United States: SEC Proposes Amendments To Form ADV And Certain Investment Advisers Act Rules

On May 20, 2015, the Securities and Exchange Commission ("SEC") proposed changes to certain disclosure items in Form ADV and related instructions and to certain rules promulgated under the Investment Advisers Act of 1940. The proposed changes are intended to enhance the ability of the SEC to conduct effective examinations of investment advisers. While many of the changes are technical in nature, and the more substantive ones will not surprise many, the proposal is nonetheless instructive as to the direction which future SEC examinations may take. The proposal is best explained with reference to specific topics for examination.

Enhanced Disclosure Items

1. Separately Managed Accounts

The SEC noted that, in contrast to private funds, Form ADV currently requires relatively little information regarding an investment adviser's separately managed accounts. The proposal seeks to amplify disclosure concerning the types of assets held in Separately Managed Accounts ("SMAs") and the use of borrowing and derivatives for such accounts. Form ADV would require reports to segment the regulatory assets under management in SMAs into ten broad asset classes. Investment advisers with more than $10 billion Regulatory Assets Under Management ("RAUM") in SMAs would be required to provide both mid-year and year-end data in their annual reports.

Advisers with more than $150 million RAUM in SMAs would be required to report the number of accounts that correspond to certain categories of gross notional exposure1, and the weighted average amount of borrowings in those accounts. Advisers with more than $10 billion RAUM in SMAs would additionally report the weighted average gross notional value of derivatives, as a percentage of net asset value, in each of six different categories of derivatives. These larger advisers would be required to include mid-year as well as year-end data in their annual reports.

Advisers would also be required to provide certain information regarding custodial arrangements for SMA RAUM. In the event a concern is raised about a particular custodian, the SEC notes that such information would enable its staff to identify advisers whose clients use the same custodian.

2. Information Concerning Investment Advisers

Disclosures concerning the investment adviser itself would be supplemented by new requirements relating to, among other items, websites for social media platforms, an adviser's branch offices and outsourced compliance functions.

Perhaps most significantly, the reports would require the identification of outsourced chief compliance officer functions. The proposal notes "a wide spectrum of both quality and effectiveness of outsourced chief compliance officers and firms."

3. Information Concerning the Advisory Business

More detailed information would be required with respect to the number of advisory clients, the types of advisory clients and RAUM attributable to client types. Advisers would be required to account for their calculations of RAUM if they differed from the calculation of assets under management reported to clients. Revised Form ADV would also require disclosure of RAUM for parallel managed accounts relating to a registered investment company or business development company managed by the adviser.  Additional wrap fee program data would also be required.

4. Private Fund Reporting

Private fund reporting would be augmented by a question relating to the percentage of a private fund owned by qualified clients.2

5. Umbrella Registration

The proposed changes would formalize the "no-action" relief granted by the SEC staff to a group of related advisers--principally private fund advisers--which effectively act as a single advisory business. Under the current guidance, one adviser may file a single Form ADV on behalf of itself and other advisers which are controlled by or under common control with the filing adviser, provided that they conduct a single advisory business. The amendments would clarify the use of Form ADV by multiple advisers and, the SEC believes, would yield additional and more consistent data about groups of private fund advisers. The amendments would impose conditions for the use of umbrella registrations, which are designed to confirm that the group operates a single advisory business:

  • The advisers advise only private funds and clients in SMAs which are qualified clients.
  • The filing adviser has its principal office and place of business in the United States.
  • Each adviser and its employees and other persons acting on its behalf are subject to the supervision and control of the filing adviser.
  • The advisory activities of each adviser are subject to the Advisers Act and specifically to the examination authority of the SEC.
  • Each adviser operates under a uniform code of ethics and compliance policies and procedures administered by a single chief compliance officer.

Amendments to Books and Records Rules

Advisers would be required to maintain records supporting performance claims in communications to any person. The current rule only requires retention of records when the performance data is communicated to ten or more persons.

The rules would require advisers to retain, in addition to current communication retention rules, originals of all written communications received and copies of all written communications sent by an investment adviser relating to the performance or rate of return of any or all SMAs or securities recommendations.


1 Gross notional exposure would be the percentage obtained by dividing (i) the sum of (a) the dollar amount of any borrowings and (b) the gross notional value of all derivatives, by (ii) the net asset value of the account.

2 A qualified client is an investor with either $2 million net worth or $1 million assets under management with the related investment adviser.

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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