For emerging managers, SEC compliance isn't just about ticking boxes; it's about fulfilling the requirements laid out in the Investment Advisers Act of 1940 and all associated rules. That necessitates registering at the appropriate regulatory tier, filing accurate disclosure statements, abiding by the custody rule, and retaining records sufficient to pass regulatory scrutiny. Fail in this regard, and you'll be more than paying a fine: you'll be explaining yourself to your LPs.

Who Must Register With Whom

The very first question an emerging manager must ask is, "Do I register with the SEC, register with the state, or am I eligible for an exemption?"

As for the answers, that will hinge on the AUM of your firm.

Below $25 million in regulatory AUM, you would register at the state level. Between $25 million and $110 million, the question becomes more complex. $110 million and above, you'd better prepare to register with the SEC.

If you are an emerging manager setting up your first institutional fund, you'll likely find that you cross the $110 million threshold sooner than you expect, especially if you factor in unfunded commitments.

The two most common exemptions worth noting are as follows:

The Venture Capital Fund Adviser Exemption (Rule 203(l)-1) lets qualifying VC managers skip registration. The Private Fund Adviser Exemption (Rule 203(m)-1) is for advisors of private funds with AUM of less than $150 million. Note that exempt reporting status is a legal reporting requirement, not an opt-out.

And as of 2024, the SEC's Investment Adviser Registration Depository (IARD) website shows that there are over 15,000 registered investment advisers, while Exempt Reporting Advisers have increased by approximately 40% over the previous 5 years.

Form ADV: What It Is, and Where Emerging Managers Screw Up

Form ADV is the official registration form for private investment advisors. Part 1 is a data form covering your business operations, ownership, potential conflicts of interest, and your regulatory status. Part 2 is the written disclosure statement, often called the brochure, that outlines the services you offer, the fees you charge, and your conflicts of interest in clear language.

Part 1 needs to be updated within 90 days of your fiscal year-end and amended as soon as information becomes inaccurate.

Here is where most advisors trip up with their Form ADV: They have a fee arrangement in the brochure, but in practice, they charge a different fee. They report AUM improperly, as they do not understand regulatory AUM definition. They fail to update their Form ADV Part 2 upon a change of strategy and team members.

Having worked inside 22 years of fund administration, the Form ADV failure we most often observe happens when there is no one accountable for completing the task, treating the Form ADV's annual update as just a one-time-a-year thing to complete and not a continuous compliance requirement.

The Custody Rule and Why Emerging Managers Get Told

Under the Custody Rule (Rule 206(4)-2), any advisor holding custody of client assets must keep the client funds with a qualified custodian, provide account statements, and in most circumstances, submit to an annual "surprise" examination by an independent public accountant.

Custody is often defined more broadly than emerging managers might anticipate. Not only does physical possession of the assets constitute custody, but any "ability to take possession" also does, via online account access, a general power of attorney, etc. In our view, any emerging manager is the General Partner for a fund and thus has custody under the rule.

Most institutional emerging managers comply with the rule by taking the Pooled Investment Vehicle Audit Alternative: an annually audited fund managed by a PCAOB-registered public accountant who provides audited statements to LPs within 120 days of a fiscal year-end. But you also have to actually complete it.

Recordkeeping: The One Thing Most Managers Ignore

Rule 204-2 says an adviser has to make and keep records: five years for most, three years in an easily accessible spot. All written communications related to the adviser's business have to be stored, email, text messages, WhatsApp, etc.

The SEC has focused heavily on off-channel communication since 2021 and has taken enforcement actions against advisers whose business texts, calls, and other business communication were stored only on personal devices. This lesson is equally applicable for any registered private fund investment adviser.

Our observed failure mode in practice: An emerging fund GP launches a $75 million venture capital fund with a Google Drive folder and a Gmail account. The first SEC exam is in Year 3 with the help of a consulting firm. In preparing for the exam, the consultant asks for communications for Year 1. The Gmail has been shut down. The Google Drive has since been reorganized because a general partner left. The trade records are in a Google Sheet that is no longer reconciled with current accounting books.

Written Compliance Policies and Annual Review

Rule 206(4)-7 also requires every adviser to adopt written compliance policies and conduct an annual assessment of the adequacy of the policies. A compliance manual found online and downloaded without any customization is not a defensible compliance program.

A compliance policy document for a $100 million fund need not be 200 pages. It needs to describe how the adviser will manage material conflicts of interests, maintain the code of ethics, implement its trading practices, perform valuation, comply with the custody rule, keep records, and implement disaster recovery and business continuity procedures. And there must be evidence, a written memo or dated checklist, that the compliance officer reviewed these policies within the past 12 months.

FAQs

At what asset size does an emerging fund manager have to register with the SEC?

Generally, an investment adviser with $110 million or more in regulatory AUM (Assets Under Management) must register with the SEC. Advisers with $25 million to $110 million of regulatory AUM may also be subject to state-level registration requirements. However, both the Venture Capital Fund Adviser Exemption and the Private Fund Adviser Exemption provide safe harbors for eligible fund advisers with less than $150 million in private fund AUM.

What is the difference between an investment adviser registration status and an Exempt Reporting Adviser?

An investment adviser registration subject to the Advisers Act must comply with all applicable reporting and recordkeeping obligations. An Exempt Reporting Adviser is one that has claimed an exemption to SEC registration requirements, but must still report certain information to the SEC (via a reduced Form ADV) and will be subject to SEC examinations. The exemption reduces reporting and compliance requirements but does not eliminate regulatory obligations.

Does the custody rule apply to a venture capital fund manager?