Palace Fund

Investment Advisers Act of 1940 — Adviser Registration

What It Is

The Investment Advisers Act of 1940 requires anyone who provides investment advice for compensation to register with the SEC as an investment adviser — unless an exemption applies. The fund manager (GP or managing member) of a private fund is generally considered an investment adviser to the fund.

Exempt Reporting Adviser (ERA)

Most small private fund managers qualify for the private fund adviser exemption under Section 203(m). This means you do not register but you DO file as an “exempt reporting adviser” on Form ADV.

Requirements to qualify:

  • Advise only private funds (funds relying on 3(c)(1) or 3(c)(7))
  • Total US regulatory assets under management (RAUM) under $150 million
  • No requirement to have US clients specifically — this is about US RAUM

What an ERA must do:

  • File Form ADV Parts 1A and 2A (brochure) with the SEC via IARD
  • Pay IARD filing fees
  • Report basic information about the fund(s) managed
  • Remain subject to SEC antifraud provisions and SEC examination authority
  • File annual amendments within 90 days of fiscal year end

What an ERA does NOT have to do:

  • Implement a full written compliance program (though strongly recommended)
  • Appoint a chief compliance officer (though recommended)
  • Follow the Custody Rule (though practical custody compliance is still important)
  • Follow the full books and records requirements of registered advisers

Registered Investment Adviser (RIA)

If you exceed $150 million RAUM or advise non-fund clients (like separate accounts), you must register as an RIA.

Key obligations of a registered adviser:

  • Written compliance policies and procedures (Rule 206(4)-7)
  • Designated chief compliance officer
  • Annual compliance review
  • Custody Rule compliance (Rule 206(4)-2): qualified custodian, annual surprise examination or audited financials
  • Books and records requirements (Rule 204-2)
  • Form ADV delivery to clients (investors)
  • Code of ethics
  • Pay-to-play restrictions (Rule 206(4)-5)

State vs. SEC Registration

  • Advisers with less than $100 million AUM generally register with the state, not the SEC.
  • Exception: Advisers to private funds may register with the SEC (or file as ERA) regardless of AUM size if they would otherwise have to register in 15+ states.
  • California registration is through the DFPI. California-only advisers with less than $100M AUM who do not qualify for SEC registration must register with the state.

Korean Investor Considerations

  • Foreign clients (Korean investors in your fund) count toward your RAUM calculation since the fund is a US-domiciled vehicle.
  • Having foreign investors does not change your ERA eligibility — what matters is total RAUM, not investor nationality.
  • Korean investors may ask about your registration status. Being an ERA is normal and legitimate for a small fund.

Action Items for Palace Fund

  1. File as an Exempt Reporting Adviser on Form ADV via IARD (Investment Adviser Registration Depository).
  2. Calculate RAUM — if under $150 million (very likely for an emerging fund), you qualify for the private fund adviser exemption.
  3. Prepare Form ADV Part 2A (brochure) even though not strictly required to deliver it. It is a good practice document and Korean investors may request it.
  4. Monitor AUM. If you approach $150 million, plan for full SEC registration.
  5. Even as an ERA, implement basic compliance practices: personal trading policies, conflict of interest procedures, valuation policies. The SEC can and does examine ERAs.
  6. Annual update: File Form ADV amendment within 90 days of fiscal year end.