SEC Proposes Significant Reporting Requirement Amendments to Form ADV
On May 20, 2015, the Securities and Exchange Commission (SEC) released several proposals, "Amendments to Form ADV and Investment Advisers Act Rules," that would require investment advisers to provide additional information on Form ADV. Form ADV is the uniform form used by investment advisers to register with both the Securities and Exchange Commission (SEC) and state securities authorities. Specifically, the SEC proposals would impose additional reporting requirements for Separately Managed Accounts (SMAs), require new disclosures for investment advisers and their businesses, clarify the use of "umbrella" registration for private fund and certain other advisers, and expand the books and records required to be kept by the adviser. The purpose of the proposals is to improve the quality of information that investors and the SEC receive, as well as to fill gaps identified by the SEC and facilitate risk-monitoring initiatives.
SEPARATELY MANAGED ACCOUNTS
Under Form ADV, SMAs are advisory accounts other than pooled investment vehicles. Form ADV currently requires considerably more disclosure for pooled investment vehicles than for SMAs. The SEC's proposals would increase the disclosure requirements for SMAs to more closely match the level of disclosure for pooled investment vehicles. Any investment adviser that has SMA regulatory assets under management (RAUM) will be required to make disclosures related to: (a) the types of assets held, (b) the adviser's use of derivatives and borrowings, and (c) the role of custodians.
TYPE OF ASSETS HELD
Each adviser of a SMA would be required to provide the approximate percentage of its SMA RAUM in ten broad asset categories specified under the proposal. Financial advisers would need to make annual disclosures of SMA RAUM percentages. However, the level of detail required to be provided annually will vary depending on the size of the adviser. For example, advisers with at least $10 billion in SMA RAUM will be required to provide its SMA RAUM percentages as of two specified dates each year when making their annual filings.
DERIVATIVES AND BORROWINGS
The SEC proposals also would require advisers to report on their use of borrowing and derivatives in their SMAs. The level of disclosure again depends on the amount of SMA RAUM. Advisors with at least $150 million but less than $10 billion in RAUM attributable to SMAs will be required to:
- (1) categorize their SMAs annually based on the net asset value and gross notional exposure percentage of each account; and
(2) calculate and report the weighted average amount of borrowing within each category.
- In addition to the obligations listed in the previous sentence, advisers with at least $10 billion in SMA RAUM would also need to:
- (1) report average derivatives exposures within six different types of derivatives for each category of SMA; and
- (2) annually report borrowing and derivatives information for two dates per year: mid-year and end-of-year.
Advisors would be required to identify any custodian that accounts for at least 10% of the adviser's SMA RAUM, with certain exceptions, and the amount held by such custodian.
ADDITIONAL INVESTMENT ADVISER INFORMATION
The SEC's proposed changes to Form ADV include requirements for additional information regarding a financial adviser including, but not limited to, the following:
- Item 1.F would be expanded to request the total number of offices in which the adviser conducts business as well as information about the adviser's twenty-five (instead of five) largest offices as calculated by the number of personnel in each office.
- Item 1.I would be expanded to request all of the adviser's websites and any social media platform on which the adviser has a presence, which the SEC staff may use to determine the consistency of information provided via the various social media platforms.
- Item 1.J would be expanded to disclose whether the adviser's chief compliance officer is employed by someone other than the adviser or a related person. The SEC designed this disclosure to allow them to better monitor risks of advisers outsourcing chief compliance officers.
The SEC proposals also clarify the process for umbrella registrations, that was outlined by the SEC in 2012 in a no-action letter. Such umbrella registrations can be useful to private equity fund adviser groups. Umbrella registration allows one adviser called the "filing adviser" to file a single Form ADV on behalf of itself and certain other advisers known as "relying advisers". Based in part on that earlier guidance, the SEC proposals include certain conditions that must be met in order to qualify for umbrella registration, including: (1) the relying adviser being controlled by or under common control with the filing adviser; (2) each relying adviser remaining subject to the filing adviser's supervision and control; (3) all advisers under the umbrella registration advise only private funds and clients in SMAs that are "qualified clients"; (4) the requirement for the filing adviser's principal place of business to be located within the United States and (5) all advisers operating under a single code of ethics and compliance program that is administered by the same chief compliance officer.
BOOKS AND RECORDS
Registered advisers have certain obligations to maintain books and records under Rule 204-2 of the Advisers Act. The Rule currently requires advisers to maintain documentation supporting performance claims in communications distributed to ten or more persons. The proposals would require advisers to maintain records supporting performance claims in any communication that the adviser circulates or distributes, regardless of the number of recipients. Additionally, while the current Rule requires advisers to maintain copies of written communications sent or received by the advisers, the SEC proposals creates a new category of documents relating to the performance or rate of return of any or all managed accounts or securities recommendations that would need to be maintained in the adviser's books and records.
The SEC will be accepting public comment on its proposals to amend Form ADV until August 11, 2015.