adviser solely to private funds (i.e. 3(c)(1) funds and 3(c)(7) funds) and has assets under management in the United States of less than $150 million.
The third situation is if the private fund adviser is exempt from registration under the so-called “small adviser exemption” under Section 203A(a)(1)(A) of the Investment Advisers Act but is nonetheless required to file a truncated Form ADV because such filing is necessary to take advantage of the NASAA Registration Exemption for Investment Advisers to Private Funds Model Rule. The small adviser exemption is actually a provision of the Investment Advisers Act that prohibits any adviser (with a few exceptions) with assets under management of under $25 million from registering with the SEC. Private fund advisers that take advantage of it are not exempt reporting advisers under federal law because they are not making use of the venture capital fund adviser exemption or the private fund adviser exemption. However, many states, such as Arizona, California, Delaware, Indiana, Iowa, Maine, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Rhode Island, Texas, Vermont, Virginia, Washington, and Wisconsin use the NASAA model rule (or a variation thereof). As a condition to using the NASAA model rule, the private fund adviser must file Form ADV as an exempt reporting adviser. Please note that private fund advisers taking advantage of the small adviser exemption in states that do not have such requirement are not required to file as exempt reporting advisers.
What Are Exempt Reporting Advisers Required To Do?
Like their registered counterparts, exempt reporting advisers are required to file Part 1A of Form ADV through the IARD system managed by FINRA. Sections of Part 1A of Form ADV that exempt reporting advisers are required to complete are:
Item 1 – Identifying Information – The exempt reporting adviser must disclose information such as its principal place of business, website address, and the name and contact information of its chief compliance officer.
Item 2 – Identification of Exemption – The exempt reporting adviser must identify the exemption it is relying upon.
Item 3 – Form of Organization – The exempt reporting adviser must disclose its corporate form and state of organization.
Item 6 – Other Business Activities – The exempt reporting adviser must disclose the other business activities in which it is engaged and if it sells products or services other than investment advice to its advisory clients.
Item 7 – Financial Industry Affiliations and Private Fund Reporting – The exempt reporting adviser must disclose the business activities of any related persons and affiliates. In addition, this section requires substantial disclosure on each private fund managed by the exempt reporting adviser, including organizational structure, asset values, and service providers.
Item 10 – Control Persons – The exempt reporting adviser must disclose the identity of every person who directly or indirectly controls the adviser or its policies.
Item 11 – Disciplinary Events – The exempt reporting adviser must disclose its disciplinary history was well as those of its employees.
While filing a truncated Form ADV does impose a burden on the exempt reporting adviser, one significant consolation is that the exempt reporting adviser will not have to produce a Brochure, a plain-English narrative description of the adviser’s business that must be filed at registration and provided to all clients, also known as ADV Part 2.
© 2017 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.