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The month of December marks an ideal time for those exempt reporting advisers with fiscal years coinciding with calendar year-end and relying on the so-called “Private Fund Adviser Exemption” to begin evaluating their continued eligibility for exemption from SEC registration. Although required to file responses to portions of Part 1 of Form ADV and subject to certain requirements applicable to registered advisers, U.S.-based advisers to private funds with less than $150 million in “private fund assets” are exempt from SEC registration and the substantial added burdens that accompany such registration.  See Advisers Act Rule 203(m)-1.The SEC sets forth strict guidelines for timely reporting of changed status and subsequent registration.

Timetable for Registration

As is true for registered advisers, in general an exempt reporting adviser is required to update Form ADV at least annually, within 90 days of the end of its fiscal year.  Exempt reporting advisers also must assess annually the value of private fund assets they manage, and report this figure in their annual updating amendment to Form ADV.This calculation of private fund assets must be made within 90 days prior to the date of the filing of the annual updating amendment.Exempt reporting advisers with December 31 fiscal years, then, must file their annual update on or before March 31, and must include as asset calculation made within the prior 90 days.Should an exempt reporting adviser’s private fund assets equal or exceed $150 million at some point during a calendar year, there is no requirement that the exempt adviser immediately submit an amended Form ADV reflecting the increased assets and seeking registration before the annual update.   

Under Rule 203(m)-1, an adviser must aggregate the value of all assets of private funds it manages to determine if the adviser is below the $150 million threshold.  Advisers are required to calculate the value of private fund assets in accordance with the instructions in Form ADV, which provide a uniform method of calculating assets under management for regulatory purposes under the Investment Advisers Act.

If no longer eligible for the private fund adviser exemption due to increased assets under management, the exempt reporting adviser must register with the SEC within 90 days of filing its annual updating amendment that reflected assets under management equal to or in excess of $150 million.  The adviser may continue to act as a private fund adviser during this period, but only if it has complied with all reporting obligations as an exempt reporting adviser.

Added Responsibilities Accompanying SEC Registration

Although exempt reporting advisers are subject to a number of statutory provisions and SEC rules governing registered advisers (anti-fraud provisions, for example), the added burdens accompanying SEC registration are substantial, and will require careful planning to allocate sufficient time and resources to implement.In addition to completing all portions of Form ADV, including the drafting of a client brochure, transitioning from an exempt reporting adviser to a registered adviser involves other significant mandates, including designating a Chief Compliance Officer, adopting a code of ethics, and designing and implementing formal, comprehensive compliance policies and procedures tailored specifically for each adviser’s business model and risk profile.Evaluating now the likelihood of continued eligibility for exempt reporting adviser status will help to ensure adequate time for completion of such requisite tasks should SEC registration be required.