SEC Adopts Changes To Form ADV, Recordkeeping Requirements For Investment Advisers
Investment advisers will be required to provide more information about various aspects of their separately managed account (SMA) business, under a new rule adopted by Securities and Exchange Commission. The rule, which was proposed in May 2015, will expand information required from investment advisers on their Form ADV filings, formalize the requirements for “umbrella registration” and amend certain books and records rules under the Investment Advisers Act of 1940.
The changes are intended to modernize the information reported by investment advisers and enhance the SEC staff’s ability to to effectively carry out its risk-based examination program and other monitoring activities. The staff also hopes these changes will help improve the ability of investors to make informed decisions about their investment advisers. The amendments will became effective October 31, 2016 and advisers will be required to comply beginning October 1, 2017.
Form ADV is used by investment advisers to register with states and the SEC. The adopted amendments include several new disclosure requirements, with a focus on collecting more specific information about advisers’ SMAs. The changes to Form ADV require advisers to SMAs to report, among other things:
- information about the types of assets held and the use of derivatives and borrowings in separately managed accounts;
- the approximate percentage of separately managed account “regulatory assets under management,” or RAUM, that are invested in 12 broad asset categories (i.e., exchange-traded equity securities, U.S. government/agency bonds and sovereign bonds);
- advisers with SMA RAUM ranging from $500 million to $10 billion will report, on an annual basis, the amount of SMA RAUM and the dollar amount of borrowings attributable to those assets that correspond to three levels of gross notional exposures.
- advisers with more than $10 billion will report both mid-year and end of year data with regard to borrowings, as well as the gross national value of six categories of derivatives attributable to those assets that correspond to the three levels of gross notional exposure; and
- the identity of any custodians that account for at least 10 percent of SMA RAUM, and the amount of the adviser’s RAUM attributable to SMAs held at the custodian.
The reporting is designed to bring disclosure of key aspects of an investment adviser’s SMA business up to a level that is comparable with the reporting requirements for private fund advisers. In addition, the SEC adopted several amendments for Form ADV disclosure requirements, including requiring:
- an adviser’s Central Index Key (CIK) numbers, if any;
- the address of each of the adviser’s websites and social media pages, including on platforms such as Twitter, Facebook or LinkedIn;
- the total number of offices at which they conduct investment advisory business and certain information about their 25 largest offices based on the number of employees, including each office’s Central Registration Depository (CRD) branch number and the number of employees who perform advisory functions from each office;
- information about whether the chief compliance officer is compensated by any person other than the adviser and, unless the other person is a registered investment company, the name and IRS Employer Identification number of that person (previously, Form ADV currently required just the name and contact number of the COO).
- the precise numbers, rather than approximate ranges, for three data points concerning the adviser’s business - the number of advisory clients, the types of advisory clients and RAUM attributable to client types.
- the RAUM of all parallel managed accounts related to a registered investment company (or series thereof) or business development company that they advise.
- information about whether the adviser participates in a wrap fee program, and if so, the total amount of RAUM attributable to acting as a sponsor to or portfolio manager for a wrap fee program (currently, an adviser is only required to indicate whether it serves as a sponsor of or portfolio manager for a wrap fee program).
With the rule the SEC also adopted amendments to Form ADV that codifies existing guidance with respect to umbrella registration for certain advisers to private funds. These provisions allow advisers organized as a single group of related entities to register and report on a single form, subject to certain conditions. These conditions are as follows:
- the filing adviser and each relying adviser advise only private funds and clients in separately managed accounts that are qualified clients (as defined in Rule 205-3 under the Advisers Act) and are otherwise eligible to invest in the private funds;
- the filing adviser has its principal office and place of business in the United States;
- each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control and, therefore, each relying adviser, its employees and the persons acting on its behalf are “persons associated with” the filing adviser (as defined in section 202(a)(17) of the Advisers Act);
- the advisory activities of each relying adviser are subject to the Advisers Act and the rules thereunder, and each relying adviser is subject to examination by the Commission; and
- the filing adviser and each relying adviser operate under a single code of ethics adopted in accordance with rule 204A-1 under the Advisers Act and a single set of written policies and procedures adopted and implemented in accordance with rule 206(4)-(7) under the Advisers Act and administered by a single chief compliance officer in accordance with that rule.
These conditions are the same that many investment advisers have been relying on since 2012.
Books and Records Concerning Performance Information
The SEC also adopted two amendments to the books and records rule, Advisers Act Rule 204-2, that will require advisers to maintain additional materials related to the calculation and distribution of performance information.
Previously, advisers were required to maintain records supporting performance claims in communications that are distributed 10 or more people. The SEC replaced the 10 or more persons condition with “any person.” It also adopted a requirement that advisers maintain originals of all written communications received and copies of written communications sent by the adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.
The amendments are substantial and firms should begin preparing for compliance now, ahead of the October 2017 compliance date. Firms that rely on the umbrella provisions should also confirm that they'll continue to be eligible to use this approach under the new rules.