Exempt Reporting Adviser

Kestrel Lane Advisers manages only private funds and has no other clients. Its total private fund assets under management in the United States are below $150 million. Under the Investment Advisers Act of 1940, the firm most likely:

1. A.Is exempt from registration and from the antifraud provisions of Section 206, because private fund investors are sophisticated.Incorrect. Section 206 applies to every investment adviser, registered or not, regardless of client sophistication.
2. B.Has no filing obligation of any kind with the SEC and is regulated solely under state law.Incorrect. Exempt reporting advisers file a subset of Form ADV with the SEC; the reporting obligation is what gives the category its name.
3. C.Qualifies as an exempt reporting adviser: exempt from SEC registration, but still required to file and update portions of Form ADV, and still subject to the antifraud provisions.Correct. The private fund adviser exemption relieves registration while preserving Form ADV reporting and Section 206 antifraud liability.
4. D.Must register with the SEC as an investment adviser, because any adviser to a private fund is required to register federally.Incorrect. The private fund adviser exemption exists precisely so that smaller private fund advisers need not register.

Why: An adviser whose only clients are private funds and whose U.S. private fund assets stay below $150 million qualifies for the private fund adviser exemption and becomes an exempt reporting adviser. Exempt from REGISTRATION does not mean exempt from the SEC. The firm must still file and periodically update the portions of Form ADV that apply to exempt reporting advisers, those filings are public, and the antifraud provisions of Section 206 continue to apply in full, as does the SEC ability to examine the firm records.

Sablefin Partners advises only private funds, holds private fund assets well below the applicable federal threshold, and has no other advisory clients. It concludes it qualifies as an exempt reporting adviser. Which statement about Sablefin's resulting obligations is correct?

1. A.Sablefin is relieved of all filing obligations and all federal securities-law duties.An ERA files a subset of Form ADV Part 1A and remains subject to the antifraud provisions.
2. B.Sablefin must deliver a Form ADV Part 2A brochure to each investor in its funds.The brochure delivery obligation attaches to registered advisers; an ERA is not registered.
3. C.Sablefin must still file and update a subset of Form ADV Part 1A through IARD, and remains subject to the antifraud provisions.Correct. Exempt reporting advisers report publicly through IARD and stay within the antifraud reach.
4. D.Sablefin's Form ADV filings are confidential and available only to the SEC.ERA filings are publicly available through the SEC's adviser search.

Why: An exempt reporting adviser is exempt from registration but is not exempt from regulation. It must still file and periodically update a designated subset of Form ADV Part 1A through the IARD system, those filings are publicly available, and it remains subject to the antifraud provisions, the pay-to-play rule and applicable books-and-records requirements. Because it is not registered, it does not deliver a Form ADV Part 2A brochure to clients as a registrant would.

Thornmere Capital advises only venture capital funds and has substantial assets under management. Its counsel advises that the firm is exempt from SEC registration but is nevertheless an EXEMPT REPORTING ADVISER. What does that status require, and how does it differ from the private fund adviser exemption?

1. A.An exempt reporting adviser has no filing obligation of any kind and is outside SEC jurisdiction, which is what exempt from registration means.Incorrect. An ERA must file and maintain specified portions of Form ADV and remains subject to the antifraud provisions and to SEC examination of required records.
2. B.An exempt reporting adviser must register with the states instead of the SEC, because federal exemption automatically transfers jurisdiction to the state.Incorrect. There is no automatic transfer. States may impose their own notice filing and fee requirements, which is not the same as full state registration.
3. C.It must file and keep current specified portions of Form ADV and remains subject to the antifraud provisions and SEC examination; the venture capital exemption has no AUM ceiling, whereas the private fund exemption applies below $150 million in the United States.Correct. Both exemptions produce ERA status, and the absence of an AUM ceiling is what distinguishes the venture capital exemption.
4. D.Both exemptions apply only below $150 million of assets under management, so Thornmere loses its exemption as it grows.Incorrect. The $150 million ceiling belongs to the private fund adviser exemption. The venture capital fund exemption has no such limit.

Why: The Advisers Act provides two distinct exemptions that produce the same reporting status. An adviser whose only clients are VENTURE CAPITAL funds is exempt from registration regardless of how much it manages, because Congress judged that category to pose limited systemic concern. Separately, an adviser whose only clients are private funds and whose assets under management in the United States are below $150 million is also exempt. An adviser relying on either exemption is an exempt reporting adviser. Exempt from registration does not mean exempt from the SEC. An ERA must still file and keep current the specified portions of Form ADV through the IARD system, and those filings are publicly available, so the regulator and investors can see who is operating and at what scale. The ERA also remains fully subject to the antifraud provisions of the Advisers Act, to the pay-to-play rule, and to SEC examination authority over the records it is required to keep. States may additionally impose their own notice filing and fee requirements.