- SEC Adopts Changes to Form ADV and Books and Records Rules
- September 19, 2016 | Authors: Eric A. Arnold; Clifford E. Kirsch; Michael B. Koffler; Susan S. Krawczyk; Holly H. Smith
- Law Firms: Sutherland Asbill & Brennan LLP - Washington Office; Sutherland Asbill & Brennan LLP - New York Office; Sutherland Asbill & Brennan LLP - Washington Office
On August 25, the Securities and Exchange Commission (the SEC) adopted amendments to Form ADV Part 1 that will require SEC-registered investment advisers to provide a significant amount of new information.1 The SEC adopted these amendments to Form ADV to improve the depth and quality of information on separately managed accounts that the SEC collects from investment advisers, to facilitate the SEC’s risk monitoring initiatives, and to assist the SEC staff in its risk-based examination program.
In the same release, the SEC also (i) amended Form ADV to codify no-action relief permitting advisers to private funds to file a single registration where multiple legal entities operate as a single investment advisory business, and (ii) adopted certain amendments to Rule 204-2 under the Investment Advisers Act of 1940, as amended, to require investment advisers to keep certain additional books and records relating to performance calculations and written communications.
The most significant amendments to Form ADV Part 1 and the new recordkeeping requirements are summarized below.
Amendments to Form ADV Part 1
The amendments to Form ADV Part 1 include certain new reporting requirements regarding separately managed accounts. In addition, the SEC has amended Form ADV Part 1 to require the reporting of certain additional identifying and background information about investment advisers, including the website addresses for their social media sites, information about outsourced chief compliance officers, and expanded information about branch offices. Finally, Form ADV Part 1 has been amended to codify the “umbrella registration” scheme that private fund advisers have been employing for the past several years in which they file a single registration on behalf of themselves and their relying advisers pursuant to previous SEC staff guidance.
Information Regarding Separately Managed Accounts
The amendments to Form ADV Part 1 will require advisers to provide certain aggregated information about the separately managed accounts2 that they advise. The new reporting requirements relating to separately managed accounts include the following:
- An amendment to Item 5 of Part 1A and Section 5 of Schedule D to require advisers to report information about the types of assets held by their separately managed accounts and the use of derivatives and borrowings in separately managed accounts; and
- An amendment to Schedule D to require advisers to identify any custodians that account for at least 10% of the separately managed account regulatory assets under management, and the amount of the adviser’s regulatory assets under management attributable to separately managed accounts held at the custodian.
In addition, the SEC is adding several new questions and amending existing questions on Form ADV Part 1 regarding identifying information, an adviser’s advisory business, and affiliations. In particular, these changes include:
- Adding a question to Item 1.D. of Form ADV Part 1A that requires an adviser to provide all of its CIK Numbers if it has one or more such numbers assigned, regardless of public reporting company status;
- Amending Item 1.I of Form ADV Part 1A to ask whether the adviser has one or more accounts on social media platforms, such as Twitter, Facebook or LinkedIn, and requesting the address of each of the adviser’s social media pages in addition to the address of each of the adviser’s websites in Section 1.I. of Schedule D;3
- Amending Item 1.F. of Form ADV Part 1A and Section 1.F. of Schedule D to require advisers to provide the total number of branch offices at which they conduct advisory business and information about their largest 25 offices in terms of number of employees;
- Amending Item 1.J. of Form ADV Part 1A to require an adviser to report whether its chief compliance officer is compensated or employed by any person other than the adviser (or a related person of the adviser) for providing chief compliance officer services to the adviser (i.e., whether the chief compliance officer is “outsourced”), and if so, to report the name and IRS Employer Identification Number (if any) of that other person;
- Amending Item 1.O of Form ADV Part 1A to require advisers with assets of $1 billion or more to report their assets within three ranges;
- Amending Item 5 of Form ADV Part 1A to require an adviser to report the precise number of clients and the precise amount of regulatory assets under management attributable to each category of clients as of the date the adviser determines its regulatory assets under management, and to also require an adviser to report the number of clients for whom it provided advisory services but did not have regulatory assets under management;
- Adding a question to Item 5 of Form ADV Part 1A to require an adviser that elects to report client assets in Part 2A of Form ADV differently from the regulatory assets under management it reports in Part 1A of Form ADV to check a box noting that election;
- Adding a question to Item 5 of Form ADV Part 1A asking for the approximate amount of an adviser’s total regulatory assets under management that is attributable to clients that are non-United States persons;
- Adding to Section 5.G.(3) of Schedule D a requirement that advisers report the regulatory assets under management of all parallel managed accounts related to a registered investment company (or series thereof) or business development company that they advise;
- Amending Item 5. I. of Form ADV Part 1A to ask whether the adviser participates in a wrap fee program, and if so, the total amount of regulatory assets under management attributable to acting as a sponsor to or portfolio manager for a wrap fee program, and also amending Section 5.I.(2) to add questions that require an adviser to provide any SEC File Number and CRD Number for sponsors to those wrap fee programs;
- Amending Sections 7.A. and 7.B.(1) of Schedule D to require an adviser to provide identifying numbers (i.e., Public Company Accounting Oversight Board (PCAOB)-assigned numbers and CIK Numbers) in response to two questions; and
- Adding a question to Section 7.B.(1) of Schedule D to require an adviser to a private fund that qualifies for the exclusion from the definition of investment company under section 3(c)(1) of the Investment Company Act of 1940 to report whether it limits sales of the fund to qualified clients, as defined in Rule 205-3 under the Advisers Act.
The SEC also adopted amendments to Part 1A that will provide a more efficient
method for the registration, on one Form ADV, of multiple private fund adviser entities operating as a single advisory business (umbrella registration). The staff provided guidance to private fund advisers regarding umbrella registration following passage of the Dodd-Frank Act,4 and the amendments codify this guidance into Form ADV. As part of such codification, the SEC is also adopting a new schedule to Part 1A—Schedule R—that must be filed for each relying adviser. Schedule R requires identifying information, the basis for SEC registration, and ownership information about each relying adviser, some of which was already filed by an adviser relying on staff guidance. Umbrella registration is not mandatory, but does simplify the registration process for these private fund advisers.
New Recordkeeping Requirements
The SEC adopted two amendments to the Advisers Act books and records rule, Rule 204-2, that will require advisers to maintain additional materials related to the calculation and distribution of performance information.
Rule 204-2(a)(16) currently requires advisers to maintain records supporting performance claims in communications that are distributed or circulated to 10 or more persons. The SEC is amending Rule 204-2(a)(16) by removing the 10 or more persons condition and replacing it with “any person.” Accordingly, under the amended rule, advisers will be required to maintain the materials listed in Rule 204-2(a)(16) that demonstrate the calculation of the performance or the rate of return in any communication that the adviser circulates or distributes, directly or indirectly, to any person.
The SEC is also adopting amendments to Rule 204-2(a)(7). Rule 204-2(a)(7) currently requires advisers to maintain certain categories of written communications received and copies of written communications sent by such advisers. The SEC is amending Rule 204-2(a)(7) to require advisers to now maintain originals of all written communications received and copies of written communications sent by an investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.
Compliance Effective Date
The SEC will require advisers to file the newly amended Form ADV Part 1 with their first amendment filed after October 1, 2017. For most advisers with a calendar year filing, this will be when they file their annual updating amendment in April 2018. Compliance with the amended recordkeeping rules will apply after October 1, 2017.
1 See SEC Release No. IA-4509, “Form ADV and Investment Advisers Act Rules” (Aug. 25, 2016), available at https://www.sec.gov/rules/final/2016/ia-4509.pdf (hereinafter, the Adopting Release).
2 For these purposes, the SEC defines “separately managed accounts” to include advisory accounts other than those that are pooled investment vehicles (i.e., registered investment companies, business development companies and pooled investment vehicles that are not registered, such as private funds).
3 For these purposes, the SEC has clarified that the required reporting is limited to accounts on social media platforms where the adviser controls the content. Thus, information about the social media accounts of an adviser’s employees would not need to be reported and neither would social media platforms that reference an adviser over which the adviser has no control and of which the adviser may not even be aware. Furthermore, the SEC did not intend to require reporting on information posted on an adviser’s internal social media platform or information not intended to promote the adviser’s business to potential clients (e.g., information posted on a job board intended to attract job applicants). See Adopting Release at 35-36.
4 See American Bar Association, Business Law Section, SEC Staff Letter (Jan. 18, 2012), available at http://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm.