The Dodd-Frank Act amended the IAA or the US Investment Advisers Act, 1940. With this amendment, it introduced a new category for the Exempt Reporting Advisers (ERAs).
The ERAs work as investment advisers but are not mandated to register with SEC (US Securities Exchange Commission) or other state regulators. They need to register with the state or federal authorities, based on the valuation of assets they manage.
Here is everything you must know about investment adviser compliance for ERAs.
Understanding the Exemptions for ERAs
Depending on the asset valuation, ERAs can register for state or federal securities. For example, small advisers with less than $25 million worth of assets can register with the state authorities alone. But, advisers having more than $110 million and mid-sized advisers with $25-$110 million in assets need registration with the SEC, unless they fall under either of these categories:
- Private Fund Adviser Exemption– Under this category, any US-based adviser can manage the private funds and keep less than $150 million in regulatory AUM or assets under management to get an exemption from SEC registration. If you are a non-US adviser, you must ensure that you manage the private funds of the sole US clients within this threshold limit.
- Venture Capital Adviser Exemption– An adviser focused solely on venture capital funds gets this exemption. Here, the AUM level is not relevant, and you will get the benefits of reduced costs. You can take guidance from experts to guide you through these laws and regulations.
Compliance Requirements for ERAs
Due to the exemptions mentioned above, ERAs are not subjected to several provisions of the Advisers Act. But, they still carry the fiduciary responsibilities for their clients, including investment adviser compliance for ERAs. Compliance encompasses:
Commitment to Anti-Fraud Practices
According to the rules set in sections 206 (1) and (2) of the act, an investment adviser cannot use any method, device, or plan to defraud an existing or prospective client with the intent of fraud. You must be forthcoming about your obligations and strategies. Find an expert to set up reporting and monitoring systems for the same.
Most importantly, refrain from any business practice that ends up as a fraud or deceit on your clients. It may be a guaranteed return on an equity fund or false claims about your previous accomplishments. Try not to omit or mislead your clients and refrain from plans that create conflicts of interest.
Practicing Anti-Money Laundering Methods
Investment advisers must stay away from money laundering practices under the requirements of the USA Patriot Act or the Bank Secrecy Act, 1970. Also, the country’s investment advisers cannot indulge in business with entities or persons enlisted on OFAC’s Specially Designated Nationals and Blocked Persons. You may be asked to enforce employee AML training for reporting and identifying suspicious activities via due diligence research.
Adherence to Pay-to-Play
The Advisers Act also prohibits some ERAs from pay-to-play practices for compensation made for investment advisory to a government official or department after political contributions. They need a cooling-off period of 2 years after making this contribution. Also, they cannot use third-party solicitors subject to the same restrictions.
Apart from these, investment adviser compliance for ERAs also includes recordkeeping for the clients, protection of investors’ privacy, and adopting the compliance manual with the code of ethics. Seek help from the experts to assist at every level from ERA registration to compliance with applicable laws.
