The Securities and Exchange Commission brought an unusually high number of enforcement actions against exempt reporting advisers in 2022 – that appears to be more than the prior three years combined and a record number for a single year. This uptick in SEC enforcement activity should serve as a reminder for exempt reporting advisers of the regulatory risks they face under the Investment Advisers Act of 1940 (Advisers Act) and other aspects of the federal securities laws.

“Exempt reporting advisers” are investment advisers that rely on Section 203(l) or Section 203(m) of the Advisers Act. Section 203(l) generally provides an exemption from SEC registration for investment advisers that provide advice solely with respect to “venture capital funds.” Section 203(m) generally provides an exemption from SEC registration for investment advisers that provide advice solely to private funds and have less than $150 million in assets under management (or, for an investment adviser whose principal place of business is outside of the United States, have less than $150 million in assets under management attributable to a US place of business).

While not subject to registration with the SEC, exempt reporting advisers are still subject to certain provisions and rules under the Advisers Act as well other parts of the federal securities laws. Exempt reporting advisers are also subject to SEC examinations, even though the SEC staff has historically not conducted examinations of exempt reporting advisers on a regular basis (see footnote 1). It is notable, therefore, that certain of the enforcement actions below appear to arise out of SEC examinations.


Exempt reporting advisers are subject to Rule 206(4)-5 under the Advisers Act (the “Pay-to-Play Rule”). In the private fund context, the Pay-to-Play Rule generally prohibits a private fund adviser and its “covered associates” from making political contributions to certain US state or local government officials (or candidates for such offices) who have direct or indirect influence over the decision of a US state or local government entity to invest in a private fund. For example, the Pay-to-Play Rule restricts contributions to a state governor or treasurer (or candidate for such office) who appoints the trustees of a state pension plan that is a current or prospective investor.

SEC enforcement actions for violations of the Pay-to-Play Rule are the largest category of enforcement actions against exempt reporting advisers both last year and historically, making up approximately a third of the enforcement actions against exempt reporting advisers. The most recent SEC enforcement actions on the Pay-to-Play Rule include the following:

  • Canaan Management, SEC Release No. IA-6126 (September 15, 2022) (with respect to a $1,000 contribution to candidate for governor of California by a covered associate when the Regents of the University of California was an existing investor).
  • Highland Capital Partners, SEC Release No. IA-6128 (September 15, 2022) (with respect to a $1,000 contribution to a candidate for governor of Massachusetts by a covered associate when the Massachusetts Pension Reserves Investment Management Board was an existing investor).
  • StarVest Management, SEC Release No. IA-6129 (September 15, 2022) (with respect to $1,000 and $400 contributions to a candidate for mayor of New York by two covered associates when the New York City Employees’ Retirement System and the Teachers’ Retirement System of the City of New York were existing investors).

These enforcement actions also highlight the difficulties relating to the strict liability associated with violations of the Pay-to-Play Rule: (1) Each action involved contributions made well after (in most circumstances, more than a decade after) the government entity investor had committed to the associated closed-end fund, so there was no implication of a quid pro quo associated with the contribution; (2) in one case, the contribution was returned, and in another case, the covered associate attempted to have the contribution returned; and (3) in two cases, the candidates were unsuccessful.

Exempt reporting advisers who have existing investors or who are soliciting prospective US state or local government investors (such as pension plans and university endowments) should make sure that they are taking their regulatory obligations seriously with respect to the Pay-to-Play Rule. It appears that most of these actions do not arise out of SEC examinations but come out of the Public Finance Abuse Unit of the SEC Division of Enforcement. In addition, much of the relevant information on political contributions is publicly available.

Fiduciary duty and disclosure obligations

Exempt reporting advisers are subject to Section 206 of the Advisers Act and Rule 206(4)-8 under the Advisers Act. Among other things, Section 206 of the Advisers Act imposes a fiduciary duty on investment advisers with respect to their “clients,” which, in the private fund context, is the private funds (and generally not the investors in such private funds). Rule 206(4)-8 generally prohibits an adviser to a pooled investment vehicle from (1) making untrue or misleading statements of material fact, or omitting a material fact, in communications to investors or prospective investors, and (2) otherwise engaging in fraudulent, deceptive or manipulative conduct with respect to investors or prospective investors.

Leaving aside enforcement actions relating to misappropriation and similar types of fraud, there was a notable uptick in enforcement actions relating to violations of Section 206 and Rule 206(4)-8. Examples of enforcement actions against exempt reporting advisers for these violations include the following:

  • Alumni Ventures Group, SEC Release No. IA-5975 (March 4, 2022) (materially misleading statements regarding management fee calculations, inter-fund loans and cash transfers between funds that violated fund operating agreements, and undisclosed conflict of interest regarding determination of terms of inter-fund transactions).
  • Corona Associates Capital Management, SEC Release No. IA-6062 (June 30, 2022) (failure to comply with fund agreements, specifically failure to have the audit required by fund agreement).
  • Energy Innovation Capital Management, SEC Release No. IA-6104 (September 2, 2022) (errors in calculation of management fees).
  • SparkLabs Global Ventures Management, SEC Release No. IA-6121 (September 12, 2022) (inter-fund lending program that was in violation of the fund governing documents).

An exempt reporting adviser should carefully review whether the adviser is compliant with the relevant fund governing and disclosure documents, particularly with respect to the calculation of fees and conflicted transactions. The calculation of the management fee and other fees covers not just ensuring an accurate calculation but also related issues, such as valuation practices (including writing off or writing down investments) to the extent that such fees are based on the value of the investments. Compliance with fund disclosure documents also includes compliance with descriptions of the investment process, including due diligence, and the investment strategy. Finally, exempt reporting advisers should review their disclosure and procedures for conflicted transactions. These issues are heightened during periods of financial distress.

The SEC has historically used Section 206 and Rule 206(4)-8 as the basis for many enforcement actions against SEC-registered private fund advisers, and it appears that the SEC is now increasingly using them to pursue enforcement actions against exempt reporting advisers. For this reason, exempt reporting advisers should also review the current and historic areas of focus for SEC enforcement against SEC-registered private fund advisers, including, for example, the allocation of fees and expenses and the disclosure of, and consent to, conflicts of interest.

Other enforcement areas

Exempt reporting advisers are subject to Section 204A of the Advisers Act, which requires that an investment adviser adopt policies and procedures to prevent the misuse of material non-public information. Exempt reporting advisers, like all other market participants, are also subject to potential insider trading liability. In 2022, there was an enforcement action against a trader of an exempt reporting adviser for misusing material non-public information to engage in a fraudulent front-running scheme, although, notably, the adviser itself was not subject to an enforcement action (see footnote 2).

Furthermore, exempt reporting advisers are subject to other regulations outside of the Advisers Act beyond insider trading laws. For example, several SEC enforcement actions prior to this year focused on violations of Rule 105 of Regulation M of the Securities Exchange Act of 1934, which prohibits selling short an equity security that is the subject of certain public offerings and purchasing the offered security from an underwriter, broker or dealer participating in the offering, if such short sale was affected during the restricted period (see footnote 3).

Finally, there were no enforcement actions in 2022 alleging improper reliance on either Section 203(l) or Section 203(m). Historically, the SEC has brought only a few such actions. Each involved improper reliance related to two investment advisers that were operationally integrated but sought to be treated separately with respect to their Advisers Act status (see footnote 4). However, exempt reporting advisers should still exercise caution with respect to their Advisers Act status even in the absence of enforcement actions in 2022.

We will continue to monitor the enforcement and examination activity of the SEC with respect to exempt reporting advisers, particularly if these trends continue.

This column was written by Goodwin Procter partners Gregory Larkin and Brynn Peltz, counsel Cynthia Wells and associates Justin Kanter, Daniel Ji and Alexander Vivona.


1. Rules Implementing Amendments to the Investment Advisers Act of 1940, SEC Release No. IA-3221 (Jun. 22, 2011) at text accompanying n.188 (“[W]e do not anticipate that our staff will conduct compliance examinations of [exempt reporting advisers] on a regular basis”) and n.188 (“Our staff will conduct cause examinations where there are indications of wrongdoing, eg, those examinations prompted by tips, complaints and referrals”).

2. Sean Wygovsky, SEC Release No. IA-6155 (September 29, 2022).

3. See, eg, Helikon Investments Ltd, SEC Release No. 34-93091 (September 21, 2021); Rockwood Investment Management, Inc, SEC Release No. 34-73106 (September 16, 2014); Formula Growth, Ltd, SEC Release No. 34-73119 (September 16, 2014).

4. See Penn Mezzanine Partners Management, LP, SEC Release No. IA-3858 (June 20, 2014) & TL Ventures, SEC Release No. IA-3859 (June 20, 2014) (operationally integrated with one adviser seeking to rely on Section 203(m) and the other on Section 203(l); Bradway Capital Management, LLC, SEC Release No. IA-4733 (Jul, 25, 2017) (operationally integrated with one SEC-registered adviser and one seeking to rely on Section 203(m)).