What Advisers Need to Know to Comply with the SEC’s New Form ADV Amendments

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On August 25, 2016, the SEC adopted amendments to Form ADV and the Advisers Act.  As noted in the adopting release, the amendments to Form ADV are designed to improve the depth and quality of information the SEC collects on investment advisers that will enhance the staff’s ability to effectively carry out risk monitoring initiatives and assist the SEC’s risk-based examination program.

Form ADV Part 1 Amendments:

  • Umbrella Registration for certain private fund advisers.  Groups of private fund advisers that operate as a single advisory business can now register on the same Form ADV application, streamlining the registration process for multiple entities while providing more consistent data and a clearer picture of groups of advisers that operate as a single business.
  • Additional RAUM information:  Advisers must break down their regulatory assets under management (RAUM) by type of client, calculate the number of clients by type, and report RAUM attributable to non-United States clients.
  • Separately Managed Account (“SMA”) Information.  Advisers will need to report additional information about separately managed accounts (i.e., client accounts other than registered investment companies, business development companies, and registered and unregistered pooled investment vehicles managed by the adviser).
  1. Advisers will report the approximate mid-year and annual percentages, as required, of SMA RAUM that are invested in twelve categories[1] of investments.
  2.  Advisers with at least $500 million but less than $10 billion in SMA RAUM will be required to report the amount of SMA RAUM and the dollar amount of borrowings attributable to those assets that correspond to three levels of gross notional exposures. 
  3. Advisers with at least $10 billion in SMA RAUM will be required to report derivative exposures across six derivatives categories. 
  • Branch Office, Social Media, Chief Compliance Officer compensation information:
  1. The investment adviser’s largest 25 offices in terms of numbers of employees must be listed. Previously, only the largest 5 offices were required to be listed;
  2. The website addresses of the investment adviser’s social media pages for which they have control over the content must be reported (e.g., Facebook, LinkedIn, Twitter).
  3. An investment adviser whose CCO is compensated or employed by a source other than the investment adviser for whom they provide CCO services, a related person of the investment adviser or an investment company advised by the investment adviser must report the name of the person that provides the CCO’s compensation along with the person’s IRS Employer ID number, if any.
  • Additional Wrap Fee Program information.  Advisers that participate in wrap fee programs must break down regulatory assets under management attributable to acting as a sponsor to a wrap fee program, portfolio manager for a wrap fee program or sponsor to and portfolio manager for the same wrap fee program.

Amendments to the Advisers Act

Rule 204-2, Books and records to be maintained by investment advisers, has been amended to require advisers to:

  1. make and keep supporting documentation that demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person.
  2. maintain originals of all written communications received and copies of written communications sent by them related to the performance or rate of return of any or all managed accounts or securities recommendations.

How you can prepare

These changes will be material for many firms and will require infrastructure designed to capture and monitor the required information so that filings can be made timely and accurately.  A few thoughts as you prepare for the October 1, 2017 compliance date

  • Take the time now to review the adopting release;
  • Determine the scope and applicability of the new requirements to your firm;
  • Estimate costs of compliance;
  • Notify senior management – set expectations;
  • Consider operational aspect of compliance;
  • Promptly note the effective date and compliance date – plan accordingly;
  • Break down compliance into several concrete tasks and set dates for completion, and;
  • Determine early the extent of outside support needed.
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[1] Exchange-Traded Equity Securities; Non Exchange-Traded Equity Securities; U.S. Government/Agency Bonds; U.S. State and Local Bonds; Sovereign Bonds; Investment Grade Corporate Bonds; Non-Investment Grade Corporate Bonds; Derivatives; Securities Issued by Registered Investment Companies or Business Development Companies; Securities Issued by Pooled Investment Vehicles (other than Registered Investment Companies or Business Development Companies); Cash and Cash Equivalents; and Other.