For emerging private fund managers, understanding the U.S. Securities and Exchange Commission (SEC) registration requirements and adviser status designations is critical. Depending on assets under management (AUM) and fund structure, advisers may qualify as either a Registered Investment Adviser (RIA) or an Exempt Reporting Adviser (ERA), each with distinct regulatory obligations.
Navigating the registration process as an RIA or the transition from an ERA to an RIA requires careful attention. There are different reporting requirements and triggers which must be adhered to. Building a compliance program early (i.e., creating policies, procedures, disclosures, and offering training) will help advisers meet regulatory requirements on time.
Investment advisers with over $100 million in regulatory AUM may register voluntarily with the SEC, gaining access to the regulatory framework. However, once an adviser reaches $150 million in AUM, SEC registration becomes mandatory in most cases. This threshold applies specifically to U.S.-based advisers. Generally, advisers who reach this AUM threshold are often already Exempt Reporting Advisers and a transition filing is required.
The SEC’s 120-day registration option allows private fund managers to register reflecting $0 AUM upon submitting their initial Form ADV filing. Once approved by the SEC, an adviser has 120 days to amend their Form ADV filing to reflect AUM above RIA registration thresholds. This allows for a calculated delay in full SEC registration for up to 120 days after they begin managing client assets, often through a private fund. This grace period is designed to provide emerging managers with time to launch their operations and begin fundraising without triggering immediate registration.
Private fund managers should take precautions to avoid starting the 120-day registration process too early. Failure to register within this timeframe while continuing to manage assets may result in the withdrawal of RIA registration.
An ERA is an investment adviser that is exempt from full SEC registration but is still required to file a limited version of Form ADV. The two exemptions include advisers who manage less than $150 million in private fund assets or those who advise solely on venture capital funds. Eligibility for ERA status can vary by state and AUM, and advisers may still need to register or file notice with state securities regulators depending on where they operate or have clients.
While federal regulations typically take precedence in the investment advisory space, advisers who are not registered with the SEC—particularly ERAs or state-level firms—must also be mindful of the regulatory requirements specific to the states in which they operate. Complying with applicable state laws is essential to maintaining proper registration and avoiding potential compliance issues.
Exempt Reporting Advisers relying on the private fund adviser exemption must annually calculate total AUM to determine if the exemption still applies. The adviser must apply for registration with the SEC within 90 days after filing the annual updating amendment.
Whether registering as an RIA or ERA, emerging managers will simultaneously develop detailed compliance policies and procedures to ensure adherence to SEC requirements regarding their registration status.
One of the first documents that must be adopted by any private fund manager with an RIA status is the Code of Ethics. This document covers areas such as personal trading, gifts and entertainment, political contributions, and other relevant areas. All personnel should understand their obligations under the Code of Ethics, and annual certifications should be obtained to reinforce ongoing compliance with these obligations.
Beyond the Code of Ethics, a Compliance Manual will need to be drafted to establish procedures for various compliance concepts, including the review of any real or potential conflicts of interest and controls around fees and expenses. In addition, private fund managers should also implement controls to prevent the misuse of material non-public information. Protecting sensitive data reduces regulatory risk and preserves the firm’s reputation. In terms of external communications, all marketing and advertising materials must comply with the SEC marketing rule.
While ERAs avoid many of the requirements of full registration, they must still adopt a compliance program to ensure they and their employees comply with key provisions of the Advisers Act, such as anti-fraud rules.
Initial fund compliance starts with ensuring that offering documents—such as Limited Partnership Agreements (LPAs), Private Placement Memorandums (PPMs), side letters, and marketing materials—are fully aligned. Clear disclosure of fees, expenses, valuation methods, and potential conflicts of interest is essential to meet SEC regulatory expectations. These documents should also be drafted and finalized during the SEC registration or reporting process.
Investor onboarding compliance is critical and will include measures like risk-based AML/KYC reviews and confirmation of accredited or qualified investor status. Additionally, advisers will need to be mindful of the SEC custody rule requirements, which typically involve an annual financial audit of the fund by a PCAOB-registered accounting firm and the delivery of GAAP-compliant financial statements to investors, providing transparency and safeguarding investor assets.
Having a comprehensive understanding of registration and reporting requirements will best position advisers to meet compliance requirements. If an adviser is unclear of their registration status, they should avoid accepting capital commitments above the SEC RIA registration thresholds, so they do not violate regulatory requirements. However, ERAs are permitted to accept commitments but must report as an ERA within 60 days after commencing investment advisory activities.
Petra Funds Group’s compliance team has decades of experience managing SEC regulatory compliance programs for private fund advisers. The group’s expertise enables them to provide insight and guidance on a wide range of regulatory compliance services, from investment adviser registration to ongoing compliance support to performing SEC mock examinations. Learn more about Petra’s comprehensive compliance offering here and contact Jesse Brown with questions.
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