Proposals made by the Securities and Exchange Commission (SEC) in 2015 to amend Form ADV and certain rules under the Investment Advisers Act of 1940 (Advisers Act) (SEC Proposes Significant Reporting Requirement Amendments to Form ADV) have been finalized and adopted. On August 25, 2016, the SEC issued its final rules (Form ADV and Investment Advisers Act Rules) with the proposed amendments. According to the SEC, the amendments are designed to provide the public with added disclosures about registered investment advisers, aid the SEC in monitoring industry risk, and allow for more efficient reporting by investment advisers.
Investment advisers file Form ADV in order to register with the SEC. The SEC uses the data provided in the form to better regulate the industry and to protect investors. In addition, the SEC makes the form accessible to the public and encourages investors to review the form before selecting an investment adviser. Under the newly adopted rules, advisers filing Form ADV will be required to provide additional information about separately managed accounts (SMA), including information about the types of assets, derivatives and borrowings in each account. In addition, the revisions streamline umbrella registration and provide guidance on which advisers can take advantage of umbrella registration.
The Advisers Act regulates investment adviser activity. Included in the final rule are changes to book and recordkeeping requirements that each investment adviser must follow. The amendments impose heightened book and recordkeeping requirements on investment adviser communications related to performance and performance metrics.
Starting October 1, 2017, investment advisers will be required to use the revised Form ADV (with their first amendment due after that date) and comply with the new recordkeeping requirements.
SEPARATELY MANAGED ACCOUNTS
As with the proposed rules, the Form ADV amendments require advisers to report aggregate information on SMA, specifically relating to: (a) the types of assets held, (b) use of derivatives and borrowings, and (c) the role of custodians. The SEC noted that advisers should include accounts that are beneficially owned by non-United States persons when filing their reports. A summary of some of the changes in these categories include:
- Types of Assets: The revised Form ADV sets out 12 broad asset categories. Advisers will be required to report the percentage of SMA regulatory assets under management (RAUM) in each category. Advisers with less than $10 billion in SMA RAUM will be required to report annually, while advisers with $10 billion or more in SMA RAUM will be required to report on both an annual and mid-year basis.
- Use of Derivatives and Borrowing: There are two separate reporting groups related to use of derivatives and borrowings in SMAs. Advisers should report borrowings and derivatives based on RAUM in SMA as opposed to net asset values.
- (1) Advisers with at least $500 million but less than $10 billion SMA RAUM will be required to report the amount of SMA RAUM and total amount of borrowings that correspond to ranges of gross notional exposures in those accounts.
- (2) Advisers with $10 billion or more in SMA RAUM will be required to report the amount of SMA RAUM, total amount of borrowings that correspond to ranges of gross notional exposures in those accounts, and average derivative exposure in six different categories.
- Custodians: Advisers will be required to identify custodians that account for 10 percent or more of SMA RAUM and the amount of the adviser's SMA RAUM held at the custodian.
ADDITIONAL INFORMATION REGARDING INVESTMENT ADVISERS
In addition to new SMA reporting requirements, the final rule also requires advisers to provide additional disclosures relating to their investment activities. Some of the new changes include: (a) disclosing public social media accounts, (b) reporting on the activities performed at the adviser's 25 largest offices, (c) disclosing outside compensation and employment of the adviser's chief compliance officer, (d) additional asset reporting, (e) reporting the amount of an advisory client's RAUM and, (f) reporting an adviser's involvement and amount of RAUM in wrap fee programs.
The amendments facilitate umbrella registration by tailoring the form to better accommodate umbrella registrations while also providing additional guidance on who can qualify for the group registration. According to the SEC, umbrella registrations are limited to "private fund advisers that operate as a single advisory business." It should be noted that qualifying applicants are not required to use umbrella registrations. The amendments lay out a list of conditions that must be met in order to qualify for umbrella registration. A summary of the conditions include:
- The filing adviser and relying advisers only advise private funds and qualified clients in SMAs that are eligible to invest in private funds.
- The filing adviser has its principle office and place of business in the United States.
- Each relying adviser and the relying adviser's employees are under the supervision and control of the filing adviser.
- Each relying adviser is subject to the Advisers Act and examination by the SEC.
- The filing adviser and all relying advisers operate under a single code of ethics and set of written policies and procedures that are administered by a single chief compliance officer.
BOOKS AND RECORDS
The SEC's final rule also amends Rule 204-2 of the Advisers Act. With the new requirements, the SEC hopes to help prevent the distribution of fraudulent performance claims. As proposed, advisers will be required to maintain all material containing performance calculations or rates of return that the adviser circulates or distributes. The amendment broadens the current rule by requiring advisers to retain material distributed to any person and does not set a threshold on the number of persons receiving the communication. In addition, advisers will be required to maintain the originals of all written communications sent or copies received by advisers that contain information relating to the performance or rate of return of any managed accounts or securities recommendation.