Why Exempt Reporting Advisers (ERAs) Compliance Matters for Emerging Managers

Compliance concept with icons for regulations, law, standards, requirements and audit on a virtual screen with a business person touching a button

Understanding compliance as an Exempt Reporting Adviser (ERA) under the Investment Advisers Act of 1940 is critical to building trust with investors and maintaining regulatory integrity. ERAs are not required to register with the Securities and Exchange Commission (SEC), but they must adhere to specific reporting and compliance obligations.

In the remainder of this blog, Justin Estrera, Venture Capital CFO at Kranz Consulting, offers some essential guidance to startups looking to establish ERA compliance success and efficiency.

While not exhaustive, the following provides essential tips, best practices, common pitfalls to avoid, and a compliance calendar to guide startups in meeting these requirements effectively.

Important things to know about Exempt Reporting Advisers (ERA) Compliance:

  1. Compliance Tips for Exempt Reporting Advisers (ERAs)
  2. Common ERA Compliance Pitfalls to Avoid
  3. Compliance Calendar for ERAs (Non-Comprehensive)
  4. Ongoing Responsibilities for Exempt Reporting Advisers (ERAs)

Compliance Tips for Exempt Reporting Advisers (ERAs)

Navigating compliance as an Exempt Reporting Adviser (ERA) requires diligence, organization, and a proactive approach to regulatory requirements. Below are key compliance tips to help ERAs maintain adherence to obligations and protect their reputation.

1. Understand reporting obligations

ERAs must file an annual amendment to Form ADV within 90 days of the end of their fiscal year. Additionally, it’s essential to keep Form ADV current by filing amendments when material changes occur outside the annual reporting window.

2. Ensure accuracy and completeness of records

Maintain organized, up-to-date books, records, and documentation, such as communications, fund performance data, and marketing materials. Be prepared for periodic examinations or queries from regulatory authorities or investors. Implementing a mock audit program can be a helpful strategy to ensure readiness.

3. Adopt and maintain a robust code of ethics

Even though ERAs are not required to register, adopting a code of ethics promotes consistency, enhances investor confidence, and addresses common due diligence requests from prospective investors.

4. Monitor advertising and solicitation practices

Avoid incomplete or inaccurate performance data that could mislead investors. Ensure all marketing materials are accurate and fully compliant with applicable regulations.

5. Stay up-to-date on state requirements

State-level compliance obligations vary widely and may include additional filings or registration requirements. Regularly review these requirements to ensure compliance.

6. Set up strong cybersecurity protocols

Develop and maintain policies that protect sensitive investor and financial information. Regularly review and update cybersecurity measures to address evolving risks and threats.

7. Be aware of changes in exemption eligibility

Periodically verify compliance with the criteria for the venture capital exemption and other factors that preserve ERA status to avoid inadvertently losing exemption eligibility.

8. Proactively resolve conflicts of interest

Clearly and comprehensively disclose any potential conflicts of interest. Implement, maintain, and periodically review policies to address areas such as fee arrangements and co-investments to avoid regulatory or reputational issues.

By following these compliance tips, ERAs can confidently meet their regulatory obligations, safeguard their operations, and build trust with investors and stakeholders. Staying proactive and vigilant is essential to maintaining compliance in an ever-evolving regulatory environment.

Common ERA Compliance Pitfalls to Avoid

  1. Failing to Update Form ADV Timely: Late filings or failure to report material changes can lead to penalties or loss of exemption.
  2. Inadequate Documentation: Disorganized or incomplete records and data may result in issues and findings during examinations.
  3. Ignoring State-Level Requirements: Overlooking local compliance responsibilities can expose the ERA to fines or sanctions by agencies other than the SEC.
  4. Non-Compliant Marketing: Misleading items and misstatements in performance data or other advertising materials can harm reputation and create liability.
  5. Disregarding Cybersecurity Risks: Lack of focus on data protection can lead to breaches, reputational damage, litigation and enforcement actions

Compliance Calendar for ERAs (Non-Comprehensive)

DateCompliance ItemDescription
January 15Confirm Annual Fund AuditsEnsure engagement letters are signed with auditors for fund audits to be completed and distributed to investors within regulatory or contractual deadlines
March 31Annual Form ADV Update (90 days post-Fiscal Year-End for Dec 31 FYEs)File an annual amendment to Form ADV Part 1A and 1B if required
April 30 (approx.)State Blue Sky Filings for Fund InterestsEnsure fund compliance with applicable state-level filings (varies by state)
June 30Mid-Year Review of Compliance PoliciesReview and update compliance policies to reflect regulatory or operational changes
October 15Prepare for Year-End FilingsReview investor disclosures, compliance documents, and assess fund performance records
December 31Confirm ERA Exemption StatusVerify ongoing eligibility for the venture capital adviser exemption

Ongoing Responsibilities for Exempt Reporting Advisers (ERAs)

To maintain compliance and foster investor trust, Exempt Reporting Advisers (ERAs) should focus on consistent and thorough management of their ongoing responsibilities. Below are key tasks to address on a recurring and as-needed basis:

  1. Monthly/Quarterly Responsibilities:
    • Regularly monitor fund performance reporting to ensure transparency and alignment with investor expectations.
    • Conduct thorough reviews of key service providers, such as fund administrators and auditors, to assess their performance and reliability.
    • Reconcile financial records to maintain accuracy and avoid discrepancies.
    • Keep investor contact information current to support effective communication and reporting.
  2. Ad Hoc Responsibilities:
    • Promptly file updates to Form ADV following any material changes, such as shifts in ownership, location, or operations, to maintain regulatory compliance.

By addressing these responsibilities on both a routine and ad hoc basis, ERAs can ensure efficient operations, maintain investor confidence, and stay aligned with regulatory requirements. A proactive approach to these tasks supports long-term success and readiness for any compliance challenges.

Final Thoughts on Why Exempt Reporting Advisers Compliance Matters for Emerging Managers

By following these tips, best practices, and the compliance calendar, ERAs can confidently navigate their legal and fiduciary responsibilities. We encourage you to collaborate with internal legal counsel and compliance professionals to develop a thorough and effective strategy for meeting regulatory requirements.

At Kranz Consulting, we are here to serve as a trusted business advisor, ready to support ERAs and their legal and compliance teams in achieving their compliance objectives.