SEC to begin examining Exempt Reporting Advisers

November 25, 2015

Last Friday, Marc Wyatt, Director of the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations, stated that the SEC staff has begun to examine Exempt Reporting Advisers as a part of the agency’s routine examination program. Mr. Wyatt made these remarks while speaking to the American Bar Association’s Hedge Fund Sub-Committee during the association’s Business Law Section Fall Meeting in Washington, D.C.

By way of background, in 2011, in response to the Dodd-Frank Act, the SEC adopted new rules and amendments under the Investment Advisers Act of 1940 (“Advisers Act”). As a part of the changes, the SEC established new exemptions from registration as an investment adviser; namely, the Private Fund Adviser Exemption and the Venture Capital Fund Adviser Exemption. Advisers meeting either of these exemptions may file as an ERA with the SEC, as opposed to registering as an investment adviser. However, when the rules were adopted, the former Chairman of the SEC stated that the staff of the SEC did not intend to conduct routine examinations of ERAs. Rather, ERAs would be subject to examination only if there were indications of potential wrong doing or other regulatory concerns.

Mr. Wyatt’s statement seemingly represents a significant change of tack for the SEC. Previous to this development, ERA firms have taken comfort in a minimal application of the Advisers Act, an arm’s length relationship with the SEC, and a pass on the National Examination Program. However, ERAs now face a drastically increased likelihood of examination by the SEC staff, an event that many ERAs may not be entirely prepared for.

If you have questions about this alert, or would like more information about ACA Compliance Group and our market-leading SEC regulatory support, please contact Damon Zappacosta, Partner, ACA Compliance Group or your regular ACA consultant.