SEC COMPLIANCE

Form ADV and the Exempt Reporting Adviser Explained

By Baruch Mackliff, the Capital Commander · PRBE Capital

Topic: SEC compliance for a private raise

There is a line a lot of operators cross without noticing. On one side you are doing deals: buying a building, syndicating a project, putting a group of people you know into an opportunity. On the other side you are managing a fund, taking a fee for judgment about securities on somebody else's behalf, and you are an investment adviser under federal law whether or not you ever used the word.

This is what makes someone an adviser, what the exempt reporting adviser category actually is, and what a first Form ADV filing involves.

What makes you an investment adviser

The Advisers Act definition has three elements and is deliberately broad.

• You provide advice about securities, meaning their value or the advisability of buying or selling them.
• You do it for compensation.
• You are in the business of doing it.

Compensation is not limited to a management fee. Carried interest counts. A promote counts. A fee paid by the fund rather than by its investors counts. Being in the business does not require a brochure or a shingle; it can be satisfied by holding yourself out, by charging for the advice, or simply by the regularity of the activity.

The element that catches fund managers is the identity of the client. When you form a pooled vehicle and manage it, the adviser's client is generally the fund, not the individual investors in it. One fund is one client. That structure is exactly why the old exemption for advisers with a small number of clients was repealed: a manager could run several substantial funds and still count a handful of clients.

So if you set up a vehicle, raise money into it, and exercise discretion over what securities it buys, you are almost certainly acting as an investment adviser to that fund.

The most important exception concerns what the fund holds. Advice about securities is what the statute reaches. A fund that acquires real property directly may not be advising on securities at all, and its manager can fall outside the definition entirely. But that conclusion is fragile. A vehicle holding joint venture interests, limited liability company interests in other entities, notes, or interests in other funds may well be holding securities, and the analysis turns on the actual holdings rather than on what the asset class is called in the deck. This is the single most common place where a sponsor assumes an answer and is wrong about it.

Registered, exempt, and the category in the middle

Being an adviser does not automatically mean registering with the Commission. There are three possible states.

• Registered. Full registration, carrying the compliance programme, the client brochure, books and records obligations, custody requirements, a code of ethics and examination exposure.
• Exempt reporting adviser. Exempt from registration, but still required to file and keep current a public report on Form ADV.
• Exempt with no report. A narrow set of exemptions that carry no filing at all.

The middle category is where most emerging fund managers land, and the name is the problem with it. Exempt reporting adviser sounds like a lighter grade of registration. It is better understood as a public filing obligation with a reduced set of rules attached. The regulator is still watching, and the filing is still a signed statement.

Two exemptions produce that status.

• The private fund adviser exemption. An adviser whose only clients are private funds, and whose assets under management attributable to those funds in the United States stay below the statutory threshold, is exempt from registration. The threshold is expressed in the statute as one hundred fifty million dollars of private fund assets under management in the United States. Confirm the current figure and its interpretation before you rely on it.
• The venture capital fund adviser exemption. An adviser solely to venture capital funds is exempt regardless of size, but venture capital fund is a defined term with conditions attached, including a cap on non-qualifying investments as a share of committed capital, limits on borrowing, and no ordinary redemption rights for investors. A fund that describes itself as venture capital does not necessarily meet the definition.

A separate exemption exists for a genuinely foreign adviser with limited United States contacts, and that one produces full exemption with no filing. An adviser solely to small business investment companies is likewise fully exempt rather than reporting. Both are narrow, and most managers will not qualify for either.

The assets under management figure is not the one in your deck

The threshold is measured using regulatory assets under management, which is a defined calculation and not the number a manager quotes to investors.

It is computed gross. You do not deduct leverage or other liabilities. It includes uncalled capital commitments. In certain circumstances it includes assets managed without compensation. The result is routinely larger than the net asset value the manager thinks of as the size of the fund, and managers cross the threshold on paper while believing they are comfortably underneath it.

If the threshold is crossed, the adviser has to register, and the rule provides a transition period measured from the annual amendment that reports the crossing rather than an immediate cut-off. That window is ninety days, and it is enough time to prepare a registration only if the work begins when the number is known, not when the window opens.

What an exempt reporting adviser actually has to do

The filing itself is a subset of Form ADV Part 1A. An exempt reporting adviser completes the identifying items, the organisational items, the items covering other business activities and affiliations, the disciplinary item, and the schedules that go with them, including a dedicated section of Schedule D completed for each private fund the adviser manages. It does not prepare the client brochure that registered advisers file, and it does not file the retail relationship summary.

The deadlines are fixed.

• The initial report is due within sixty days of first relying on the exemption.
• An annual updating amendment is due within ninety days of the end of the adviser's fiscal year, every year, for as long as the status continues.
• Other-than-annual amendments are due promptly when specified information becomes inaccurate, covering identifying details, form of organisation and disciplinary history. Promptly means promptly, not at the next annual filing.
• A final report is filed when the adviser stops relying on the exemption, whether because it is registering or because it has wound down.

Alongside the filing, the antifraud provisions of the Advisers Act apply in full. That includes the rule aimed specifically at fraud on investors in pooled vehicles, which is the provision that most often turns a fund dispute into a regulatory matter. The political contribution restrictions also reach exempt reporting advisers, which matters to anyone raising from public pension money. What does not apply is most of the registered-adviser rulebook: the compliance rule, the custody rule, the code of ethics rule and the marketing rule are written for registered advisers.

The Commission has also made clear that it retains the ability to look at an exempt reporting adviser's records, even though these advisers are not on the routine examination cycle.

The state layer, which is a separate question

Exempt reporting adviser status is a federal concept. It says nothing about the states.

States run their own adviser registration regimes, and many have adopted their own private fund adviser exemption, sometimes mirroring the federal one and sometimes adding conditions such as requirements about who may invest, audited financial statements, or disclosure delivered to investors. An adviser that is an exempt reporting adviser federally may still have to register, or make its own exempt filing, in the state where it has a place of business and in states where its activity crosses a threshold.

A manager who files federally and stops there has done one of the two halves.

What a first Form ADV filing involves

The filing goes through the industry system used for adviser registrations, and the sequence surprises people because the first step is not the form.

• Entitlement and account setup. Before anything can be filed the firm needs an account on the system and a firm identifier. That means paperwork, and the account must be funded to cover the filing fee before a filing will go through. Allow weeks for this, not days.
• Ownership and control. The schedules require direct owners, indirect owners up the chain, and control persons, with dates and percentages. Holding companies, trusts and several managing members turn this into genuine work.
• Disciplinary history. For the firm and for each control person, across a defined set of regulatory, criminal and civil categories. This is answered from records rather than from recollection, and a yes answer does not disqualify anybody. An inaccurate no is the problem.
• The private fund section, one per fund. Each fund gets its own entry: its identifier, its fiscal year end, its gross asset value, its type, which exclusion from investment company status it relies on, how many beneficial owners it has, what share is held by funds of funds, whether it is audited, whether the audited statements go to investors, and the identity of the auditor, the custodian, the administrator, the prime broker and any marketer.
• Consistency with the fund documents. The step most often skipped and the one that matters most. Form ADV is public. Investors and institutional allocators read it next to the private placement memorandum and the partnership agreement. If the filing describes a fee the partnership agreement does not support, names an auditor the fund never engaged, or reports a structure the documents do not create, that inconsistency now sits in a public filing signed by the firm.

Budget several weeks for a first filing rather than an afternoon. The form is not difficult. Assembling accurate answers to it is.

How we handle it

PRBE Capital's work here starts before the filing: establishing whether the vehicle actually makes the sponsor an adviser, which exemption fits the structure, what the regulatory assets under management calculation produces as opposed to what the deck says, and then getting the account, the ownership schedules and the per-fund data assembled so that the first filing is accurate and consistent with the fund documents instead of drafted against a deadline.

This is an explanation of how the exempt reporting adviser category and the Form ADV filing work, not legal, financial or securities advice. Thresholds, deadlines, the items an exempt reporting adviser must complete and the state-level requirements all change, and the rules that govern you are the ones in effect when you rely on the exemption. An investment management or securities lawyer confirms your status and signs off on the filing.

Common questions

Does running a fund make me an investment adviser?

Usually, yes. The definition reaches anyone who advises others about securities, for compensation, as a business, and when you manage a pooled vehicle the adviser's client is generally the fund itself rather than its investors. Carried interest and a promote both count as compensation. The main exception concerns what the fund holds, since a vehicle that acquires real property directly may not be advising on securities at all.

What is an exempt reporting adviser?

It is an adviser that is exempt from registering with the Commission but still has to file and keep current a public report on Form ADV. The status comes from either the private fund adviser exemption or the venture capital fund adviser exemption. The name is misleading: it is a public filing obligation with a reduced rulebook attached, not an exemption from oversight.

What is the private fund adviser exemption?

It exempts from registration an adviser whose only clients are private funds and whose private fund assets under management in the United States stay below the statutory threshold, which the statute expresses as one hundred fifty million dollars. An adviser relying on it is an exempt reporting adviser rather than fully exempt. The threshold is measured using regulatory assets under management, which is a defined calculation, so confirm the current figure and how it is computed.

When is a first Form ADV due for an exempt reporting adviser?

The initial report is due within sixty days of first relying on the exemption. After that an annual updating amendment is due within ninety days of the end of the adviser's fiscal year, and other-than-annual amendments are due promptly when identifying information, form of organisation or disciplinary history becomes inaccurate. A final report is filed when the adviser stops relying on the exemption.

What does an exempt reporting adviser have to file on Form ADV?

A subset of Part 1A: the identifying and organisational items, the items on other business activities and affiliations, the disciplinary item, and the accompanying schedules, including a dedicated Schedule D section completed for each private fund managed. Exempt reporting advisers do not prepare the client brochure that registered advisers file, and they do not file the retail relationship summary.

How is regulatory assets under management calculated?

Gross, without deducting leverage or other liabilities, and including uncalled capital commitments. It is routinely a larger number than the net asset value a manager thinks of as the fund's size, which is how advisers cross the registration threshold while believing they are below it. Crossing it triggers a transition period of ninety days measured from the annual amendment that reports the crossing.

Does filing federally cover my state adviser obligations?

No. Exempt reporting adviser status is a federal concept and says nothing about state law. States run their own adviser regimes, many with their own private fund adviser exemption that sometimes adds conditions such as investor eligibility requirements or audited financial statements. An adviser may still need to register or make its own exempt filing in its home state and in states where its activity crosses a threshold.