Trending Legal Issue
Proposed Amendments to Form ADV and Advisers Act
Would Streamline Registration and Increase
Recordkeeping Requirements
By Marguerite C. Bateman and Christine A. Schleppegrell
September 3, 2015
On May 20, 2015, the SEC proposed amendments to Form ADV and the Investment Advisers Act of 1940 (Advisers
Act) in order to improve risk monitoring. Through this proposal the SEC aims to elicit additional information regarding
separately managed accounts, including their use of derivatives. Also, the SEC proposed changes to the Advisers
Act Books and Records Rule (Rule 204-2).
The proposal would impact investment advisers that file Form ADV (including private fund advisers that will take
advantage of the umbrella registration provided for by the amendments) and investment advisers that manage
separately managed accounts (SMAs). SMAs are clients other than registered investment companies, business
development companies and other pooled investment vehicles (such as private funds) and are designed to meet the
needs of institutional and individual investors. In addition, the proposal would impact exempt reporting advisers,
including small entities.
FORM ADV AMENDMENTS
Specifically, the proposal seeks to make the following changes to Part 1A of Form ADV: (1) fill certain data gaps;
(2) incorporate “umbrella registration” for private fund advisers; and (3) add technical or clarifying amendments to
existing items.
1. Fill in Data Gaps
As part of the proposed changes to Form ADV, advisers would be required to disclose information regarding SMAs,
social media platforms, wrap fee programs, and offices used to conduct advisory business. Although the SEC gathers
detailed information regarding pooled investments, it does not currently request the same information regarding
SMAs.
Pursuant to the proposal advisers would be required to disclose the following information regarding SMAs:
(a) regulatory assets under management (RAUM); (b) investments, use of derivatives, and borrowings; and (c) the
role of custodians. Advisers would be required to annually report the percentage of SMA assets under management
invested in each of 10 categories (exchange-traded equities, U.S. government bonds, U.S. state and local bonds,
sovereign bonds, corporate bonds-investment grade, corporate bonds-non-investment grade, derivatives, securities
issued by registered investment companies and business development companies, securities issued by other pooled
investment vehicles, and other). The proposal requires the disclosure of detailed information depending on the
amount of SMA assets with thresholds set at $0, $150 million, and $10 billion. The chart below details the specific
reporting requirements based on RAUM attributable to SMAs. However, all advisers would be required to annually
report the percentage of SMA assets held in derivatives; a subadviser of an SMA would only provide information for
the portion of the account it subadvises.
Other reporting requirements provided for in the amendments include:
Social Media Websites and Platforms: Advisers would be required to provide addresses for all social media websites
and platforms, including Facebook, LinkedIn, and Twitter.
Office Locations: Each adviser would be required to disclose the total number of offices at which the adviser conducts
investment advisory business and provide information for its 25 largest offices (measured by number of employees),
including contact information, each office’s branch CRD number, number of employees in each branch office that
perform advisory functions, list of securities-related activities conducted from each office, and description of other
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investment-related business conducted from each office. Currently, advisers are only required to provide information
about their principal office and place of business and five largest offices.
Chief Compliance Officer (CCO): Advisers would be required to report whether its CCO is compensated or employed
by any person other than the adviser (or related person of the adviser) for providing CCO services. If so, the adviser
must provide the IRS Employer Identification Number and name of the other person compensating the CCO.
Wrap Fee Programs: Advisers must report the total amount of RAUM attributable to acting as a sponsor and/or
portfolio manager for a wrap fee program and provide an SEC file number for each such program.
Assets as Range: Advisers with $1 billion in assets or more would be required to specify a range of total assets: $110 billion, $10-50 billion, or $50 billion or more.
Identifying Numbers and Other Information: Advisers would be required to provide all assigned CIK and PCAOB
numbers reflecting industry affiliations. In addition, they must report the RAUM of all parallel managed accounts
related to a registered investment company or business development company advised by the adviser, as well as the
percentage of a private fund owned by qualified clients.
2. Umbrella Registration
The proposal would allow multiple private fund adviser entities operating a single advisory business to use a single
Form ADV. Although Form ADV was originally designed to facilitate the registration of an investment adviser that is a
single legal entity, more frequently advisers of private funds are organized as a group of related advisers that are
separate legal entities. These separate legal entities operate as, and are viewed by regulators and investors as, a
single advisory business. Currently, a private fund adviser organized as a group of related advisers might have to file
multiple registration forms. The staff previously issued guidance that facilitated umbrella filings in order to address
this issue. The proposed rules codify this staff guidance and alter portions of Form ADV to accommodate today’s
reality of how advisers are structured.
The proposal would allow umbrella registration for a private fund adviser operating as a single business through
multiple legal entities. However, umbrella registration would not be available for advisers that are related but that
operate separate advisory businesses, nor would it be available to exempt reporting advisers. The amendments
define a Filing Adviser as an investment adviser eligible to register with the SEC and one that files a single umbrella
registration for itself as well as each Relying Adviser. A Relying Adviser is an investment adviser eligible to register
with the SEC that relies on a Filing Adviser to file a single umbrella registration on its behalf.
Eligibility for Umbrella Registration
The following criteria would determine whether an adviser operates as a single business and can therefore take
advantage of umbrella registration:
1.
Filing Adviser and each Relying Adviser (a) advise only private funds and clients in SMAs that are qualified
clients, (b) are otherwise eligible to invest in private funds they advise, (c) have accounts that pursue
investment objectives and strategies that are substantially similar to those of private funds;
2.
Filing Adviser has its principal office and place of business in the U.S.;
3.
Relying Adviser is subject to the supervision of the Filing Adviser such that the Relying Adviser is an
associated person of the Filing Adviser;
4.
Advisory activities of Relying Adviser are subject to the Advisers Act; and
5.
Filing Adviser and Relying Adviser operate under a single code of ethics and a single set of written policies
and procedures administered by a single CCO.
As noted above, staff guidance has permitted umbrella registration under certain circumstances. However, advisers
have not been required to provide each Relying Adviser’s CRD, unique identifier numbers, basis for registration, or
form of organization. The proposed amendments would require a Filing Adviser to identify the Filing Adviser and
Relying Advisers that manage or sponsor private funds and the instructions to Form ADV would specify whether a
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question pertains solely to the Filing Adviser or to the Filing Adviser and each Relying Adviser. In addition, the
proposal would require the Filing Adviser to file new Schedule R to Form ADV, which would require information on
each Relying Adviser, such as its basis for SEC registration and ownership information. Once Form ADV is filed, the
Filing Adviser would also be responsible for updates, including information of the Relying Advisers. The Filing Adviser
would also be responsible for including this information in any other reports the Filing Adviser makes under the
Advisers Act.
3. Clarifying Amendments
The proposal seeks to add clarity on several fronts, including: registration requirements for newly created entities;
change of structure or legal status surrounding succession to the business of a registered investment adviser;
disclosure requirements regarding funds of funds; and removal of disclosure reporting pages from Form ADV.
ADVISERS ACT AMENDMENTS
Books and Records Rules 204-2(a)(16) and 204-2(a)(7)
The proposal would require registered advisers, including small advisers, to make and keep (i) documentation
distributed by the adviser to any person where such documentation is necessary to demonstrate the calculation of
performance, and (ii) all written communications received or sent relating to the adviser’s performance. Currently,
advisers are only required to keep supporting documentation if the information is distributed to more than 10 people.
However, this proposal eliminates the 10-person minimum and requires retention of communications to any person.
Specifically, advisers would be required to maintain the materials listed in Rule 204-2(a)(16) since such materials
demonstrate the calculation of the performance or rate of return in any communication that the adviser circulates or
distributes. Amendments to Rule 204-2(a)(7) would require advisers to keep originals of all written communications
received and copies of written communications sent related to performance or rate of return for SMAs or securities
recommendations.
ANALYSIS
While the proposed amendments to Form ADV are designed to provide the SEC with additional information to assess
the risk associated with SMAs and derivatives, it would also ease reporting requirements by incorporating umbrella
filing into Form ADV. Aspects of the proposal that have attracted the most industry attention are the umbrella
reporting requirements, the additional disclosure required for advisers with multiple offices, and information requested
regarding CCOs. It is possible that the additional reporting requirements pertaining to CCO compensation and the
requirement that Filing Advisers and Relying Advisers have the same CCO, could limit the use of third-party CCOs. In
fact, the inclusion of additional CCO reporting requirements resonates with the recent industry-wide focus on CCO
liability. The Books and Records requirements would expand the documentation required to be maintained but, as a
practical matter, would not likely impact advisers greatly as most keep all communications as a matter of course.
COMMENTS
During the comment period, which ended on August 11, 2015, several comment letters on the proposed amendments
were received, including from major industry trade associations (SIFMA, IAA, ICI). Both SIFMA and the IAA raised
issues regarding client confidentiality, the need for definitional clarification, and the importance of a longer
implementation period. The ICI focused on proposed rules (included in a separate release) affecting registered
investment companies.
Securities Industry and Financial Markets Association
SIFMA recommended that the proposed rules should do the following: (a) maintain confidentiality of SMAs (especially
for advisers with a small number of separate accounts); (b) add instructions to Item 5.K. to clarify treatment of subadvisory relationships; (c) eliminate requirement to report additional information about specific investment strategies;
(d) allow advisers to define “derivatives” according to the definition in FASB ASC 815; (e) clarify status of assets
“held” at custodians; (f) clarify the term “non-U.S. clients”; (g) eliminate the requirement to identify the custodian’s
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office; (h) clarify definition of “parallel managed account”; (i) eliminate ongoing requirement to update social media
information; and (j) provide guidance telling advisers to check the box that most closely reflects the asset type of the
client (since the option to check multiple boxes was removed in the amendments).
Other recommendations included requiring advisers (in Part 1A) to report on activity that has already occurred, rather
than report forward-looking information. Finally, while SIFMA expressed its support for codification of umbrella
registration, it requested at least one full calendar year before the final rules become effective, as well as an
exemption from partial year reporting.
Investment Advisers Association
The IAA weighed in and suggested the following changes: (1) increase the reporting threshold for derivatives and
borrowing use in SMAs from $150 million to $500 million to alleviate the burden on small firms; (2) keep responses to
client assets and derivatives exposure information confidential (and, if not, allow advisers to use generic
descriptions); (3) alter the derivatives disclosure to address gross notional concepts; (4) amend custody questions on
Form ADV to resolve confusion; and (5) allow an implementation date of 12 months after the final rules are adopted.
The IAA contended that raising the reporting threshold to $500 million would alleviate the reporting burden for
approximately 3,000 advisers, while still allowing the SEC to obtain the necessary data set. Regarding aggregate
data reporting, the IAA asked that aggregate data on adviser holdings, borrowings, and derivatives remain nonpublic. While the IAA recognized the significance of this data, public disclosure could allow an interested party to
trace the adviser’s reporting in order to determine the plan portfolio’s profile. This is especially a concern for larger
advisers due to the more detailed breakdown of derivatives exposure. The IAA contended that this data should be
treated according to the same principles as are applied to Form PF data. Finally, the IAA cautioned against using
grow notional value in a public disclosure document because the public may use this information for making
regulatory judgments about leverage or risk.
Investment Company Institute
The ICI focused the majority of its 99-page comment letter on the proposed changes affecting registered investment
companies, only including a brief note that the ICI generally supports the proposed changes to Form ADV and does
not object to proposed amendments to the Books and Records rule.
Private Companies and Firms
Private companies and firms expressed similar concerns to those raised by the leading trade organizations. In
addition, one commenter noted that most investors do not review Form ADV Part 1A, and it might be more beneficial
to provide social media information in Part 2A. The view was also expressed that gathering information on the
percentage of employees with social media accounts and requiring disclosure of branch office information for large
firms is not useful and, if this requirement is adopted, clarity should be provided regarding how frequently branch
office information should be updated.
Another commenter suggested that the SEC clarify the treatment of special purpose vehicles under umbrella
registration, noting that the proposed amendment does not clearly address reporting with respect to private funds’
general partners and managing members. A separate commenter critiqued the proposed amendments as particularly
burdensome to middle-market private equity firms.
Trending Legal Issue
Reporting Requirements for Advisers Based on Regulatory Assets Under Management
Attributable to SMAs
Reporting Requirement
$0 to $150 million
$150 million to
$10 billion or more
$10 billion
Asset Categories
Disclose SMA assets in 10 categories annually. Calculate
assets on the date the adviser determines Regulatory Assets
Under Management (“RAUM”) for purposes of annual
amendments to Form ADV.
Disclose SMA assets in 10
categories both mid-year and at
year-end.
Derivatives and Borrowings
Provide information on the
use of borrowings and
derivatives in SMAs, but
only for SMAs with net asset
value of at least $10 million.
Report the same information as
advisers in the $150 million to
$10 billion category. Also, report
average derivative exposures
within six different types of
derivatives (interest rate, foreign
exchange, credit, equity,
commodity, and other) for each
category of SMA.
No reporting required for
SMAs with less than $10
million of net assets.
Provide information on the
use of borrowings and
derivatives in SMAs. Also, (i)
categorize SMAs annually
based on net asset value and
gross notional exposure
percentage of each account
and (ii) report the weighted
average amount of borrowings
within each category.
Gross notional exposure = ((a)
dollar amount of any
borrowings + (b) gross
notional value of all
derivatives)/net asset value of
account
Custodians
Report both mid-year and at
year-end.
Identify custodians that account for at least 10% of SMA RAUM and the amount of adviser’s
RAUM attributable to SMAs held at each custodian.
© 2015 Schiff Hardin LLP
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