SEC Proposes Amendments to Form ADV & Investment Advisers Act

On May 20, 2015, the Securities and Exchange Commission (the “SEC”) published for comment proposed amendments to Form ADV and certain rules promulgated under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). [1] The proposed amendments to Form ADV relate to Part 1A, which, although available on the SEC’s website, is not required to be delivered to clients. The SEC proposes to (1) require investment advisers to provide additional information on their Form ADV Part 1A, including information about their separately managed account (“SMA”) business; (2) incorporate a method for private fund adviser entities operating a single advisory business to register using a single Form ADV; (3) require investment advisers to maintain records that demonstrate performance calculations or rates of return in any written communications, and maintain originals of all written communications received and copies of written communications sent related to the performance or rate of return of all managed accounts or securities recommendations; and (4) make clarifying, technical, and other amendments to Form ADV and Advisers Act rules.

Proposed Amendments to Form ADV

a. Information about Separately Managed Accounts (“SMAs”)

Several of the proposed amendments to Form ADV require advisers to report information about their SMAs, which, for purposes of Form ADV reporting, refer to advisory accounts other than those that are pooled investment vehicles. These include:

• Approximate percentage of SMA regulatory assets under management (“RAUM”) invested in ten broad asset categories (e.g., exchange-traded equity securities and U.S. government/agency bonds);
• Information on the use of borrowings and derivatives in SMAs; and
• Identity of custodians that account for at least 10% of SMA RAUM, and the amount of the adviser’s RAUM attributable to SMAs held at the custodian.

The proposed amendments would require advisers to report the information annually. Advisers with at least $10 billion in SMA RAUM would need to provide more detailed information than advisers with less than $10 billion in SMA RAUM.

b. Additional Information about Advisers, Their Advisory Business, and Affiliates

In addition to information about SMAs, the SEC proposes to collect additional identifying information about advisers and information about their advisory business, financial industry affiliations, and private fund reporting. These include:

• Identifying numbers (e.g., Central Index Key numbers of the adviser and its affiliates and Public Company Accounting Oversight Board registration numbers for private fund auditors);
• Websites for social media platforms (e.g., Twitter, Facebook, and LinkedIn);
• Information about the adviser’s offices other than its principal office and place of business, including information about the number of employees performing advisory functions from each of the adviser’s 25 largest offices (in terms of number of employees) and the types of business activities conducted at each such location;
• Whether the 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, and, if so, the name and IRS Employer Identification Number of that other person;
• Approximate amount of the adviser’s own assets within a given range (i.e., $1 billion to less than $10 billion, $10 billion to less than $50 billion, or $50 billion or more);
• The number of clients and amount of RAUM attributable to each category of clients (reported as an approximate number rather than a range);
• Whether the adviser reports its client assets in Part 2A of Form ADV differently from the RAUM reported in Part 1A of Form ADV;
• RAUM of all parallel managed accounts related to a registered investment company or business development company advised by the adviser (a parallel managed account being any managed account or other pool of assets advised by the adviser that pursues substantially the same investment objective and strategy and invests side by side in substantially the same positions as the identified investment company or business development company);
• Additional information concerning wrap fee programs if the adviser serves as a sponsor of, or a portfolio manager for, a wrap fee program (including RAUM attributable to acting as a sponsor and/or portfolio manager of a wrap fee program and the SEC File Number and CRD Number for sponsors to wrap fee programs); and
• Percentage of a private fund owned by qualified clients (as defined in rule 205-3 under the Advisers Act).

c. Umbrella Registration

The SEC’s proposed amendments also incorporate the concept of umbrella registration into Form ADV, essentially codifying the guidance its staff provided in a 2012 no-action letter issued to the American Bar Association (the “2012 ABA Letter”). [2] Under the proposed amendments, one adviser (the “filing adviser”) may file a single Form ADV on behalf of itself and other advisers that are controlled by, or under common control with, the filing adviser (each, a “relying adviser”), provided that they conduct a single advisory business (collectively, an “umbrella registration”). The conditions for umbrella registration, as set forth in the proposed amendments to Form ADV’s General Instructions, are the same as those in the 2012 ABA Letter (except that the 2012 ABA Letter also included disclosure conditions for Form ADV, the substance of which is covered by the proposed amendments to Form ADV). [3] While umbrella registration has been permitted since the 2012 ABA Letter, advisers seeking to rely on the 2012 ABA Letter have had to report information regarding their filing advisers and relying advisers on a form that was not designed to accommodate umbrella registration. The proposed amendments would, among other things, add a new schedule to Part 1A (Schedule R) that would need to be filed for each relying adviser.

Proposed Amendments to the Recordkeeping Rule

Rule 204-2 under the Advisers Act requires registered advisers to create and maintain certain books and records. Currently, advisers are required to maintain records supporting performance claims in communications that are distributed or circulated to ten or more persons. [4] Advisers are also required to maintain certain categories of written communications received and copies of written communications sent by them. [5] The SEC proposes to amend Rule 204-2 to require advisers to maintain records supporting performance claims in any communication that the adviser circulates or distributes, directly or indirectly, to any person, regardless of whether it is a personalized client communication or an advertisement sent to ten or more persons. The SEC also proposes to amend Rule 204-2 to require advisers to 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 SEC expects that the proposed amendments would provide its examination staff with additional information to review an adviser’s compliance with Rule 206(4)-1, which regulates advertisements by investment advisers, and provide assistance in enforcing Rule 206(4)-1 in cases of fraudulent advertising.

Proposed Clarifying, Technical, and Other Amendments

The SEC’s proposals include a number of amendments to Form ADV that are designed to clarify the form and its instructions. These proposed amendments include rewording and reorganizing certain questions and instructions, and eliminating certain outdated references. Additionally, the SEC proposes to amend several Advisers Act rules and remove transition provisions from rules where the transition process is complete.

Comments to the SEC’s proposed amendments are due 60 days after the proposals are published in the Federal Register.

Endnotes:

[1] Amendments to Form ADV and Investment Advisers Act Rules, Release No. IA-4091 (May 20, 2015), available at http://www.sec.gov/rules/proposed/2015/ia-4091.pdf.
(go back)

[2] 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.
(go back)

[3] These conditions are: (1) the filing adviser and each relying adviser advise only private funds and clients in SMAs that are qualified clients (as defined in rule 205-3 under the Advisers Act) and are otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds; (2) the filing adviser has its principal office and place of business in the United States and, therefore, all of the substantive provisions of the Advisers Act and the rules thereunder apply to the filing adviser’s and each relying adviser’s dealings with each of its clients, regardless of whether any client or the filing adviser or relying adviser providing the advice is a United States person; (3) 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); (4) 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 SEC; and (5) 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).
(go back)

[4] See Rule 204-2(a)(16).
(go back)

[5] See Rule 204-2(a)(7).
(go back)