SEC Adopts Revisions to Form ADV Part 1A and Advisers Act

The Securities and Exchange Commission (“SEC”) adopted revisions to Part 1A of the Form ADV on August 25, 2016. All investment advisers registered with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), as well as state-registered investment advisers and SEC “exempt reporting advisers”, are required to complete certain sections of Part 1A of the Form ADV. These revisions become effective on October 1, 2017, meaning most advisers will first encounter the SEC’s revised Form ADV and new informational requests when they file their annual Form ADV amendment in the first quarter of 2018. Due to the additional types and scope of data that must be provided, however, we advise clients to familiarize themselves with and prepare for this new reporting regime promptly. Additionally, the SEC has expanded the scope of Rule 204-2 of the Advisers Act with respect to communications regarding performance results or rates of return. Each of these significant revisions is discussed below.

Separately Managed Accounts. Separately managed accounts (each, a “SMA”) are the primary target of the SEC’s revisions to Part 1A of the Form ADV. While the SEC has collected a significant amount of data on private funds since the adoption of the Dodd-Frank Act, it has collected far less with respect to SMAs; the revised Form ADV is intended to address this informational gap. The SEC has not provided an explicit definition of a SMA in connection with these revisions. Instead, an adviser is instructed that a “separately managed account” (for the purposes of the Form ADV) is any advisory account other than a pooled investment vehicle (i.e., a registered investment company, a business development company, or a private fund). This means that an adviser that provides advisory services to a pension plan or a sovereign wealth fund, as well as to other non-pooled investment vehicle advisory accounts such as to a high net-worth individual, will be required to consider such advisory clients as a SMA with respect to the Form ADV.

Under the revised Form ADV, advisers will be asked to provide aggregated information about their SMA advisory clients, including the types of assets which they hold and their exposure to derivatives and leverage. The scope and granularity of information an adviser is asked to provide depends on the total regulatory assets under management (“RAUM”) of an adviser’s SMAs. Those advisers whose RAUM attributable to SMAs is greater than $10 billion have the largest disclosure requirements, while those under $500 million have the smallest. With respect to reporting the types of assets held by the adviser’s SMAs, the SEC has provided 12 categories of assets from which to select; advisers are instructed to use a reasonable methodology to determine which assets fall within which categories and to avoid double counting any SMA asset. Additionally, all advisers are required to provide information about any custodian who holds more than 10% of the adviser’s RAUM attributable to SMAs; the information requested here is similar to that requested for private fund custodians.

Social Media Accounts. While the current Form ADV instructs advisers to provide their firm’s website address, the revised Form ADV also requests information about an adviser’s social media accounts. The SEC has clarified that an adviser should only include accounts where the adviser is able to control the content associated with the account, and explicitly mentioned Facebook, Twitter, and LinkedIn as examples of such accounts. If a website automatically creates a profile for an adviser without the adviser’s consent, or the adviser otherwise has no control on the information and content associated with the profile, the adviser should not include such account when completing this section of the revised Form ADV. Additionally, an adviser will not be required to disclose the social media accounts of its employees.

Umbrella Registration. The SEC historically permitted related advisers that operate as a single advisory business through multiple legal entities to register as such under a single Form ADV; however, the filing, which was designed for single rather than multiple legal entities, caused confusion for such related advisers. The revised Form ADV has simplified and clarified who is eligible to qualify for such “umbrella registration,” as well as the information requested from each adviser in connection therewith. The SEC noted that umbrella registration is only available for those advisers who in fact operate as a single advisory business and satisfy each of five conditions evidencing such fact. (See page 64 of SEC Release No. IA-4590.) Clients who believe that they may be eligible to qualify for such umbrella registration status are advised to speak with counsel.

Other Key Revisions to Form ADV. The revised Part 1A of Form ADV includes a variety of other changes, some of which are described below.

  • Item 1.F – An adviser will now be required to disclose its total number of offices, as well as the address and other information for its 25 largest offices in terms of employees; this expands the scope of the current question, which only asks for the address and contact information of an adviser’s principal place of business and its five largest offices.
  • Item 1.J – An adviser must now disclose if its Chief Compliance Officer is employed or compensated by anyone other than the adviser and, if so, disclose the name and other information of such third party; this information is designed to help the SEC track the effectiveness of outsourced compliance providers.
  • Item 5 – An adviser must now report the actual number of clients advised by the adviser for each client type and the RAUM attributable to such clients, as opposed to the percentage ranges requested in the current Form ADV.
  • Section 7 of Schedule D – Advisers to Section 3(c)(1) private funds must indicate if the adviser limits sales of interests in such funds to “qualified clients”, as defined in the Advisers Act. For those advisers who are exempt reporting advisers with the SEC or otherwise not subject to the “qualified client rule” with respect to performance fees, such advisers may answer “No” to this question.

Rule 204-2 of the Advisers Act. In addition to the revised Form ADV Part 1A, the SEC also amended the record-keeping requirements of the Advisers Act. Specifically, SEC-registered investment advisers will now be required under Rule 204-2 of the Advisers Act to maintain the materials described in Rule 204-2(a)(16) (17 CFR 275.204-2(a)(16)) of the Advisers Act that “demonstrate the calculation of the performance or rate of return in any communication that the adviser circulates or distributes, directly or indirectly, to any person.” Under the current Rule 204-2, SEC-registered investment advisers are only required to keep such supporting documentation if the communications are distributed to ten or more persons. These amendments considerably expand the scope of the rule to encompass all performance related communications, including but not limited to custom calculations requested by a single investor or potential investor. Additionally, advisers will now be required to retain original copies of all written communications related to performance or rate of return that are sent to or received from any third party. These amendments to the record-keeping requirements of the Advisers Act will apply to all communications circulated or distributed after October 1, 2017. While investment advisers who are exempt from registration with the SEC are technically not subject to these new record retention rules, we recommend that all advisers, regardless of registration status, to retain such records as a best practice.

Conclusion. As mentioned above, both the revised Form ADV and amended record-keeping requirements of the Advisers Act will become effective on October 1, 2017. However, all advisers are encouraged to promptly review their current operational practices and determine what modifications, if any, will be necessary to ensure continued compliance with all applicable regulations. While the new rules may seem simple at first glance, we suspect that many advisers will need to adjust their internal accounting and record-keeping practices to comply with the new requirements.

Leave a Reply