What Is the Investment Advisers Act of 1940?
The Investment Advisers Act of 1940 is the primary federal law governing investment advisers in the United States. It establishes the framework for SEC registration, imposes fiduciary duties on advisers, and defines the regulatory obligations that come with managing other people’s capital for compensation.
For fund managers, this is the statute that determines whether you register with the SEC as a registered investment adviser, file as an exempt reporting adviser, or rely on another exemption entirely.
Who Is an Investment Adviser?
The Act defines an investment adviser as any person who, for compensation, engages in the business of advising others on the value of securities or the advisability of investing in, purchasing, or selling securities. Private fund managers meet this definition almost by default: you are advising a pooled vehicle (the fund) on securities investments, and you are compensated through management fees and carried interest.
The three-part test is straightforward: (1) you provide advice about securities, (2) you are in the business of doing so, and (3) you receive compensation. If all three are met, the Act applies to you.
Registration Thresholds
The Dodd-Frank Act reshaped the registration landscape in 2010 by dividing advisers between federal and state jurisdiction based on AUM:
- Above $100 million AUM. SEC registration required (or permitted above $110 million).
- $25 million to $100 million. State registration required in the adviser’s home state, unless the state does not examine advisers, in which case SEC registration is permitted.
- Below $25 million. State registration, unless exempt.
These thresholds refer to regulatory assets under management (RAUM), which can differ from the AUM figures you report to LPs. RAUM includes uncalled capital commitments, which means a fund with $80 million in commitments but only $30 million deployed may already cross the $100 million threshold for SEC purposes.
Exemptions for Private Fund Managers
Two exemptions matter most for emerging managers:
Private fund adviser exemption. Managers whose only clients are private funds and who have less than $150 million in US AUM can avoid full registration by filing as an exempt reporting adviser (ERA). You still file a shortened Form ADV and are subject to SEC examination, but you avoid the full compliance apparatus.
Venture capital fund adviser exemption. Managers advising solely qualifying venture capital funds are exempt from registration regardless of AUM. The fund must meet specific criteria: primarily invest in qualifying portfolio companies, not borrow more than 15% of capital, not offer redemption rights, and represent itself as a venture capital fund.
Fiduciary Obligations
The Act imposes a fiduciary duty on all investment advisers, whether registered or exempt. The SEC has articulated this as two components: the duty of care (providing advice in the client’s best interest based on thorough analysis) and the duty of loyalty (not placing your interests ahead of the client’s and making full disclosure of conflicts).
For general partners, this fiduciary standard applies to your relationship with the fund and, by extension, its limited partners. It influences everything from fee disclosures in the PPM to allocation policies across multiple funds.
Practical Considerations
Most emerging managers launching their first fund will either register with the SEC or file as an ERA, depending on their AUM trajectory. The decision often comes down to cost: full registration means hiring or outsourcing a chief compliance officer, building a compliance manual, and maintaining ongoing books and records. ERA status reduces that burden but still requires annual Form ADV filings and exposes you to SEC examination authority. Fund counsel typically advises on the optimal path during fund formation.
Frequently Asked Questions
Who needs to register under the Investment Advisers Act?
Any person or entity that provides investment advice for compensation and manages more than $100 million in regulatory assets under management generally must register with the SEC. Advisers managing between $25 million and $100 million typically register with their state securities regulator. Below $25 million, state registration applies unless an exemption is available.
What exemptions exist for private fund managers?
The most common is the private fund adviser exemption, which allows managers advising solely private funds with under $150 million in US AUM to avoid full SEC registration while filing as an exempt reporting adviser. The venture capital fund adviser exemption applies to managers advising only qualifying venture capital funds, with no AUM limit.
What obligations does the Act impose on registered advisers?
Registered investment advisers must file Form ADV with the SEC, maintain books and records, adopt compliance policies, designate a chief compliance officer, and adhere to fiduciary duties including the duty of care and duty of loyalty. The SEC can examine registered advisers at any time.
