Exempt Reporting Adviser does not mean Exempt from SEC scrutiny
In a move that serves as a valuable reminder for Exempt Reporting Advisers that they are not exempt from the watchful eye and scrutiny of the SEC, on Friday September 2, 2022 the Commission charged Energy Innovation Capital Management, LLC (EIC), a California-based exempt reporting adviser, with charging excess management fees from two venture capital funds.
The order found that EIC overcharged management fees by making errors including:
- Failing to make adjustments to its management fee calculations for individual portfolio company securities subject to write-downs;
- Inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio company security level;
- Incorrectly including accrued but unpaid interest as part of the basis of the calculation of management fees for certain investments; and
- Failing to begin the post-commitment management fee period at the correct date.
EIC has returned $678,681 plus interest to the impacted funds and their limited partners and has agreed to settle the SEC’s charges by paying a $175,000 penalty.
Exempt Reporting Advisers (ERAs) are generally exempt from registered investment adviser requirements under the Dodd-Frank Act and Investment Advisers Act of 1940 (the “Advisers Act”) due to their size and/or the types of assets they manage. However, ERAs are not exempt from certain reporting requirements (e.g. Form ADV Part 1), anti-fraud provisions of the Advisers Act, recordkeeping requirements, “Pay to play” rules, MNPI restrictions and are subject to SEC examination.
It is important for all ERAs to consider these requirements and the unique risks posed by each Adviser’s business activities when evaluating the necessity for controls and the appropriate approach to compliance. When working with Advisers, PINE takes a risk-based approach to compliance and encourages all Investment Advisers to adopt a customized compliance program as a best practice.
We believe a strong, well-documented, compliance program assures awareness of critical matters and will serve as a strong foundation for the culture of compliance that will become strategically invaluable as Investment Advisers look to scale their business and become subject to SEC registration requirements with increased regulation.
At PINE, we take pride in ensuring we understand each Adviser so we that can craft a compliance program that fits both the size and complexity of their business regardless of registration status or any exemption they may rely on. If you have questions about what this SEC action could mean for your business; feel free to reach out to your regular PINE contact or send an email to email@example.com.