The Securities and Exchange Commission (SEC) has adopted amendments to Form ADV as well as certain rules under the Investment Advisers Act of 1940 (the “Advisers Act”) (collectively, the “Amendments), previously proposed in May 2015. The Amendments, adopted on August 25, will impact SEC-registered investment advisers and, indirectly, many state-registered advisers, largely because various states also employ Form ADV. The Amendments will likely have minimal practical effect on most SEC Exempt Reporting Advisers, except for certain additional reporting requirements, including those relating to social media applicable to such advisers.
As originally proposed, the Amendments will: (1) require investment advisers to provide information related to their separately managed account (SMA) business; (2) better enable private fund investment advisers to file an “umbrella registration” for separate investment advisers that operate as a single investment advisory business; (3) adjust Rule 204-2 under the Advisers Act to require investment advisers to maintain records that demonstrate performance calculations or rates of return in any written communications and maintain certain additional records; and (4) make certain clarifying, technical and other amendments. The Amendments also introduced a number of notable changes to the SEC’s original May 2015 proposal, including a higher “asset under management” threshold for some of the new SMA reporting requirements, a delayed compliance date of October 1, 2017, and a clarification that a firm’s Form ADV need not be adjusted to comply with the Amendments outside of the currently required amendment cycle (i.e., in connection with the firm’s annual or other than annual amendments to comply with the currently existing requirements).
The Amendments are intended to not only modernize and enhance disclosures for the investment management industry, but also to further the SEC’s use of technology. In part, the SEC hopes the changes will improve its ability to monitor various risks by taking advantage of technological advances in data collection and analysis—especially in light of the growth of new and increasingly complex investment products and strategies.
Amendments to Form ADV
Information Regarding SMAs
The Amendments enhance the SEC’s ability to collect information specific to investment advisers’ SMAs, which for the purposes of reporting on Form ADV include all advisory accounts other than registered investment companies, business development companies, and pooled investment vehicles that are not investment companies (i.e., private funds). The data collection focuses on types of assets held and the use of derivatives and borrowings in SMAs. For the most part, the SEC adopted its SMA-related changes as proposed except in select areas, such as adding a “fewer than five clients” column in place of a requirement that the actual number of clients be listed. Further, the Amendments require less information about separately managed accounts than what was originally proposed for investment advisers managing at least $150 and less than $500 million in regulatory assets, and no longer require investment advisers to report the number of SMAs managed by the advisers. The changes were made in response to many commenters opposing the public disclosure of SMA information, citing the potential cost of disclosure of confidential client information, particularly for advisers with a small number of SMAs, and the concerns with disclosing proprietary investment or trading strategies.