AN OVERVIEW OF SEC REVISIONS TO FORM ADV AND RECORD-KEEPING RULE

The SEC recently adopted revisions to Part 1A of the Form ADV that became effective on October 1, 2017. The SEC has also expanded the scope of Rule 204-2 of the Advisers Act regarding communications about performance results or rates of return. We will address the revisions to Form ADV reporting requirement first.

1. Increased Disclosure Requirements for Separately Managed Accounts. 

The chief focus of the SEC’s revisions is to increase amount of information the SEC will receive about SMA’s. Prior to the revision, there is only a minimal requirement to provide information on SMA’s in Item 5 of Part 1A. The SEC has not provided an express definition of SMA for the purposes of this new reporting, but the SEC has indicated that an SMA is any advisory account other than a pooled investment vehicle, including: (a) a registered investment company, (b) a business development company, or (c) a private fund. 

The new disclosures an adviser must make about an SMA are the following:

a. Disclosures re SMA Assets. Advisers must provide aggregated information about the approximate percent of SMA assets held in twelve different asset categories (e.g., various classes of equity and bond investments, derivatives, etc.) These categories are undefined as well, allowing for advisers to use their own methodology to determine what investments should fall into what categories. Lastly, note that advisers with regulatory assets under management of at least $10 billion have to report this information twice a year, while those under $10 billion need only report at year end.

b. Disclosure of Use of Derivatives and Borrowing with SMA’s. Advisers with at least $500 million in regulatory assets under management are required to report on the amount of assets under management attributable to the SMA’s and the amount of borrowings attributable to those assets, while advisers with at least $10 billion in regulatory assets under management must report that same information twice a year, as well as derivatives exposures within six types of derivatives categories. 

c. Disclosures re Custodian Accounts. Advisers will have to provide information about any custodian who holds more than 10% of the adviser’s regulatory assets under management attributable to SMA’s.

2. Umbrella Registration.

The revised Form ADV has codified existing SEC guidance on when umbrella registration is allowed, and has clarified the information required from each adviser in connection therewith. Umbrella registration is only available for advisers operating as a single advisory business and satisfying five conditions evidencing same. These revisions should standardize the qualification for umbrella registration and provide additional information pertaining to the subject. 

3. Other Revisions to Form ADV.

The revised Part 1A of Form ADV includes a number of additional changes, including:

a. 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 based on number of employees (under the existing rule, only the principal place of business and five largest offices needed to be reported).

b. Item I.I.: The revisions require information about an adviser’s social media accounts, and expressly included Facebook, Twitter, and LinkedIn as examples of reportable accounts. An adviser is not required to disclose the social media accounts of its employees, however.

c. Item 1.J.: An adviser will have to disclose if its Chief Compliance Officer is employed or compensated by anyone other than the adviser and, if so, the name and other information of that party.

d. Item 5: In addition to reporting requirements for SMA’s subject to Item 5 as discussed above, an adviser will have to report the actual number of clients advised by the adviser for each client type and the amount of regulatory assets under management attributable to each category of client (currently, the disclosure in Form ADV is percentage ranges only).

e. Section 7 of Schedule D: Advisers to Section 3(c)(1) private funds will have to report if sales of interests in such funds are limited 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.

4. Rule 204-2 of the Advisers Act. 

The amendments to the record-keeping requirements under Rule 204-2 of the Advisers Act will apply to all communications circulated or distributed after October 1, 2017. SEC-registered investment advisers will be required to maintain those materials set forth in Rule 204-2(a)(16) (17 CFR 275.204-2(a)(16)) 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.” 

This is a significant change from current Rule 204-2, which only requires that SEC-registered investment advisers keep such supporting documentation if the communications are distributed to ten or more persons. Additionally, advisers will be required to retain original copies of all written communications relating to performance or rate of return with any third party.

Disclaimer: This post is not, and shall not be construed as, legal advice or a legal opinion on any specific facts or circumstances. Furthermore, this post is not intended to create, nor shall it be construed as creating, an attorney-client relationship. The post is for general informational purposes only, and you are urged to consult an attorney regarding any specific legal question you may have.