Marc Wyatt, director of the SEC's Office of Compliance Inspections and Examinations ("OCIE"), has indicated that OCIE has begun subjecting exempt reporting advisers to OCIE's routine examination program. His statement – reportedly made at a Nov. 20 meeting of the ABA Hedge Fund Sub-Committee at the ABA Business Law Section Fall Meeting in Washington, D.C. – represents a significant change in OCIE's treatment of exempt reporting advisers.

Exempt reporting advisers are investment advisers that are not required to register with the SEC as an investment adviser because they meet one of two exemptions: the Venture Capital Fund Adviser Exemption or the Private Fund Adviser Exemption (i.e., the exemption relied upon by investment advisers that have less than $150 million of assets under management and advise solely private funds).

These two exemptions were established by rules adopted by the SEC to put into effect the provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Based on these rules, exempt reporting advisers i) must submit and update at least annually certain parts of Part 1 of Form ADV; ii) will be subject to any recordkeeping rules established by the SEC with respect to exempt reporting advisers (which have not yet been proposed); iii) must establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information; and iv) are subject to the anti-fraud provisions (and certain of the rules associated with these provisions, which include the pay-to-play rules set forth in Rule 206(4)-5) of the Investment Advisers Act of 1940.

However, while it was understood that the SEC would have the right to inspect exempt reporting advisers on a "for cause" basis where the commission had identified a potential regulatory concern, the SEC had previously indicated that it did not expect to subject exempt reporting advisers to routine examinations. Accordingly, Wyatt's statement would appear to reflect a significant change in the SEC's approach to its oversight of exempt reporting advisers.

It is currently unclear whether the SEC has focused more time on the inspection of advisers exempt by virtue of the Venture Capital Fund Adviser Exemption or those exempt pursuant to the Private Fund Adviser Exemption, or whether there has been more of a focus on U.S. or non- U.S. exempt reporting advisers. Nevertheless, exempt reporting advisers should plan to review their policies and procedures covering compliance with the Investment Advisers Act in order to be better prepared for routine examinations by the SEC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.