Registered investment adviser (RIA)

Registration as an investment adviser creates a critical regulatory framework for hedge fund managers. This registration fundamentally shapes how they operate and interact with clients. Before the Dodd-Frank Act Dodd-Frank Act The Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act) is comprehensive U.S. financial regulatory legislation enacted in 2010 that significantly impacted hedge funds through registration requirements, reporting obligations, trading restrictions, and enhanced compliance standards. of 2010, many hedge fund managers used the private adviser exemptionFormer exemption that allowed investment advisers with fewer than fifteen clients to avoid SEC registration, eliminated by Dodd-Frank. to avoid registration. However, regulatory changes eliminated this exemption for most substantial managers. This change fundamentally altered the regulatory landscape.

Investment advisers with $100 million or more in regulatory assets under management (RAUM)The total value of client assets managed by an investment adviser for SEC registration threshold purposes. generally must register with the SEC. Those managing between $25 million and $100 million typically register with state regulators instead. The Dodd-Frank Act created three limited exemptions from SEC registration. These exemptions allow certain managers to avoid federal registration even above the $100 million threshold:

Private Fund Adviser Exemption allows advisers who manage only private funds with less than $150 million in regulatory assets under management in the United States to operate as exempt reporting advisers Exempt reporting adviser An exempt reporting adviser is an investment adviser that doesn't have to complete full SEC registration, but still must meet some basic reporting requirements. This status typically applies to advisers who only manage private funds with less than $150 million in U.S. assets, or advisers who exclusively manage venture capital funds. . This means they avoid full registration requirements.

Venture Capital Fund Exemption allows advisers who manage only venture capital funds to remain exempt from SEC registration. This exemption applies regardless of how much money they manage.

Foreign Advisers Exemption provides an exemption for foreign advisersInvestment advisers located outside the United States who may qualify for exemptions from SEC registration. with minimal U.S. presence. To qualify, they must have fewer than 15 U.S. clients and investors and less than $25 million in U.S. assets under management.

Mid-sized advisers with assets between $25-100 million may qualify for SEC registration under specific circumstances. They can register with the SEC if their home state does not require registration or examination, or if they would be required to register in 15 or more states.

Investment advisers act as fiduciariesLegal obligation to act in the best interests of another party, requiring utmost good faith and loyalty. to their clients. This means they carry duties of careThe fiduciary obligation to act in clients' best interests when providing investment advice and to exercise reasonable care. and loyaltyThe fiduciary obligation to eliminate conflicts of interest or provide full disclosure and obtain informed consent. that require them to act in clients' best interests. They must also disclose all material conflicts of interest. The SEC's 2019 Fiduciary Duty InterpretationSEC guidance issued in 2019 clarifying the duties of care and loyalty that investment advisers owe to their clients. clarified these requirements. The duty of care requires advisers to provide investment advice in the best interest of clients based on their objectives. The duty of loyalty requires advisers to eliminate or fully disclose conflicts of interest so clients can give informed consentAgreement given by clients after full disclosure of potential conflicts of interest or other material information..

The fiduciary standard applies whether advisers act with discretionary authorityThe power granted to an investment adviser to make trading decisions on behalf of clients without obtaining prior approval for each transaction. (making investment decisions for clients) or in a non-discretionary capacityAn advisory relationship where the adviser provides investment recommendations but clients retain authority to make final trading decisions. (providing advice only). These duties include seeking best executionThe obligation to seek the most favorable terms reasonably available when executing client transactions. for trades, providing ongoing monitoring of investments, disclosing material conflicts, fairly allocating investment opportunities among clients, and ensuring fee reasonableness.

RIAs must establish comprehensive compliance programs under Rule 206(4)-7. This includes designating a chief compliance officer (CCO)The person responsible for overseeing a firm's compliance with applicable laws and regulations. who is a supervised person with sufficient familiarity with legal requirements. The officer must have adequate resources and authority to administer the compliance program effectively.

Written compliance policiesWritten procedures that must be reasonably designed to prevent violations of applicable laws and regulations. and procedures must be reasonably designed to prevent violations. They must address thirteen key areas including safeguarding client assets, accurate recordkeeping, marketing policies, valuation processes, confidentiality protection, business continuity plans, conflicts of interest, cybersecurity, and client privacy protection.

Additional core requirements include several important obligations. RIAs must conduct annual written reviews to assess policy adequacy and effectiveness. They must establish codes of ethics under Rule 204A-1 with personal trading restrictions for supervised persons. RIAs must maintain detailed books and records under Rule 204-2 covering all aspects of advisory operations. They must file and update Form ADV Form ADV Form ADV is the uniform form used by investment advisers to register with the SEC and state securities authorities, containing detailed information about the adviser's business, ownership, clients, employees, business practices, affiliations, and disciplinary history. Parts 1 and 2 with business information and client disclosures. When authorized, they must implement proxy voting proceduresPolicies and processes that investment advisers must implement when authorized to vote client securities.. Finally, they must comply with custody requirements including annual surprise examinations when applicable.

The SEC's Marketing Rule took full effect in November 2022. This rule consolidates previous advertising and cash solicitation rules under a single framework governing investment adviser communications. The rule establishes comprehensive requirements for performance advertising, testimonials, endorsements, and third-party ratings. It also provides more flexibility for institutional communications.

RIAs must maintain detailed records of all marketing materials. They must ensure compliance with performance presentation standards, including requirements to show net performanceInvestment returns calculated after deducting all fees, expenses, and other costs. alongside gross performanceInvestment returns calculated before deducting management fees, performance fees, and other expenses.. They must also provide appropriate context for hypothetical performance presentations.

RIAs face numerous operational restrictions. These include limitations on principalA trade where the investment adviser buys securities from or sells securities to its clients. and cross trades requiring client consent. They face pay-to-play rulesRegulations that restrict investment advisers from receiving compensation from government clients after making political contributions. under Rule 206(4)-5 that restrict political contributions. There are limits on gifts and entertainment, and comprehensive disclosure requirements for outside business activities and potential conflicts.

Business continuity planningPolicies and procedures designed to ensure firms can continue operating during and after operational disruptions or emergencies. requirements have gained increased importance, particularly following the COVID-19 pandemic. RIAs must address operational disruptions and remote work considerations. RIAs must also establish policies for soft dollar arrangementsAgreements where investment advisers use client commissions to pay for research and other services from broker-dealers. and best execution when using client commissions for research and brokerage services.

The SEC conducts regular examinations of RIAs. These examinations focus on several key areas including conflicts of interest, compliance program effectiveness, personal trading violationsBreaches of code of ethics requirements governing employees' personal securities transactions and reporting obligations., custody rule complianceAdherence to regulatory requirements governing the safekeeping of client assets, including segregation and auditing obligations., performance fee calculations, and cybersecurity preparedness. The Division of Examinations regularly publishes risk alertsPublications by the SEC Division of Examinations highlighting common compliance deficiencies and examination priorities. highlighting common deficiencies and enforcement priorities. Compliance with these focus areas is essential for avoiding regulatory action and maintaining good standing as a registered adviser.

The regulatory environment for RIAs continues to evolve. In June 2024, the Fifth Circuit Court of AppealsFederal appellate court that reviews decisions from district courts in Texas, Louisiana, and Mississippi. vacated the SEC's Private Fund Adviser RulesSEC regulations that would have imposed additional disclosure and operational requirements on private fund advisers before being overturned by the Fifth Circuit Court of Appeals.. These rules would have imposed additional quarterly reporting, audit requirements, and restrictions on preferential treatment for private fund advisers. This decision significantly reduced the additional compliance burden that had been scheduled to take effect in September 2024.

Acting SEC Chairman Mark Uyeda signaled in April 2025 that the Commission may revisit the current $100 million threshold for federal registration. This could potentially reduce the number of advisers required to register with the SEC. However, any changes would require formal rulemaking.