Canada: SEC Amends Form ADV And Recordkeeping Rules

On August 25, 2016, the Securities and Exchange Commission (the SEC) adopted amendments to disclosure requirements under the Investment Advisers Act of 1940 (the Act), including amendments to Form ADV.1 The amendments are designed to provide the SEC and investors with additional and higher quality information and to assist the SEC in its examination and enforcement efforts and risk monitoring initiatives. The compliance date for the amendments is October 1, 2017. Although investment advisers (including Exempt Reporting Advisers) will not need to make the new Form ADV disclosures until their regular 2018 annual update filings are due, private fund sponsors should begin the process of identifying the type of information that they will have to include in their updating amendments and prepare for changes to their recordkeeping policies.

What You Need To Know

  • Increased Disclosure of Separately Managed Accounts (SMAs). The amendments to Form ADV require additional disclosure for advisers' SMAs (any client that is not a pooled investment vehicle such as registered investment companies, business development companies, and other pooled investment vehicles like private funds). Prior to the effectiveness of the amendments, Form ADV only required advisers to disclose minimal information about SMAs such as percentage of clients and regulatory assets under management that represent SMAs. Regulatory assets under management are a total tally of the assets over which an adviser provides investment advice, calculated using a method proscribed by the SEC.
    • Pursuant to the amendments, advisers will be required to report the approximate percentage of SMA regulatory assets under management that are invested in 12 broad asset categories. Advisers with more than $10 billion in regulatory assets under management attributable to SMAs will be required to include mid-year as well as end of year information as part of their annual filing, while those advisers with less than $10 billion in regulatory assets under management attributable to SMAs will only be required to disclose end of year information. Advisers may use their own consistently applied internal methodologies to determine how to categorize assets. 
    • Advisers should not look through funds or ETFs to report the underlying asset type.
    • Advisers with at least $500 million in regulatory assets under management attributable to SMAs will also be required to report information regarding the use of borrowings and derivatives in those accounts.
    • The amendments will also require advisers to identify any custodians that account for at least 10% of SMA regulatory assets under management.
  • Additional Information on Form ADV. The amendments require advisers to disclose the following additional information on Form ADV:

(i) Social Media Presence. Form ADV previously only required advisers to provide their website addresses. The amendments will require advisers to disclose all websites of the adviser and publicly available social media platforms (Facebook, LinkedIn, Twitter) where the adviser has a presence and for which it controls the content.

(ii) Office Information. Advisers will be required to provide the total number of offices in which they conduct business as well as information about their 25 largest offices based on the number of personnel, including the number of employees who perform advisory functions and the nature of business activities conducted from each office.

(iii) Chief Compliance Officer (CCO). Advisers will be required to report whether their CCOs are compensated or employed by any person other than the adviser or a related person of the adviser. This amendment reflects the SEC's skepticism concerning the outsourcing of the CCO function.

(iv) Balance Sheet Assets. An adviser with assets of $1 billion or more will be required to report its assets within the following three ranges: $1 billion to less than $10 billion, $10 billion to less than $50 billion, and $50 billion or more.

(v) Advisory Business. The amendments will require advisers to, among other things, report the number of clients and the amount of regulatory assets under management attributable to each category of clients.

(vi) Private Fund Reporting. The amendments include several changes to the private fund disclosure of Form ADV, including requiring an adviser to a private fund that qualifies for the exclusion from the definition of investment company under the Investment Company Act of 1940 to report whether it limits sales of the fund to "qualified clients" (as defined in the Act)

  • Umbrella Registration. The amendments codify the umbrella registration approach for private fund advisers that consist of multiple entities that operate a single advisory business.  Accordingly, advisers may file a single umbrella Form ADV covering the "filing adviser" as well as certain affiliated "relying advisers" under the following conditions:

(i) The filing adviser and relying advisers must advise only private funds and/or "qualified clients" in SMAs that 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.

(ii) The filing adviser must have its principal office and place of business in the United States.

(iii) Each relying adviser, its employees and persons acting on its behalf are subject to the filing adviser's supervision and control.

(iv) The filing adviser and each relying adviser must be subject to the Act and examination by the SEC.

(v) The advisers must operate under a single code of ethics and single set of written compliance policies and procedures administered by a single CCO.

Although the SEC declined to extend umbrella registration to non-U.S. investment advisers or exempt reporting advisers, existing SEC staff guidance permits certain exempt reporting advisers to file a single Form ADV on behalf of multiple special purpose entities (SPEs). The Adopting Release states that this guidance has not been withdrawn.2

Performance Information. The amendments require advisers to maintain additional written materials related to the calculation and distribution of performance information.

(i)  The amendments provide for the retention of all communications to any person demonstrating calculation of performance or rate of return. Previously, advisers were only required to maintain records supporting performance claims that were distributed to 10 or more persons.

(ii) The amendments also require investment advisers to maintain originals of all written communications received and sent relating to the performance of managed accounts or securities recommendations.

Impact on ERAs. Exempt Reporting Advisers, (ERAs) are generally not required to register with the SEC, but are subject to certain reporting and other obligations under the Act. Unless an ERA is also registered with a state securities authority, such ERA is only required to complete certain items of Part 1A of Form ADV. Accordingly, the only material changes to Form ADV that should impact ERAs include certain amendments to:

(i)   Item 1 of Form ADV, including the use of social media, reporting of information on up to 25 offices, information about CCO compensation, and reporting of balance sheet assets within three ranges, and

(ii)   Item 7 of Form ADV, including the reporting of identifying numbers for an adviser's financial service providers  and the reporting of whether an adviser to a private fund limits sales of the fund to qualified clients. 

Footnotes

1. See Form ADV and Investment Advisers Act Rules, Advisers Act Release No. IA-4509 (Aug. 25, 2016), available at https://www.sec.gov/rules/final.shtml (the Adopting Release).

2. Frequently Asked Questions on Form ADV and IARD, Reporting to the SEC as an Exempt Reporting Adviser (Mar. 2012) available at https://dc.aws-sec.akadns.net/divisions/investment/iard/iardfaq.shtml#exemptreportingadviser.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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