SEC Brings Investment Adviser Integration Case

On September 20, 2024, the Securities and Exchange Commission reached a settlement in an administrative proceeding involving an adviser improperly claiming the Private Fund Adviser Exemption.¹
The adviser sought this exemption by asserting that it managed less than $150 million in private fund assets. However, due to substantial operational overlap with another adviser, the SEC considered the two advisers as integrated, together managing more than $150 million, thereby violating Section 203(a) of the Advisers Act.
The adviser did not comply with the Custody rule because it was not registered with the Commission.

Private Fund Exemption – Advisers solely managing private funds with assets under $150 million may claim the Private Fund Exemption.
Integration – The adviser in question managed $137 million in private funds but had significant operational overlap with another adviser managing $114 million in traditional accounts.
1. Overlapping Owners – Three individuals owned both advisers (in different proportions).
2. Overlapping Personnel – Both advisers shared personnel who provided investment advice.
3. Office Space – Both advisers operated out of the same office space with no barriers and policies to enforce separation. Both advisers used the same email and phone systems and had the same IT domain.
Custody Rule – The adviser did not complete required fund audits, likely because it believed registration—and therefore compliance with the Custody Rule—was unnecessary.

SEC Focus: Avoiding Registration – SEC examiners are particularly scrutinizing managers attempting to circumvent registration requirements by splitting their advisers in a such a way as to be able to claim either the Private Fund or Venture Capital exemptions. In this case, the two advisers appeared to operate as a single advisory business due to the extensive overlap in functions, which led to an SEC investigation. Similar approaches by other advisers will inevitably raise the same concerns.
Integration and Resource Sharing – In today’s complex financial landscape, it is common for related advisers to share back-office personnel, systems, and office space. When both advisers are properly registered and follow an effective code of ethics, such arrangements typically do not pose regulatory risk.
Foreign Subsidiaries – Firms managing both registered U.S. advisory businesses and unregistered foreign advisory businesses must ensure operational separateness. Sharing back-office functions may be permissible under no-action letter relief, however sharing investment advisory personnel may be viewed as problematic.

¹ In the Matter of ACP Venture Capital Management Fund LLC; File Number 3-22150