Precidian has already entered into license agreements with over 20 firms, including BlackRock and Nationwide. Through this model, Precidian allows licensed managers to offer ActiveShares ETFs by collecting an ongoing fee by licensing out its technology and process. Alternatively, Precidian will act as a sponsor and handle regulatory obligations. Precidian already has competition, as several other firms have filed for their own non-transparent ETFs.
ActiveShares’ fees will be higher than traditional index funds, and it will be required to outline how it differs from traditional ETFs – including costs and risk – on its prospectus cover. It will be interesting to see how the potential automation of active management will stack up against traditional active managers’ performance in the long run.
REGISTERED INVESTMENT ADVISER Vs. EXEMPT REPORTING ADVISER
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was far-reaching legislation that sought to address correcting the causes of the 2008 financial crisis. These reforms affected all federal financial regulatory bodies. Among the many changes was the creation of an “Exempt Reporting Adviser” – “ERA” – which allows mid-sized funds that meet certain criteria to avoid some of the compliance obligations promulgated under the Investment Advisers Act of 1940 (“Adviser’s Act”).
The Securities and Exchange Commission (the “SEC”) defines an investment adviser as a “person or firm that is engaged in the business of providing investment advice to others or issuing reports or analyses regarding securities, for compensation.” In order to register with the SEC – and become a “Registered Investment Adviser” (“RIA”) – firms with over $100M in assets must file a Form ADV disclosing information about their services and fees, among other information. To maintain their status, firms must appoint a competent Chief Compliance Officer to run a compliance program that meets requirements in the Adviser’s Act.
Advisers that manage U.S.-based private funds and have under $150M in assets, and advisers with solely venture capital funds, can register with the SEC as an ERA. While ERAs do not have all the same weighty requirements as RIAs, there are overlaps in their requirements and in best practices.
Overlap – same rules apply to ERAs and RIAs:
- Pay-to-Play
- AML – subject to restrictions of the Office of Foreign Asset Control (“OFAC”)
- Privacy – must keep a written information security program, have an employee in charge of said program, and send a Privacy Notice to clients
- SEC exams – ERAs are included in routine exams; all the more reason to make sure you have all the necessary policies and best practices in place
Differences:
- Compliance Manual & Code of Ethics – required for RIAs; best practice for ERAs
- Form ADV – while an RIA files a Form ADV 1, 2A & 2B, an ERA files only a portion of the ADV 1
- Recordkeeping – ERAs do not need to meet the same recordkeeping obligations as an RIA, but it is considered a best practice to do so
- Anti-Fraud Rules – General anti-fraud rules apply to both – no misleading statements or omissions of material fact – but RIAs have additional rules, including restrictions on advertising
Industry prohibitions, such as cherry-picking performance, are not allowed under the anti-fraud rules, and therefore apply to ERAs.
Once an ERA calculates that it manages over $150M in assets, generally on its annual filing, it has a 90-day grace period to update its SEC registration to an RIA. By taking time to put best practices into place when you are an ERA, the transition to RIA is easier and the foundation is already laid. PINE can do the heavy lifting to prepare these documents and filings for your firm. We offer ongoing compliance support including adviser registration and regulatory filings, compliance manual and code of ethics creation and updates, annual reviews, employee education and more. Please reach out to learn more about our compliance and CFO services, and how we can lighten your workload so you can focus on managing money, generating returns, and raising capital.
CYBER ALERTS
The Securities and Exchange Commission’s (“SEC”’s) Office of Compliance Inspections and Examinations (“OCIE”) has launched a third cybersecurity sweep. This sweep has reportedly focused on the cybersecurity practices of registered investment advisers (“RIAs”) and specifically includes RIAs with multiple offices and those recently involved in mergers and/or acquisitions.
If you have yet to focus on your firm’s cybersecurity, OCIE’s continued focus on this topic highlights that the SEC’s concerns around cybersecurity are not going away. The reality of daily breaches and hacks combined with the watchful eye of regulatory bodies should put ensuring your firm has the dedicated cybersecurity resources at the top of your list.
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