Disclosures | Form ADV | Investment Advisers Act

Amendments to Form ADV Part 1A for 2017

The SEC issued its Final Rule adopting several changes to Part 1A of Form ADV in August 2016.  (See our blog post.) The amendments to the Form ADV focus on additional reporting requirements for separately managed accounts (SMAs) and stream-lining the umbrella registration requirements. Several additional disclosures and clarifications have been included regarding investment advisers and their businesses to help make filing requirements clearer. Advisers filing initial ADVs or other-than-annual amendments have a compliance date of October 1, 2017.  Advisers can expect for the IARD system to be updated by this time to reflect the revised filings requirements.  Advisers who are not filing initial or amended Form ADVs are expected to be in compliance when they file their annual updates in March 2018.  The specific changes are discussed in further detail below.

SMA Reporting Requirements

The Form ADV amendments require additional reporting requirements for SMAs, and are focused in three areas:

  1. SMA Asset Categories

Advisers will now be required to report the approximate percentage of SMA assets, choosing from twelve broad categories (e.g., exchange-traded equity securities and U.S. government/agency bonds) in Section 5(K)1 of Schedule D. (See page 41 of Form ADV Part 1A Summary of Changes.)  Advisers with at least $10 billion in regulatory assets under management (RAUM) are required to provide this data both mid-year and at year-end. Advisers with less than $10 billion in RAUM will be required to report this data only at year end. Instead of defining these terms, the instructions permit advisers to use their own “consistently applied methodologies” to select asset categories.

  1. SMA Derivatives and Borrowing

Advisers of SMAs with at least $500 million in regulatory assets under management (RAUM) are required to report information about their use of borrowings and derivatives in Section 5.K(2) of Schedule D. The extent of the information disclosed will depend on the amount held by the SMA. For SMAs that hold between $500 million and $10 billion, the advisers must report the “amount of RAUM attributable to SMAs and the dollar amount of borrowings attributable to those assets that correspond to three levels of gross notional exposures.”(See page 44 of Form ADV Part 1A Summary of Changes).  In addition to those disclosures, SMAs holding $10 billion or more will also be required to report the derivatives exposures within six derivatives categories.  As noted above, those holding $10 billion or more will report this information as of both mid-year and at year-end.  Investment advisers may, but are not required to, limit their reporting to individual accounts of at least $10 million.

  1. Custodians

Investment advisers are required to identify any custodians that account for at least 10% of the total RAUM of the SMA, the custodian’s office location, and the amount of RAUM held at each custodian on Section 5.K(3) of Schedule D. (See page 46 of Form ADV Part 1A Summary of Changes.)

Umbrella Registration

The Final Rule provides a better process for “umbrella registration”, for a filing adviser and one or more relying advisers, as allowed under the 2012 ABA letter.  Umbrella Registration (i.e. the filing of a single ADV for several investment advisers) is permitted, but not required, for “private fund advisers that are registered . . . and operate a single advisory business through multiple legal entities.” (See Page 61 of the Final Rule.)  A new Schedule R will be added to the Form ADV that will be required to be filed for each relying adviser to provide identifying and ownership information.

Before a group of private fund advisers can qualify to operate as a single advisory business for purposes of Form ADV, five conditions must be met (see page 64 of the Final Rule):

  1. The filing adviser and each relying adviser advise only private funds and clients in separately managed accounts that are “qualified clients” (as defined in Rule 205-3 under the Advisers Act) and are otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds;
  2. The filing adviser has its principal office and place of business in the United States and, therefore, all of the substantive provisions of the Advisers Act and the accompanying rules apply to the filing adviser’s and each relying adviser’s dealings with each of its clients, regardless of whether any client or the filing adviser or relying adviser providing the advice is a United States person;
  3. Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control and, therefore, each relying adviser, its employees and the persons acting on its behalf are “persons associated with” the filing adviser (as defined in section 202(a)(17) of the Advisers Act);
  4. The advisory activities of each relying adviser are subject to the Advisers Act and the rules thereunder, and each relying adviser is subject to examination by the Commission; and
  5. The filing adviser and each relying adviser operate under a single code of ethics adopted in accordance with Rule 204A-1 under the Advisers Act and a single set of written policies and procedures adopted and implemented in accordance with Rule 206(4)-(7) under the Advisers Act and administered by a single chief compliance officer in accordance with that Rule.

In addition to the reporting on Schedule R, the filing adviser should note on Schedule D whether any of the reported private funds are managed or sponsored by it or any of the relying advisers.

Social Media, Additional Offices and the CCO

Finally, a few other new disclosures have been incorporated into the ADV in conjunction with current reporting requirements. The SEC has also included some clarifications to help advisers better understand what information should be used to achieve consistency in their responses.

  1. Online Activity

In addition to disclosing website addresses in Item 1.I, advisers will also be required to disclose “all publicly available social media platforms where the adviser has a presence for which it controls the content.” (See page of 4 of Form ADV Part 1A Summary of Changes.)  Disclosure will be required even if the platforms are only used to market business outside the United States or toward non-US clients. In response to numerous comments, however, the SEC limited required disclosure to accounts where the adviser controls the content. Additionally, advisers will not have to provide information about the social media accounts of employees.

  1. Office Locations

Item 1.F will now require advisers to disclose the total number of offices where investment advisory business is conducted and provide further information about their 25 largest offices, including the number of employees providing advisory services and the types of activities conducted in these offices. (See page 3 of Form ADV Part 1A Summary of Changes.)

  1. Chief Compliance Officer

In addition to providing the name and contact information of the CCO in Item 1.J, advisers will be required to disclose if the CCO is employed by someone other than the adviser (or an affiliate) and to report the name and IRS employer identification number of that other person. Advisers will not be required to disclose the identity of the other person compensating or employing the chief compliance officer if that other person is an investment company registered under the Investment Company Act of 1940 advised by the adviser.  (See page 4 of Form ADV Part 1A Summary of Changes.)

  1. Balance Sheet Assets

Item 1.O. has been updated so investment advisers with assets of $1 billion or more can select from a list of ranges: $1-10 billion; $10-50 billion; or $50 billion or more.  (See page 6 of Form ADV Part 1A Summary of Changes.)

  1. Advisory Business Information

The SEC amended Item 5 of the Form ADV Part 1A to require more detail about a firm’s advisory business (See Page 11 of Form ADV Part 1A Summary of Changes. Item 5 will now require the following disclosure:

  • The actual number of clients and amount of RAUM attributable to each category of clients (currently only ranges are disclosed);
  • The approximate amount of an adviser’s total RAUM attributable to clients that are non-United States persons;
  • The number of clients that an adviser provides advisory services to, but does not include in its RAUM;
  • Whether an adviser reports assets in Form ADV Part 2A differently from RAUM reported in Part 1A;
  • The RAUM attributable to all separately managed accounts that are managed in parallel to a registered investment company;
  • The adviser’s total RAUM attributable to acting as a sponsor and/or portfolio manager of a wrap fee program, as well as SEC file number and CRD number for those wrap fee programs
  1. Financial Industry Affiliations and Private Fund Updates

In Schedule D, advisers will now be required to provide identifying numbers (e.g. CIK numbers) for all listed related persons. Additionally, private fund advisers will be required to report in Schedule D whether sales of the fund are limited to qualified clients.  (See page 50 of Form ADV Part 1A Summary of Changes.)

  1. Solicitation

As a clarification, when asked in Question 19, Schedule D, if “clients” are solicited to invest in the private fund, feeder funds should not be considered as “clients.”

  1. Audited Financial Statements

The private fund’s financials from the most recently completed fiscal year should be used when answering if the statements have been delivered to investors.

  1. Wyoming

Based on a recently enacted Wyoming statute, effective July 1, 2017, an investment adviser will no longer be able to use having a principal office and place of business in Wyoming as a basis to register with the SEC. In order to qualify for registration, the investment adviser must (1) have greater than $100 million AUM; (2) advise a registered investment company; or (3) be eligible to rely on one of the exemptions from the prohibition on registration in Rule 203A-2.  The SEC adopted a technical amendment to Form ADV, adding Wyoming to the Form ADV and ADV-W as one of the states with an investment adviser regulation.