The SEC is proposing amendments to Form ADV that are designed to provide additional information regarding advisers, including information about their separately managed account (SMA) business; incorporating a method for private fund adviser entities operating a single advisory business to register using a single Form ADV; and make clarifying, technical and other amendments to certain Form ADV items and instructions. The proposed amendments are designed to enhance the staff’s ability to effectively carry out the risk-based examination program and other risk assessment and monitoring activities with respect to these separately managed accounts and their investment advisers.
In addition, the Commission is proposing amendments to the Advisers Act’s Books and Records rule (Rule 204-2) and other technical amendments to several Advisers Act rules to remove transition provisions that are no longer necessary.
Proposed Reporting Requirements (on Form ADV)
Separately Managed Accounts (“SMA”)
For the SMAs (which the SEC has defined to include any account except for an investment company or pooled investment vehicle), the proposal is suggesting additional information including types of assets held, and the use of derivatives and borrowings in the accounts be disclosed on the ADV:
• Types of Assets Held: advisers will need to report the approximate percentage of SMA regulatory assets under management (“RAUM”) invested in ten broad asset categories, such as exchange-traded equity securities and U.S. government/agency bonds.
• Borrowing and Derivatives: for advisers with at least $150 million, but less than $10 billion in RAUM, attributable to SMAs, the SEC proposes additional reporting on the number of accounts that correspond to certain categories of gross notional exposures, and the weighted average amount of borrowings (as a % of net asset value). This would only be required for those SMAs with a net asset value of at least $10 million in SMA RAUM. For advisers with at least $10 billion in SMA RAUM, they would report the above information as well as the weighted average gross notional value of derivatives in each of the six different categories of derivatives. This would be updated annually.
• Custodians: advisers will be expected to identify any custodian that account for at least 10% of the SMA RAUM, and the amount of the adviser’s RAUM attributable to the SMAs held at that custodian.
For advisers with at least $10 billion in RAUM attributable to SMAs, the SEC proposes to collect both mid-year and year-end data, as identified above, on an annual basis. This is not proposing that advisers file information semiannually. Rather, when filing an annual amendment, the adviser would be required to provide information as of each semi-annual period.
Additional reporting will be required regarding the adviser’s business and affiliations.
Identifying Information (Item 1 and Section 1 of Schedule D – Form ADV Part 1)
• If an adviser has more than one CIK number, they will be required to submit all on the ADV under Item 1.D (whereas currently the adviser only supplies one).
The purpose: gather information from all sources to investigate relationships.
• The question regarding the website addresses will be expanded to ask for all social media platforms used (such as Twitter, Facebook and LinkedIn). (Item 1.I of Part 1A and Section1.I of Schedule D)
The purpose: compare for consistency across the multiple platforms and provide current and prospective clients with information to learn more about the adviser.
• Rather than provide additional information about the adviser’s principal office and place of business, the SEC is requesting locations for the 25 largest offices, in terms of employees. Then for each office, the adviser will be required to provide: CRD number (if applicable), number of employees that performed advisory functions, the business activities conducted in each office, and a description of any other investment-related business conducted from each office. (Item 1F of Part 1A and Section 1.F of Schedule D)
The purpose: assist the SEC in determining where the exams should be conducted and assess risk.
• Additional information will be required of the Chief Compliance Officer (CCO), including whether the CCO is compensated or employed by any person other than the adviser for providing CCO functions and if so the name and IRS Employer Identification number of that other person. (Item 1.J of Part 1)
The purpose: to assess the number of outsourced CCOs.
• Update Item 1.O to require advisers to report the assets (from their financials) within a range. Currently it only requires a response if the adviser has assets of $1 billion or more.
The purpose: provide more accurate data for additional rule making.
Advisory Business Information (Item 5 and Section 5 of Schedule D – Form ADV Part 1)
• Currently in Item 5, advisers disclose a range for the number of advisory clients, the types of advisory clients, and regulatory assets under management attributable to client types. The SEC is proposing to replace the ranges with precise information, so for each category the adviser would include the total number of clients and the RAUM attributable. (Item 5.C.(1). Item 5.D. (1)-(2))
The purpose: to provide more accurate information.
• Additional reporting on the number of clients for whom the adviser provides advisory services but do not have RAUM. (Item 5.C.(1))
The purpose: to obtain better understanding of the adviser’s business.
• An adviser that elects to report different assets in Part 2A than what is reported in Part 1, would be required to check a box in Part 1 for this election. (Item 5.J.(2))
The purpose: allow staff to review across advisers those that report different asset totals.
• In addition to currently disclosing the % of clients that are non-US, the SEC is proposing the disclosure of the approximate RAUM that is also non-US. (Item 5.F.(3))
The purpose: provide additional information to the SEC.
• They are proposing in addition to the SEC File Number for registered investment companies and business development companies advised by the adviser, that the adviser disclose the RAUM managed for all parallel managed accounts related to those two types of clients. (Section 5.G.(3) of Schedule D )
The purpose: assist the SEC in determining how advisers manage conflicts of interest.
• Finally, for all the wrap programs listed, the adviser would have to report the total amount of RAUM attributable and any SEC File Number or CRD Number for those wrap sponsors. (Section 5.I.(2) of Schedule D)
The purpose: help the SEC better understand the adviser’s business and assess risk.
Financial Industry Affiliations and Private Funds (Section 7.A. and 7.B.(1) of Schedule D – Form ADV Part 1)
• The SEC is proposing to have advisers provide identifying numbers such as PCAOB and/or CIK numbers.
• Also proposed is a new question that would require advisers to report the percentage of a private fund owned by qualified clients as defined by rule 205-3 under the Advisers Act.
The SEC is also proposing many Clarifying, Technical and Other Amendments to various Items and corresponding Sections in Schedule D. For details on these proposals see the link to the adopting release below.
Under the amendments the SEC is proposing that umbrella registration be available where a filing adviser and one or more relying advisers conducting a single private fund advisory business for which each relying adviser is controlled by or under common control with the filing adviser. As proposed, umbrella registration would only be available in the scenario of a private fund adviser operating as a single business through multiple legal entities, and not for advisers that are related but that operate separate advisory businesses.
The conditions, which are indicia of a single advisory business, include the following:
1. The filing adviser and each relying adviser advise only private funds and clients in separately managed accounts that are qualified clients.
2. The filing adviser has its principal office and place of business in the United States.
3. Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control.
4. The advisory activities of each relying adviser are subject to the Advisers Act, its rules, and are subject to examination by the Commission.
5. The filing adviser and each relying adviser operate under a single code of ethics and written policies and procedures, administered by a single chief compliance officer.
A new schedule to Part 1A – Schedule R – would have to be filed for each relying adviser.
Books and Records Rule
Two amendments are being proposed to the Advisers Act Books and Records rule that would require investment advisers to maintain additional materials related to the calculation and distribution of performance information.
1. The first amendment would require advisers to make and keep supporting documentation that demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person. Currently the Books and Records rule only requires such records be maintained for performance or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that the investment adviser circulates or distributes, directly or indirectly, to 10 or more persons.
2. The proposed amendments also would require advisers to maintain originals of all written communications received and copies of written communications sent by an investment adviser related to the performance or rate of return of any or all managed accounts or securities recommendations.
The comment period for the proposed rules will be 60 days after publication in the Federal Register.