The SEC recently adopted new rules that substantially amend Form ADV under the Investment Advisers Act of 1940, as amended (the Advisers Act). Although not as comprehensive as the Form ADV amendments adopted in 2011, the new rules implement significant revisions to the form, including expanding the information collected with respect to separately managed accounts (SMAs), codifying under the term “umbrella registration” previous staff no-action relief permitting affiliated advisers to private funds operating a single advisory business to file a single Form ADV (the Relying Adviser Relief), and making certain clarifying and technical amendments to the form. The new rules also add to the books and records required to be kept related to performance claims. These new rules become effective October 31, 2016, and have a compliance date of October 1, 2017, so investment advisers with a December 31 fiscal year end will be required to comply with the revised reporting requirements no later than their annual amendment filing in the first quarter of 2018.

Some of the most important points of the new rules include:

Disclosure regarding separately managed accounts

The new rules require investment advisers to report new information about their SMA businesses. SMAs include any client account other than a registered investment company, business development company or other pooled investment vehicle (e.g., private funds). While the amount of relevant information regarding SMA business was previously limited, the SEC is seeking to make the level of disclosure related to SMAs comparable to that collected with respect to an adviser’s private fund business. Thus, an adviser with regulatory assets under management (RAUM) attributable to SMAs (SMA RAUM) is required to provide information about the types of assets held in SMAs, the use of derivatives and borrowing, and the custodians used for such SMAs. Reporting with respect to SMAs will increase incrementally at SMA RAUM thresholds of $500 million and $10 billion, and an adviser that acts as sub-adviser to an SMA will only have to report the required information with respect to the portion of the account for which it acts as sub-adviser. An adviser with its principal place of business outside the US must report information about all of its SMAs and may not exclude those owned by non-US persons.

Additional information about investment advisers

More information about the adviser, its advisory business and its affiliations will be included in Items 1, 5 and 7 of Form ADV Part 1 under the new rules. Under Item 1, an adviser will be required to disclose: (i) the total number of offices in which it conducts advisory business, and information regarding its 25 largest offices including the number of employees providing advisory functions and the types of other business activities conducted from such offices; (ii) websites and publicly-available social media platforms on which the adviser controls the content; (iii) the name and IRS Employer Identification Number for any person other than the adviser or a related person (unless it is a registered investment company advised by the adviser) that compensates or employs the adviser’s chief compliance officer; and (iv) if the adviser’s own balance sheet assets (as opposed to client assets) are at least $1 billion, the approximate amount of its assets within specified ranges.

New Item 5 disclosures include: (i) the number of clients and amount of RAUM attributable to 14 specified categories of clients; (ii) the number of clients for which the adviser provided advisory services but for whom it does not have RAUM (e.g., a non-discretionary account); (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. In Item 7, an adviser must now disclose certain identifying numbers (e.g., PCAOB registration numbers) of service providers to the private funds it advises, and advisers to private funds that rely on the 100 or fewer holders exclusion from being an investment company (Investment Company Act Section 3(c)(1)) must indicate whether sales of interests in such private funds are limited to “qualified clients,” as defined in Advisers Act Rule 205-3.

Umbrella registration of affiliated investment advisers

The new rules effectively codify the Relying Adviser Relief by expressly permitting the “umbrella registration” on a single Form ADV of certain affiliated advisers operating a single advisory business, provided that certain conditions are met. Because Form ADV was not originally designed to accommodate registration of multiple entities, the use of a single form to facilitate registration of multiple entities under the Relying Adviser Relief led to complications and confusion. As amended, the General Instructions to Form ADV now provide standardized instructions for affiliated advisers seeking to file a single Form ADV, provided that the conditions for umbrella registration are satisfied. 

Umbrella registration is only available to US investment advisers. The SEC declined to expressly apply it to affiliated entities that are exempt reporting advisers, but stated that the new rules do not withdraw previous SEC guidance that permits certain exempt reporting advisers to file a single Form ADV on behalf of multiple special purposes entities.

Recordkeeping

The new rules also amend Advisers Act Rule 204-2 to require investment advisers to maintain additional supporting materials related to calculation and distribution of investment performance information. Specifically, the revisions require an investment adviser to maintain records supporting performance information distributed to any person (prior Rule 204-2 required retention of such information in relation to communications distributed to 10 or more persons), and require investment advisers to maintain all written communications sent or received relating to performance or rate of return of all managed accounts or securities recommendations (the rule previously required advisers to maintain only certain categories of such written communications).

Investment advisers should review the changes now in order to be ready to comply with these substantial new reporting requirements before the October 2017 compliance date. Advisers that currently rely on umbrella registration should also confirm that they will continue to be eligible under the new rules and instructions, and should review new Schedule R and the information required to be disclosed on it with respect to relying advisers in advance of the compliance date. 

A more detailed discussion of the new rules can be found in our Financial Services Alert: “SEC adopts substantial new reporting requirements for investment advisers on Form ADV: key points.”