Increased Transparency for Investment Advisers: SEC Adopts Amendments to Form ADV and Other Reporting Requirements
By Kathleen Connolly, Senior Manager, Alternative Investment Group
Registered investment advisers beware! There will be a revised Form ADV as of October 1, 2017, that incorporates several amendments recently adopted by the Securities and Exchange Commission (the “SEC”). These amendments were part of a proposal by the SEC in May 2015 and were adopted on August 25, 2016. For most advisers the new requirements will not take effect until the following annual reporting update, which will be due in the first quarter of 2018.
In addition, the SEC also adopted amendments to several Advisers Act rules.
Background
The Form ADV is used by investment advisers to register with the SEC as well as state securities authorities. The form consists of two parts. Part 1 requires information about the investment adviser’s business, such as ownership, clients, employees, affiliations and any disciplinary actions. It is a simple check-the-box/fill-in-the-blank format that is used by the SEC to assist in the regulation of its examination programs. Part 2 of Form ADV is a narrative brochure prepared by the adviser that contains information as to the type of advisory services offered, conflicts of interest, and the educational and business background of management and key advisory personnel of the adviser. Part 2 is designed to provide a plain English description of the investment adviser’s services, to be provided to clients of the adviser. Investment advisers are required to file an annual updating amendment within 90 days of the end of the adviser’s fiscal year.
In May 2015, the SEC released proposed amendments to Part 1A of Form ADV. This proposal also included amendments to several Investment Advisers Act rules. The SEC received an abundance of comment letters on the proposal from both U.S. and non–U.S. industry participants who voiced their concern about the impact the proposal would have on fund managers, most notably on the public availability of information on the adviser’s managed accounts and the additional cost/burden this will place on advisers. The SEC took into account the questions and concerns raised by the commenters and made several modifications to the proposed amendments.
The amendments are published on the SEC’s website, and advisers should review the amendments adopted for full details of compliance. Below is a brief summary:
Amendments to Form ADV
Separately Managed Accounts – Advisers will be required to provide information on an aggregate level regarding separately managed accounts that they manage. Advisers will be required to report information about the types of assets held and the use of derivatives and borrowings in separately managed accounts.
- Advisers will be required to report, based on broad asset categories, the approximate percentage of separately managed account regulatory assets under management. Depending on the size of assets under management attributable to separately managed accounts, advisers will report semi-annually or annually.
- Advisers will also be required to report information regarding use of borrowings and derivatives within separately managed accounts. The form has listed derivative categories to give the SEC an understanding of the exposures within these accounts. There is also a minimum threshold, for each account, that would require reporting.
- Advisers will be required to identify any custodians that account for at least 10 percent of separately managed account assets and the amounts held by these custodians.
Additional Information Regarding Investment Advisers – Adopted within the amendments to Form ADV are several new questions, as well as revised questions on Form ADV regarding the adviser’s identifying information, advisory business, and affiliations.
- Additional identifying information will include the adviser’s Central Index Key Number; more detailed information of the adviser’s social media platforms; offices other than its principal office and place of business; whether the adviser’s chief compliance officer is compensated or employed by any person other than the adviser; and advisers’ assets within one of three specified ranges.
- Additional information about the advisory business will include the number of clients and amount of regulatory assets under management attributable to each client category, the number of clients that receive advisory services only; the approximate amount of regulatory assets under management for non-U.S. persons; and the assets under management of all parallel managed accounts, to assess any conflicts of interest.
- Additional information about affiliations will include the relationships advisers have with other financial providers and information pertaining to any private funds held by an adviser.
Umbrella Registration – The SEC also amended Form ADV to codify umbrella registration for certain advisers to private funds. Umbrella registration is not mandatory, but it can provide private fund advisers that operate a single advisory business through multiple legal entities a more simplified registration process. Certain conditions need to be met in order for the adviser to take advantage of umbrella registration. Most comment letters received by the SEC expressed support for umbrella registration.
The SEC also adopted several technical and other amendments to Form ADV that are designed to clarify the form and its instructions. The SEC believes these will make the filing process for Form ADV clearer and more efficient for advisers. As stated above, advisers should consult the SEC website for the final rule.
Amendments to Investment Advisors Act Rules
Amendments to Books and Records Rule – The SEC is adopting two amendments to the Advisers Act Books and Records rule, that will require advisers to maintain additional materials related to the calculation and distribution of performance information:
- The SEC has rescinded the requirement to maintain performance return materials only if the material was circulated to 10 or more persons. Under the amended rule, advisors will be required to maintain this material if it is circulated to any person.
- The second amendment will require advisers to 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.
Technical Amendments to Advisers Act Rules – The SEC is removing the transition provisions from the rules where the transition process has been completed. These provisions were added to the Advisers Act Rules as part of the implementation of the Dodd-Frank Act, and also when advisers began electronically filing their brochures with the SEC. These transition periods had expired in 2012 and 2013.
Effective Dates
The effective dates for the amendments are as follows:
- Amendments to Form ADV will be effective for any adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after October 1, 2017. For most advisers, the new form will not take effect until their annual updating amendments that will be filed during the first quarter of 2018.
- Amendments to Investment Adviser Act rules will apply to communications circulated or distributed after October 1, 2017.
Conclusion
These amendments may be daunting at first, but once implemented, should help streamline the examination process performed by the SEC. It will provide the SEC a compilation of industry information which will enable the Commission to identify specific advisers for examination. The use of providing information regarding social media will give the Commission a better way to cross reference information with the Form ADV and other sources to investigate and have a more complete understanding of the advisers business prior to any examination. The enhanced reporting requirements may also help clients and future clients of the advisers to get a better understanding and differentiate between investment advisers.
Most advisers have been aware of the proposals since 2015 and the implementation does not happen until October 1, 2017. This means that the amendments for the Form ADV for most advisers will not be implemented until the first quarter of 2018. The burden of gathering the information will take time initially, but most advisers do compile this information for their own compliance and management monitoring. As the industry continues to emerge from the financial crisis, faced with a changing and complex regulatory environment, advisers need to manage the regulatory climate in order to position themselves to compete for market share. The client base has become more risk-adverse and demanding, and hopefully with increased transparency, advisers can successfully build investor relationships and increase growth.
