Beginning Oct. 1, 2017, the Securities and
Exchange Commission (SEC) implemented a new Form ADV, altering the disclosure
requirements for Registered Investment Advisors (RIA) made pursuant to the
Investment Advisers Act of 1940 (Advisers Act). The SEC adopted these rules to
increase the quality and quantity of information provided by each RIA in their
respective Form ADV. The SEC’s overall goal is to modernize the disclosure
process and fill gaps in the previous disclosure regime, allowing the SEC to
focus on firms that present the greatest risk and prioritizing the review of
Specifically, Form ADV has changed in the following ways:
1. Separately managed accounts: Form ADV will require each RIA to disclose the type of assets under management for each separately managed account (SMA). The SEC considers an SMA to be any advisory account other than those that are pooled investment vehicles (i.e., registered investment companies, business development companies and pooled investment vehicles that are not registered (including, private funds)). Given this expansive definition, the vast majority of accounts managed by RIAs constitute SMAs. Previously, an RIA had to disclose minimal information about what percentage of its clients and regulatory assets under management (RAUM) utilized SMAs, meaning the new Form ADV has greatly increased the recordkeeping burden on most RIAs. Additionally, any RIA with at least $10 billion in RAUM is required to report SMA data both mid-year and at year-end, while any RIA with less than $10 billion in RAUM is only required to report this data annually.
2. Custody rule: The SEC has released new guidance concerning whether an RIA has custody of client assets, leading to an increase in disclosures under Form ADV. Now, an RIA must disclose any custodial relationships where the custodian maintains at least 10 percent of RAUM that are attributed to SMAs. Specifically, Form ADV requires the disclosure of the custodian’s identity and office location, and the amount of RAUM maintained by that custodian.
3. Umbrella registration: The SEC has streamlined the registration process for private funds whose entities operate as one advisory business. Following the amendment to Form ADV, private fund advisers that are registered and “operate a single advisory business through multiple legal entities” may file an “Umbrella Registration”, which consists of a single Form ADV disclosing the multiple legal entities. Umbrella Registrations will require a new Schedule R wherein each fund and relevant ownership information will be disclosed. In order to qualify for Umbrella Registration, five conditions must be met:
o The RIA and each relying adviser may advise only private funds and “qualified clients” (e.g., clients having either $1 million of assets managed by an RIA or a net worth in excess of $2 million) in separately managed accounts.
o The RIA has its principal office and place of business in the United States, meaning the advisory activities of each relying adviser are subject to the Advisers Act, and each relying adviser is subject to examination by the SEC.
o Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control.
o The RIA and each relying adviser operate under a single code of ethics and a single set of written policies and procedures that are administered by a single Chief Compliance Officer (CCO).
4. Advisory business information: The new Form ADV has also increased the disclosures required for an RIA’s advisory business. Now, each RIA must disclose its actual number of clients and the amount of RAUM attributable to each category of clients, instead of disclosing ranges for such information as was previously required. Additionally and different from the past, each RIA must now identify the approximate amount of an RIA’s total RAUM attributable to non-US clients. Finally, each RIA must now disclose its assets under management in more detail, disclosing the number of clients for which the RIA provides advisory services but does not have RAUM (e.g., non-discretionary accounts), increased details about the assets of pooled investment vehicles, and fee breakdowns for programs that bundle RIA services via one collective fee structure (i.e., wrap fee programs).
5. Additional asset disclosure: Instead of simply indicating whether or not an RIA has assets under its control in excess of a $1 billion threshold, an RIA managing more than $1 billion in assets will have to identify whether its RAUM is equal to $1 billion to less than $10 billion level, $10 billion to less than $50 billion, or $50 billion or more.
6. Online activity: In addition to disclosing its website address, each RIA must disclose “all publicly available social media platforms where the adviser has a presence for which it controls the content.” The SEC will use these additional disclosures to compare the RIA’s content across each the web for consistency and accuracy. These disclosures must also include any such platform used exclusively to market business outside of the United States or toward foreign clients.
7. Largest branch offices: Each RIA is required to list their 25 largest branch offices, as determined by number of employees, and provide an explanation of the types of activities conducted from each office. Previously, Form ADV merely required the disclosure of the 5 largest branch offices.
8. CCO compensation: The amended Form ADV requires the disclosure of the name of the RIA’s CCO and a statement of whether the CCO receives compensation from any other RIA or related party. If the CCO does receive outside compensation, the RIA must report the name and IRS employer identification number of that other entity providing such compensation.
Because these rules went into effect on Oct. 1, 2017, an RIA with a December 31 fiscal year end that does not file an other-than-annual amendment during the remainder of the 2017 calendar year will first need to comply with terms of the amendment in its annual amendment filing in March 2018.