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Investment Management Alert: SEC Proposes Amendments to Form ADV and Investment Advisers Act…

June 8, 2015

On May 20, 2015, the Securities and Exchange Commission published for comment Release No. IA-4091 (the Release), which proposes amendments to Form ADV and to the rules under the Investment Advisers Act of 1940, as amended (the Advisers Act). The proposed amendments, which are designed to improve the quality and accessibility of information with respect to investment advisers and the industry for investors and regulatory monitoring, include (i) disclosure of information regarding an adviser’s separately managed accounts (SMAs), (ii) changes to the Form ADV to accommodate “umbrella registration” of an adviser (the registration of multiple private fund adviser entities operating as a single advisory business) on one Form ADV, and (iii) disclosure of certain additional information regarding investment advisers, their advisory businesses and affiliations. The proposed amendments to the Advisers Act rules are intended to enhance an adviser’s record-keeping requirements under rule 204-2 with respect to the calculation of performance calculations and rates of return in written communications. Each of these items is discussed in more detail below.

The comment period for the proposed amendments lasts for 60 days after their publication in the Federal Register.

Proposed Amendments to Form ADV

Information Regarding Separately Managed Accounts

The SEC explains that while it currently collects detailed information about pooled investment vehicles managed by registered advisers, it collects little specific information regarding SMAs managed by such advisers. For Form ADV reporting purposes, the SEC considers SMAs to be any advisory accounts other than those that are pooled investment vehicles (i.e., registered investment companies, business development companies and private funds). SMAs are commonly used by advisers to manage assets of clients such as pension plans, endowment foundations and other institutional and retail clients. The proposed amendments to Form ADV with respect to SMAs include disclosure of the following information:

  • The approximate percentage of regulatory assets under management (RAUM) attributable to SMAs invested in 10 broad asset categories, such as exchange-traded equity securities and US government/agency bonds. Advisers with at least $10 billion in RAUM attributable to SMAs would report this information on a semi-annual basis, with other advisers reporting it annually;
  • Information on the use of borrowings and derivatives in SMAs. More detailed information on such use will be required from advisers with at least $10 billion in RAUM attributable to SMAs, who again would be required to report on a semi-annual basis, with lesser reporting obligations on an annual basis for advisers with at least $150 million but less than $10 billion; and
  • Identification of custodians that account for at least 10 percent of SMA RAUM, and the amount of the adviser’s RAUM attributable to SMAs held at the custodian.

Additional Information Regarding Investment Advisers

In the release, SEC is also proposing amendments to Form ADV to improve certain identifying information with respect to the adviser, the adviser’s advisory business and industry affiliations. These amendments include:

Additional Identifying Information:

  • Providing all Central Index Key (CIK Number) numbers assigned to the adviser (currently only advisers who are public-reporting companies must provide their CIK Numbers);
  • Identifying all social media platforms and addresses thereof (currently advisers must only identify their websites);
  • Providing information with respect to the total number of offices from which advisory business is conducted, contact and other information with respect to the 25 largest offices by employee number, each office’s Central Registration Depository (CRD) number, the number of employees performing advisory services from each office, the securities-related activities conducted by each office and any other investment-related business conducted from each office (currently only information with respect to an adviser’s principal office and place of business and its largest five offices by employee number is required);
  • Reporting whether an adviser’s chief compliance officer is compensated or employed by any person other than the adviser (or related person of the adviser) for providing chief compliance officer services, and, if so, reporting the name and IRS Employer Identification Number (if any) of that person;
  • Requiring advisers to report their own assets within a range (currently an adviser must check a box if it has assets of $1 billion or more);

Additional Information About Advisory Business

  • Requiring advisers to report the number of clients and amount of RAUM attributable to each category of client as of the date the adviser determines its RAUM, including the amount of RAUM attributable to non-US clients (currently, ranges rather than numbers are required with respect to this data);
  • Reporting of the amount of RAUM of all parallel managed accounts related to a registered investment company or business development company advised by the adviser (currently only the SEC File Number for registered investment companies and business development companies advised by the adviser is required);
  • Requiring additional information concerning wrap-fee programs such as the total amount of RAUM attributable to wrap-fee programs, and to provide any SEC File Number and CRD Number for sponsors to those wrap-fee programs;

Additional Information About Financial Industry Affiliations and Private Fund Reporting

  • Requiring advisers to provide identifying numbers (e.g., Public Company Accounting Oversight Board registration numbers and CIK numbers) to better understand relationships of advisers to other financial service providers; and
  • Requiring the reporting of the percentage of a private fund owned by “qualified clients.”

Umbrella Registration

Finally, recognizing that private fund advisers are frequently structured using multiple legal entities, SEC is proposing amendments to Part 1A of the Form ADV to take account of the concept of “umbrella registration” and the guidance that it has previously issued (see American Bar Association, Business Law Section, SEC No-Action Letter, January 18, 2012 (the Guidance)), in the Form ADV. These amendments are designed to facilitate the “umbrella registration” of multiple private fund adviser entities operating as a single advisory business on one Form ADV. Under the Guidance, one adviser (the filing adviser) may file a single Form ADV on behalf of itself and other advisers that are controlled by or under common control with the filing adviser (each, a relying adviser) so long as they conduct a single advisory business. In its current form, the Form ADV is not physically designed for multiple registrant entities, frequently resulting in the provision by advisers of information that is confusing and inconsistent. As the Release states, “[t]he method outlined in the staff guidance for filing Form ADV on behalf of multiple entities is limited, however, by the form being designed for a single entity, and in some cases complicates data collection and analysis on umbrella registrants and can confuse filers and the public. The proposed amendments would revise the Form ADV and the Form’s General Instructions to allow for umbrella registration, if available. The proposed General Instructions would set out the conditions for determining whether umbrella registration would be available to a particular adviser and include the following:

  • The filing adviser and each relying adviser advise only private funds and clients in SMAs that are qualified clients and are otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser and the SMAs pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds;
  • 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 rules thereunder 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;
  • 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);
  • 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 SEC; and
  • The filing adviser and each relying adviser operate under a single code of ethics and a single set of written policies and procedures administered by a single chief compliance officer.

As the staff notes, the conditions are the same as those in Guidance that many advisers have relied on since 2012 and are drawn from its experience examining investment advisers and are designed to capture advisers to private funds that operate as a single business through commonality of the application of the Advisers Act and rules to all entities, implementation of compliance requirements and advisory services.

Proposed Amendments to Investment Advisers Act Rule 204-2—Books and Records Rule

The SEC is proposing two amendments to the record-keeping rule contained in rule 204-2 of the Advisers Act Rules, which requires advisers to create and maintain certain books and records. Rule 204-2(a)(16) currently requires registered advisers to make and keep records supporting performance claims in communications that are distributed or circulated to 10 or more persons. The SEC proposes to amend this rule and thus extend its scope by removing the “10 or more persons” condition and replacing it with “any person,” so that advisers would be required to keep supporting documentation to performance claims in communications distributed to any person. Rule 204-2(a)(7) currently requires registered advisers to maintain certain categories of written communications received and sent by advisers. The amendment would add a new category requiring advisers to maintain communications relating to the performance or rate of return of any or all managed accounts or securities recommendations. The SEC believes that these amendments would provide the examination staff with additional information to review an adviser’s compliance with rule 206(4)-1 (which regulates advertising by advisers) and would assist in enforcing the rule in cases of fraudulent advertising.

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Stephen Culhane
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