SEC Adopts Amendments to Form ADV and the Books and Records Rule

August 31, 2016

On August 25, the Securities and Exchange Commission (the "SEC") adopted amendments to Form ADV and Rules 204-2(a)(7) and (a)(16). The amendments to Form ADV are designed to provide additional information regarding advisers, including information about their separately managed account business; incorporate 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. ACA encourages all advisers to read the rule release in its entirety, which can be found at https://www.sec.gov/rules/final/2016/ia-4509.pdf. Below is a summary of the key provisions.

Information Regarding Separately Managed Accounts
For purposes of reporting on Form ADV, the SEC considers advisory accounts other than those that are pooled investment vehicles i.e., registered investment companies, business development companies, and pooled investment vehicles that are not registered (including, but not limited to, private funds) to be separately managed accounts ("SMAs"). Advisers will be required to report information about the types of assets held and the use of derivatives and borrowings in SMAs. Advisers who report that they have regulatory assets under management ("RAUM") attributable to SMAs in response to new Item 5.K.(1) of Part 1A will be required to complete new Section 5.K.(1) of Schedule D, and may be required to complete new Sections 5.K.(2) and 5.K.(3) of Schedule D regarding those accounts.

Under Section 5.K. of Schedule D, Advisers will be required to report information about the types of assets held (in 12 broad categories) and the use of derivatives and borrowings in SMAs:

  • Advisers with at least $10B in RAUM attributable to SMAs will report, on an annual basis, both mid-year and end-of-year percentages and will also be required to report the amount of SMA RAUM and the dollar amount of borrowings attributable to those assets that correspond to six (6) levels of gross notional exposures.
  • Advisers withless than $10B in RAUM attributable to SMAs will report only end-of-year percentages.
  • Advisers with at least $500M but less than $10B in RAUM attributable to SMAs will be required to report the specific amount of RAUM attributable to SMAs and the dollar amount of borrowings attributable to those assets that correspond to three (3) levels of gross notional exposures.

In addition, advisers must also identify any custodians that account for at least 10% of an SMA's RAUM, and the amount of the adviser’s RAUM attributable to SMAs held at the custodian.

Additional Information Regarding Investment Advisers
In addition to the amendments regarding SMAs, the SEC will add several new questions and amend existing questions on Form ADV regarding identifying information, an adviser's advisory business, and affiliations. The amendments will require advisers to disclose more information about their advisory business and branch office locations, as well as website addresses of publicly available social media sites over which the adviser controls the content. Such social media platforms will include Twitter, Facebook, or LinkedIn. The SEC stated, “we believe that having current information on an adviser's social media presence collected in one place on Form ADV may be helpful to investors.” In addition, the SEC stated that this information will be useful in preparing for examinations and comparing information that advisers disseminate across social media platforms, as well as for identifying and monitoring new platforms.

Outsourced Chief Compliance Officers ("CCOs")
The SEC will also now require advisers to disclose when they have outsourced their CCO position. The SEC stated that they have observed a wide spectrum of both quality and effectiveness from outsourced CCOs and firms. Identifying information regarding these third-party service providers, like others on Form ADV, will provide additional information to the SEC to assist in identifying all advisers relying on a particular service provider and could be used to improve the SEC’s ability to assess potential risks in the outsourcing of the CCO position.

Umbrella Registration
Effective immediately, the SEC adopted the amendments to Form ADV that codify umbrella registration for certain advisers to private funds. The SEC stated that although umbrella registration will not become mandatory, it will “simplify the registration process for these advisers, and provide additional and more consistent data about, and create a clearer picture of, groups of private fund advisers that operate a single advisory business through multiple legal entities.” The conditions for relying on the umbrella registration remain unchanged from the 2012 guidance. The SEC will amend the Form ADV General Instructions to provide details for advisers relying on the umbrella registration.

Clarifying, Technical, and Other Amendments to Form ADV
The SEC is also adopting several amendments to Form ADV that are designed to clarify the form and its instructions. The SEC believes that these amendments will make the filing process clearer and more efficient for advisers and increase the reliability and consistency of information provided by investment advisers. These amendments are designed to address issues the SEC staff has identified since the last significant changes to Form ADV in 2011.

Amendments to the Investment Advisers Act Rules
In addition to the amendments to Form ADV, the SEC is also adopting two amendments to the Investment Advisers Act of 1940 books and records rule (Rule 204-2), which will require advisers to maintain additional materials related to the calculation and distribution of performance information.

Rule 204-2(a)(16) currently requires advisers that are registered or required to be registered with the SEC to maintain records that support performance claims in communications that are distributed or circulated to 10 or more persons. The SEC has amended rule 204-2(a)(16) by removing the 10 or more persons condition and replacing it with "any person." Accordingly, under the amended rule, advisers will be required to maintain the materials listed in rule 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.

The SEC also amended rule 204-2(a)(7), which currently requires advisers that are registered or required to be registered with the SEC to maintain certain categories of written communications received and copies of written communications sent by such advisers. The amended rule 204-2(a)(7) will require advisers to also maintain originals of all written communications received and copies of written communications sent by an investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

Effective Date
The compliance date for the above is October 1, 2017. Therefore, any initial registrations or amendments filed on Form ADV on or after October 1, 2017, will be required to provide responses to the form revisions. For questions on the Form ADV amendments or the changes to the books and records rule, please contact ACA Partner Damon Zappacosta at +1 (212) 951-1030.