Guest post by Jonathan A. Golub, Partner – Reitler Kailas & Rosenblatt LLC 
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which became law in 2010, complicated the registration and compliance landscape for investment advisers, including those that manage private funds (referred to in this material as “private fund managers”).  The question for New York-based investment advisers managing private funds is whether they have to register with the Securities and Exchange Commission (the “SEC”), the State of New York, or multiple states. As discussed below, New York-based fund managers are treated differently under the law from fund managers domiciled in other states. This material focuses on how New York-based private fund managers should navigate the registration requirements of federal and state law.
1. Key Analysis: Regulatory Assets Under Management
The size of an investment adviser (in terms of its “regulatory assets under management” or “RAUM”) determines whether and where it is required to register if no exemption applies.  A shorthand method of calculating a private fund manager’s RAUM is the aggregate gross assets of all of the funds that it manages. Specific instructions for calculating RAUM are included in the federal Form ADV. So long as a private fund manager’s RAUM across all of its funds is below $25 million, then it is prohibited from registering with the SEC as an investment adviser at the federal level and is subject to potential state regulation and oversight.  In contrast, Rule 203A-1 under the Advisers Act provides that an investment adviser is eligible to register with the SEC if it has at least $100 million in RAUM.
The Advisers Act also recognizes a third category of investment adviser, called “mid-sized advisers.”  Mid-sized advisers are advisers having RAUM between $25 million and $100 million that are required to register with the SEC if either of the following applies: (1) the adviser is not required to be registered as an investment adviser in the state in which it maintains its principal office and place of business, or (2) if registered with a state, the adviser would not be subject to examination as an investment adviser by that state’s securities commissioner (emphasis added).  The SEC has recognized that New York is a state in which advisers are not subject to examination.  Thus, a New York-based investment adviser with assets under management of at least $25 million must register with the SEC, unless an exemption applies. To summarize the federal registration regime, if an investment adviser’s RAUM is
- between $0 and $25 million, the adviser must register with the relevant state regulatory authority or authorities, unless exempt at the state level, and is not permitted to register with the SEC;
- between $25 million and $100 million, the adviser must register with the relevant state regulatory authority or authorities (i.e., it is not permitted to register with the SEC), UNLESS it is domiciled in New York or Wyoming, in which case that adviser may register with the SEC or avail itself of an exemption from registration; and
- more than $100 million, the adviser may register with the SEC (and at $110 million, must register with the SEC), unless an exemption applies.
Note that this analysis assumes that a private fund adviser is solely advising private funds and has no other types of clients. The analysis changes if the adviser, in addition to or instead of managing private funds, advises clients through separately managed accounts. The impact of separately managed accounts on this analysis is beyond the scope of this material.
So what happens if a New York-based private fund manager has less than $25 million in RAUM? In many cases, private fund managers based in New York would remain exempt from registration in their own state. Section 359-eee of the New York General Business Law (the “NYGBL”) specifically excludes from the definition of “investment adviser” any person who has sold, during the preceding twelve months, investment advisory services to fewer than six (6) persons residing in the State of New York (other than financial institutions and institutional buyers, as defined by other regulations). Further, Section 11.4(c) of the New York Codes, Rules and Regulations (the “NYCRR”) provides that all investment advisers with more than five (5) clients in the State of New York must apply to register as an investment adviser in New York. There is no practical difference between “persons” under the NYGBL and “clients” under the NYCRR. Under NYCRR Section 11.12, a “client” means a natural person or an entity (such as a corporation, limited partnership, limited liability company, or trust). This means that a fund or managed account is a “client” under New York law. In other words, New York law does not require a fund manager to “look through” the fund and count the individual investors for purposes of determining how many New York resident clients it has.
Below is an easy-reference chart summarizing this discussion.
Note that legal practitioners typically form funds as Delaware partnerships or limited liability companies. Delaware entities would not count as a New York client, even if all of the investors in the fund reside in New York. As a result, a New York fund manager advising multiple Delaware funds with aggregate assets across all funds of less than $25 million is still likely to be exempt from registration in New York and federally. Conversely, as shown in the chart above, if the fund manager’s aggregate RAUM across all funds exceeds $25 million, it will have to either register as an investment adviser with the SEC or, if applicable, rely on a federal exemption.
2. Federal Registration Exemptions for Fund Managers
As discussed above, New York-based private fund managers that solely advise private funds are generally exempt from registration at the state and federal level if their RAUM is below $25 million and are generally subject to federal registration when their RAUM exceeds $100 million. However, there are two important registration exemptions for private fund managers. The first is Section 203(m) of the Advisers Act, which exempts from registration any adviser that solely advises private funds and manages, in the aggregate, less than $150 million in RAUM in the United States. This is often called the “private fund adviser exemption.” To determine the availability of this exemption from registration, such calculations must be made annually. Second, Section 203(l) of the Advisers Act provides a registration exemption specifically for venture capital fund managers, which is commonly referred to as the “venture capital exemption.” The venture capital exemption is based on a set of eligibility criteria that are set forth in the Advisers Act and are based on rules adopted by the SEC in July 2011. 
Importantly, fund managers relying on either the venture capital exemption or the private fund adviser exemption are nevertheless subject to certain provisions of the Advisers Act and continuous SEC reporting obligations, including a requirement to file and update portions of Form ADV Part 1 with the SEC. Since exempted venture capital fund managers and other exempted private fund managers have an obligation to report to the SEC, they are called Exempt Reporting Advisers or “ERAs.” Although exempt from registration, ERAs are still subject to and owe fiduciary duties to their clients. Prudent ERAs should adopt policies and procedures reasonably designed to prevent violations of the Advisers Act and to ensure they are meeting their fiduciary obligations.
3. Obligations for Registered Investment Advisers
If a private fund manager’s RAUM exceeds $100 million and it is unable to rely on a federal exemption from registration, it may be required to register as an investment adviser with the SEC. In this case, a private fund manager will have to submit parts 1 and 2 of the Form ADV to the SEC. The Form ADV is a federal filing that is publicly and freely accessible online. The Form ADV requires the registrant to provide a description of its business, its clients, ownership, fees, and a lengthy narrative discussion of various issues that the SEC has deemed to be material to it and to investors.
In addition, registered investment advisers – whether they are registered with the SEC or at the state level – are required to have a set of written compliance policies and procedures, including a code of ethics, and to appoint a chief compliance officer to oversee the firm’s compliance program. A federally registered investment adviser is subject to the Advisers Act and its rules as well as increased oversight by the SEC, primarily through its inspection and enforcement powers. A registered investment adviser is responsible for implementing policies and procedures to ensure that it has a compliance program that is reasonably designed to prevent violations of the Advisers Act. These include policies designed to address, for example:
- conflicts of interest and anything that might contravene the adviser’s fiduciary duties toward its clients
- recordkeeping requirements (such as preparation of required records and their maintenance, document retention practices, and tracking of communications to current and prospective investors)
- reporting requirements like Form ADV updates
- portfolio management policies (including allocations of investment opportunities among clients and consistency with client objectives)
- supervision and hiring of employees; discipline; chain of reporting, process to rectify employee and trading errors; and whistleblowing policies
- trading matters, such as soft dollars and best execution (which would not be applicable to a venture fund)
- custody of client assets
- privacy and protection of client confidential information
- social media policies
- marketing and other communications to current and prospective investors
- ethics (personal and proprietary trading (and monitoring thereof), gifts and entertainment reporting, insider trading prohibitions, political contribution restrictions)
Special note regarding payment of performance fees. The Advisers Act prohibits a registered investment adviser from receiving performance-based compensation (i.e., performance fees/allocations/carried interest) from their clients in the U.S. unless they are “qualified clients.” A “qualified client” must meet asset and income tests that differ from the requirements imposed on accredited investors. Qualified clients are defined as:
- A natural person who has, at the time immediately after entering into an advisory relationship with an adviser, at least $1,000,000 under management with the investment adviser (i.e., if the person invests $1 million in a fund or SPV, they would be a qualified client);
- A natural person or a company that has a net worth of at least $2,000,000 at the time the contract is entered into;
- A Qualified Purchaser (as defined in the Investment Company Act of 1940, as amended); or
- Certain affiliates and employees of the adviser.
Note that the prohibition on the receipt of performance fees does not apply to unregistered/exempt investment advisers. Thus, as long as a private fund manager is unregistered or exempt from registration, it can receive carried interest from each fund or SPV. If a New York-based private fund manager has any intent to register after achieving the $25 million RAUM threshold, then it makes sense to prequalify all investors in its funds as “qualified clients” in addition to qualifying them as “accredited investors”.
Jonathan Golub, Partner, firstname.lastname@example.org
Jonathan has over 10 years of experience advising hedge funds, private equity funds, venture capital funds, and other pooled investment vehicles and their managers on all aspects of fund formation, operations, and regulatory compliance.
 This article is current as of March 2016. It has been prepared for general informational purposes only. This article is not a legal opinion on any of the matters discussed herein and does not create an attorney-client relationship between the recipient and the author. The rules, regulations and procedures described herein may change at any time. Please retain legal counsel if you require an assessment of your registration obligations.
 For purposes of this material, the term “private fund” encompasses hedge funds, private equity funds, and venture capital funds whose beneficial ownership interests are sold to investors in a manner not involving a general solicitation. For legal purposes, private fund managers are considered “investment advisers” potentially subject to federal registration with the Securities and Exchange Commission or registration in one or more states.
 RAUM is gross assets in “securities portfolios” and private funds for which the adviser provides continuous and regulatory supervisory or management services. The federal Form ADV’s instructions provide the RAUM calculation method.
 See, section 203(A) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which provides that no investment adviser that is “regulated or required to be regulated” as an investment adviser in the state in which it maintains its principal office and place of business can register as an investment adviser with the SEC unless the investment adviser has regulatory assets under management of at least $25 million.
 Advisers Act section 203(A)(a)(2).
 Id. See, also, SEC Release No. IA-3221, Rules Implementing Amendments to the Investment Advisers Act of 1940, July 19, 2011.
 See, SEC Division of Investment Management: Frequently Asked Questions Regarding Mid-Sized Advisers, at http://www.sec.gov/divisions/investment/midsizedadviserinfo.htm; see, also, SEC Office of Investor Education and Advocacy, Investor Bulletin: Transition of Mid-Sized Investment Advisers From Federal to State Registration, December 2011, at http://www.sec.gov/investor/alerts/transition-of-mid-sized-investment-advisers.pdf.
 In other words, New York fund managers may voluntarily register with the SEC if they meet minimum eligibility criteria for federal registration, even if an applicable registration exemption exists. There are various reasons why an adviser would want to register with the SEC. For example, SEC registration may help to attract capital from institutional investors and may allow an adviser to sidestep state-level requirements to license their advisory personnel.
 See “Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers,” Release No. IA-3222 (July 21, 2011). Advisers Act Rule 203(l)-1 defines a “venture capital fund” as a private fund that (i) holds no more than 20 percent of the fund’s bona fide capital commitments in non-qualifying investments (other than short-term holdings); (ii) does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days (subject to limited exceptions); (iii) does not offer redemption or similar liquidity rights to investors except under extraordinary circumstances; (iv) represents itself to investors as being a venture capital fund; and (v) is not registered under the Investment Company Act and has not elected to be treated as a business development company under the Investment Company Act.