The Securities and Exchange Commission has issued proposed rules (the Proposal) under the Investment Advisers Act of 1940, as amended, that would, among other things, expand the information collected on Form ADV, provide for the umbrella registration of certain affiliated investment advisers, make certain clarifying and technical amendments to Form ADV and amend the books and records requirements related to performance claims.1  

The proposed amendments to Form ADV, released on May 20, are not as comprehensive as the amendments adopted in 2011, but, if adopted, would significantly increase the amount of information reported on Form ADV by certain investment advisers. 

A summary of the Proposal is provided below. 

AMENDMENTS TO FORM ADV

The SEC has proposed amendments to Form ADV that would (i) create a new reporting regime with respect to separately managed accounts, (ii) require an investment adviser to provide more detailed information related to certain identifying information, its investment advisory business and its affiliations and (iii) codify under the name “umbrella registration” the previous no-action relief provided by the staff of the SEC that permits affiliated advisers to private funds operating a single advisory business to file a single Form ADV (such relief, the Relying Adviser Relief).2

Separately managed accounts

The proposed amendments to Form ADV would require investment advisers to report new information about separately managed accounts.  For this purpose, separately managed accounts are considered to be any client accounts other than registered investment companies, business development companies and other pooled investment vehicles (e.g., private funds).  An investment adviser that indicates that it has regulatory assets under management (RAUM) attributable to separately managed accounts (Separately Managed Account RAUM) would be required to provide additional information about such accounts including the types of assets held, the use of derivatives and borrowing and the custodians used for such separately managed accounts. 

Types of assets held.  The proposed amendments to Form ADV would require an investment adviser to report its approximate percentage of RAUM attributable to separately managed accounts in ten broad asset categories.  An investment adviser with at least US$10 billion in Separately Managed Account RAUM (a Large SMA Adviser) would be required to provide such information as of the date used to calculate such adviser’s RAUM for purposes of its annual updating amendment to Form ADV (end of year) and as of the date that is six months before such adviser’s end of year (mid-year).3  An investment adviser other than a Large SMA Adviser must only report such information as of end of year.

Borrowings and derivatives.  The proposed amendments to Form ADV would require an investment adviser with at least US$150 million in Separately Managed Account RAUM to report information regarding the use of borrowings and derivatives in those accounts.  An investment adviser with at least US$150 million but less than US$10 billion in Separately Managed Account RAUM (a Mid-Sized SMA Adviser) would be required to report the number of separately managed accounts in groupings according to the net asset value and the gross notional exposure of such accounts as of end of year.  A Mid-Sized SMA Adviser would also be required to report the weighted average amount of borrowings (expressed as a percentage of net asset value) for the accounts reported.

A Large SMA Adviser would be required to report the number of separately managed accounts in groupings according to the net asset value and the gross notional exposure of such accounts, and the weighted average amount of borrowings (expressed as a percentage of net asset value) for the accounts reported, as of mid-year and as of end of year.  In addition, a Large SMA Adviser would be required to report the weighted average gross notational value of derivatives (expressed as a percentage of net asset value) in six categories of derivatives.

An investment adviser would not be required to report the required information with respect to any separately managed account with a net asset value of less than US$10 million.  An investment adviser that acts as sub-adviser to a separately managed account would only report the required information with respect to the portion of the account for which the investment adviser acts as sub-adviser.

Custodians for separately managed accounts.  An investment adviser would be required to identify and provide certain information for custodians that hold ten percent or more of such investment advisers’ Separately Managed Account RAUM.

Additional information about investment advisers

The proposed amendments to Form ADV would require an investment adviser to provide additional identifying information and additional information about its advisory business and affiliations.  Among other things, the Proposal would amend Items 1, 5 and 7 (and certain corresponding Sections of Schedule D) of Part 1A of Form ADV as summarized below:

  • Item 1:  The Proposal would require an investment adviser to disclose (i) its 25 largest offices, including the number of employees providing advisory functions and the types of other business activities conducted from such offices; (ii) the social media website addresses used by the investment adviser; (iii) the name and IRS Employer Identification Number for any person other than the investment adviser (or a related person) who compensates or employs the investment adviser’s chief compliance officer; and (iv) if the investment adviser’s own proprietary assets are at least $1 billion, the approximate amount of its assets within specified ranges.
  • Item 5:  The Proposal would require an investment adviser to disclose (i) the number of clients and the amount of RAUM attributable to 14 specified categories of clients4; (ii) the number of clients for which the adviser provided investment advisory services but for whom the adviser does not have RAUM5; (iii) whether the adviser reports client assets in Part 2A of Form ADV different from the RAUM reported in Part 1A; and (iv) certain additional information concerning wrap fee programs.
  • Item 7:  The Proposal would require an investment adviser to disclose (i) the percentage of a private fund advised by the adviser that is owned by “qualified clients” as defined in Rule 205-3 under the Advisers Act and (ii) certain identifying numbers (e.g., Public Company Accounting Oversight Board registration numbers) of service providers to the private funds advised by the adviser.

The SEC has also proposed several clarifying, technical and other amendments to Form ADV.  These appear to be intended to clarify a number of ambiguities and to improve the SEC staff’s ability to conduct a risk-based examination program, and are derived from questions frequently received by the staff.

Umbrella registration of affiliated investment advisers

The SEC has also proposed revisions to Form ADV that would effectively codify the Relying Adviser Relief by expressly permitting the “umbrella registration” of certain affiliated advisers operating a single advisory business. 

For various reasons, advisers to private funds are often structured as a group of two or more affiliated advisers which are operated as a single advisory business.  In theory, such a structure may require an organization to separately register affiliated entities by filing multiple Form ADVs for what is effectively the same business.  Pursuant to the Relying Adviser Relief, certain affiliated advisers are permitted to register on a single Form ADV, provided that certain conditions are met.  However, because Form ADV was not originally designed to accommodate the registration of multiple entities on the same Form, the staff has become aware that the use of a single Form ADV to facilitate the registration of multiple entities under the Relying Adviser Relief can create complications and confusion.

Under the Proposal, the General Instructions of Form ADV would be amended to provide specific instructions for affiliated advisers seeking to file a single Form ADV (i.e., umbrella registration).  The revised General Instructions would also contain the following conditions which must be met in order for umbrella registration to be available:

  1. The filing adviser and each relying adviser advise only (i) private funds and (ii) separately managed accounts that are “qualified clients,” are otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser, and pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds
  2. The filing adviser must have its principal place of business in the US such that the substantive provisions of the Advisers Act and the rules thereunder would apply to the filing adviser’s and each relying adviser’s dealings with its clients whether or not such clients or advisers are US persons
  3. Each relying adviser, its employees and other persons acting on its behalf must be subject to the filing adviser’s supervision and control and are “persons associated with” the filing adviser (as defined in section 202(a)(17) of the Advisers Act)
  4. The activities of each relying adviser must be subject to the Advisers Act and the rules thereunder and each relying adviser must be subject to examination by the SEC; and
  5. The filing adviser and each relying adviser must operate under a single code of ethics adopted in accordance with Rule 204A-1 under the Advisers Act and a single set of policies and procedures adopted and implemented in accordance with Rule 206(4)-(7) under the Adviser Act that are administered by a single chief compliance officer.

In addition, the amended Instructions would specify those questions that should be answered solely by the filing adviser and those that should be answered on behalf of the filing adviser and its relying advisers. The Proposal also includes a new Schedule R to Part 1A that would be filed for each relying adviser and would contain identifying information, basis for registration (although umbrella registration is permitted, each adviser within an affiliated group must individually meet one of the basis for SEC registration), and ownership information.  Lastly, the Proposal would amend Schedule D to require a sponsor to identify the specific adviser that manages or sponsors a private fund reported on Form ADV.

PROPOSED AMENDMENTS TO RECORDKEEPING REQUIREMENTS

The Proposal also contains amendments to the Rule 204-2, the books and records rule, which would require investment advisers to maintain additional supporting materials related to the calculation and distribution of investment performance information.  Specifically, the proposed revisions would require an investment adviser to maintain records supporting performance information distributed to anyperson, whereas the current rules require the retention of such information in relation to communications that are distributed to 10 or more persons.

In addition, the proposed revisions would require an investment adviser to maintain all written communications sent or received by the investment adviser relating to the performance or rate of return of all managed accounts or securities recommendations.  Currently, the rules require an investment adviser to maintain only certain categories of such written communications sent or received by the investment adviser.

CONCLUSION

Investment advisers should review the Proposal which, if adopted, would impose substantial new reporting requirements on many investment advisers.  Comments regarding the Proposal must be submitted within 60 days following publication of the Proposal in the Federal Register,  which, as of this writing, has not yet occurred.