Previously on the MasterCompliance blog, we covered When Do You Have to Register as an Investment Advisor and Exclusions from the Definition Investment Advisor. This Blog will discuss when a person does meet the definition of an investment advisor under the Investment Act of 1940, but is exempt from registration.

Investment Advisors Act of 1940

The Investment Advisors Act of 1940 makes it unlawful for a nonregistered investment advisor to use the mail or any instrumentality of interstate commerce in connection with their business unless they fall under one of the exemptive classes of investment advisors. These exemptive classes are:

Advisors to Insurance Companies

Advisors whose only clients are insurance companies are exempt from registration.

Intrastate Advisors

To be classified as an Intrastate Advisor, the advisor’s clients must all be residents of the state in which the advisor maintains its principal office and place of business and does not provide advice regarding any security listed on any national exchange.

Private Fund Advisors

For a Private Fund Advisor to be avoid registration, they need to qualify for one of three exemptions laid out in Title IV of the Dodd-Frank Act:

  1. The Private Fund Advisor Exemption: Advisors who only advise private funds with less than $150 million in assets under management in the United States and minimal, without regard to the number or type of private funds.
  2. The Foreign Private Advisor Exemption: A Non-U.S. advisor who does not have a place of business in the U.S. and less than $25 million assets under management for U.S. clients and investors.
  3. The Venture Capital Fund Exemption: Advisors only advising venture capital funds.

Private Funds

Under these exemptions, to be considered a private fund an issuer must either have (1) no more than 100 investors and not make a public offering, or (2) limit its investors solely to qualified purchasers and not make a public offering. An investor is considered a qualified purchaser if they are an individual with at least $5 million in investments or a business entity with at least $25 million in investments.

Assets Under Management

The Dodd-Frank Act also directs the SEC to require that private fund advisors to maintain records and to provide to the SEC any reports that the SEC deems are “necessary or appropriate in the public interest or for the protection of investors”. One of these records public fund advisors must maintain is a record of the assets under management (“AUM”) of each fund they manage which must be provided to the SEC upon request. This must be calculated quarterly based on the fair value of the assets. In the event one of their private funds exceeds $150 million AUM, the advisor will have one calendar quarter to register with the SEC before enforcement action is taken.

Foreign Advisor

To be considered as a foreign advisor and qualify for the Foreign Private Advisor Exemption, an advisor Must:

  • Have no place of business in the United States.
  • Have, in total, fewer than 15 clients and investors in the United States in private funds advised by the adviser.
  • Does not hold themselves out to the public in the United States as an investment adviser or act as an investment advisor to an investment company registered under the Investment Company Act of 1940
  • Have aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than $25,000,000.

Venture Capital Advisors

To be considered a venture capital fund under the Dodd-Frank Act, the fund must:

  • Have limited leverage;
  • Not offer investors redemption rights;
  • Represent itself as a venture capital fund to investors; and
  • Not be registered under the Investment Company Act of 1940.

For exemptions from state registration as an investment adviser, check out our State Exemptions from Investment Advisor Registration blog.

If you have any questions about or need assistance with investment advisor registration, please contact us. Also, MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities.