United States: The SEC Adopts Amendments To Form ADV And Recordkeeping Rule: Advisers Now Required To Disclose Information About Separately Managed Accounts

Last Updated: September 7 2016
Article by Kelley A. Howes, Jay G. Baris and Eric Requenez

OVERVIEW

The Securities and Exchange Commission (SEC) recently amended Form ADV to require investment advisers to disclose more information about their separately managed account business, aggregate data related to the use of borrowings and derivatives, and disclose information about other aspects of their advisory business, including branch office operations and the use of social media. The amendments also streamline registration and reporting for "umbrella registrations" made by groups of private fund advisers operating a single advisory business.

The SEC also adopted amendments to the books and records requirements under the Investment Advisers Act of 1940 (the "Advisers Act") to require advisers to maintain additional records related to the calculation and distribution of performance information.

The SEC said that the new information required in Form ADV and in the new books and records rules will "improve the depth and quality of information that [it collects] on investment advisers, facilitate [its] risk monitoring initiatives and assist [its] staff in its risk-based examination program." The SEC also believes the enhanced records regarding calculation of performance information could reduce the incidence of misleading or fraudulent advertising and communications by advisers.

SEPARATELY MANAGED ACCOUNTS

The amendments to Form ADV will require advisers to report more information about their separately managed accounts. The SEC did not define "separately managed accounts" but noted that it considers such accounts to be advisory accounts other than those that are pooled investment vehicles, including (i) investment companies; (ii) business development companies; and (iii) other pooled investments vehicles that are not registered (such as private funds). Among other things, advisers will be required to provide information on an aggregate basis regarding their separately managed accounts, including the types of assets held and the use of derivatives and borrowings in such accounts. Sub-advisers to separately managed accounts are required to provide information only about the portion of the account that they sub-advise.

Disclosure of Asset Classes

The amended Form ADV will require advisers to report, on an annual basis, the aggregate separate account investments in 12 identified categories of investments:

1. exchange traded equity securities;

2. non-exchange traded equity securities;

3. U.S. government/agency bonds;

4. U.S. state and local bonds;

5. sovereign bonds;

6. investment grade corporate bonds;

7. non-investment grade corporate bonds;

8. derivatives;

9. securities issued by registered investment companies or business development companies;

10. securities issued by pooled investment vehicles (other than registered investment companies or business development companies);

11. cash and cash equivalents; and

12. other.

Advisers will be permitted to use internal methodologies and conventions of their service providers to determine how to categorize assets within the 12 identified categories, as long as such methodologies are consistently applied and consistent with information the advisers report internally and to current and prospective clients. The SEC acknowledged that permitting advisers such flexibility could result in different advisers categorizing the same or similar assets differently as a result of different methodologies.

Advisers with at least $10 billion in regulatory assets under management (RAUM) held in separately managed accounts will provide information as of two dates—mid-year and year end. Advisers with less than $10 billion of RAUM will report information only as of year end.

Disclosure of Derivatives and Borrowing

The revised Form ADV requires advisers to report derivative transactions and borrowings using "gross notional value" and "gross notional exposure." Gross notional exposure includes borrowings and the gross notional value of derivatives. The definition of "gross notional value" specifies how derivatives are measured when determining an account's gross notional exposure.

Advisers with at least $500 million but less than $10 billion in separately managed account RAUM will be required to report the amount of such RAUM and the dollar amount of borrowings attributable to those assets that correspond to three levels of gross notional exposures ((i) less than 10%; (ii) 10–149%; and (iii) 150% or more).

Advisers with at least $10 billion in separately managed account RAUM will be required to report this information and also report on derivative exposures across six categories of derivatives in individual accounts of at least $10 million:

1. interest rate;

2. foreign exchange;

3. credit;

4. equity;

5. commodity; and

6. other.

The SEC acknowledged that it received many comments regarding the use of gross notional metrics because it "may not always reflect the way in which derivatives are used in a separately managed account and are not a risk measure." The SEC noted, however, that if advisers believe that gross notional metrics are misleading, they can provide additional narrative related to how they use derivatives in separately managed accounts. In crafting any such disclosure related to the use of derivatives, advisers should consider that Section 207 of the Advisers Act prohibits omission of material facts in a Form ADV filed with the SEC.

Disclosure Regarding Custodians Holding Ten Percent (10%) or More of an Adviser's Separately Managed Account RAUM.

The revised Form ADV requires advisers to identify custodians that hold at least ten percent of an adviser's separately managed account RAUM. Advisers are required to disclose the amount of such RAUM held with each such custodian. The SEC said that it intends to use this information in case "a concern is raised about a particular custodian."

The SEC noted that, since it does not directly regulate all custodians that may hold the assets of separately managed accounts, this disclosure requirement will allow its staff to appropriately monitor the risk that certain custodians may present.

ADDITIONAL INFORMATION ABOUT INVESTMENT ADVISERS

The SEC also amended other sections of Form ADV to require advisers to disclose additional information, including:

  • All of its Central Index Key (CIK) numbers, regardless of whether the adviser is a public reporting company or not;
  • Its social media presence in addition to its website, including accounts on Twitter, Facebook or LinkedIn, and the address of each of the adviser's social media pages where the adviser controls the content of the page;
  • Expanded information regarding the adviser's offices other than its principal office and place of business, including the total number of offices from which the adviser conducts its investment advisory business and data regarding the particular business activities conducted at each of its largest 25 offices in terms of the number of employees; such information includes:
  • each office's CRD branch number (if applicable);
  • the number of employees who perform advisory functions from each office;
  • the business activities conducted from each office (based on a list of securities-related activities); and
  • a description of any other investment-related business conducted from each office;
  • Whether the adviser's chief compliance officer is paid by or employed by a person other than the adviser or a related person of the adviser, including the name and IRS Employer Identification Number of such person;
  • If it has more than $1 billion in RAUM, the adviser must report such assets in ranges: (i) $1 billion to less than $10 billion; (ii) $10 billion to less than $50 billion; and (iii) $50 billion or more;
  • The number of the adviser's clients and the amount of RAUM attributable to particular categories of clients;
  • The number of clients for whom an adviser provides advisory services but whose assets do not count as RAUM;
  • The approximate amount of an adviser's RAUM attributable to clients that are non-U.S. persons;
  • The RAUM of parallel managed accounts related to any registered investment company (or series thereof) or business development company managed by the adviser;
  • Whether the adviser participates in a wrap fee program, and if so, the total amount of RAUM attributable to the adviser acting as a sponsor or portfolio manager for a wrap fee program and the SEC File Number and CRD Number for sponsors to those wrap fee programs; and
  • If the adviser manages private funds that qualify for the Section 3(c)(1) exclusion from the definition of investment company under the Investment Company Act of 1940, it is required to report on whether it limits sales of each such fund to qualified clients as defined in Rule 205-3 under the Advisers Act.

UMBRELLA REGISTRATION

The amended Form ADV codifies no-action relief that the staff has granted addressing "umbrella registration" of advisers. Under the staff guidance, private fund advisers consisting of a group of related advisers that are "separate legal entities but effectively operate as - and appear to investors and regulators to be – a single advisory business" may file a single umbrella registration for all the legal entities. The conditions for umbrella registration are the same as the conditions set forth in the staff's prior guidance and will be reflected in the instructions to the amended Form ADV. The revised Form ADV includes a new schedule – Schedule R – that requires disclosure for each relying adviser.

Umbrella registration is not mandatory, and private fund advisers can continue to file separate Forms ADV if they choose to do so.

AMENDMENTS TO THE BOOKS AND RECORDS RULE

Rule 204-2 under the Advisers Act currently requires advisers to maintain records that support performance information included in any communications distributed to 10 or more persons. As amended, the Rule will require advisers to:

  • maintain records demonstrating the calculation of performance or rate of return information included in communications distributed, directly or indirectly, to any person; and
  • maintain originals of all written communications received and copies of written communications sent by an adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

The SEC declined to exclude from the new recordkeeping requirements one-on-one communications that are "customized responses" to investors or communications with sophisticated clients.

The new recordkeeping requirements will apply to communications distributed after the compliance date of the new rules. Importantly, the new recordkeeping requirements also apply to communications that include performance even if the performance predates the effective date of the amendments.

COMPLIANCE DATES

The amendments take effect 60 days after publication in the Federal Register, and advisers must comply with the amendments on Oct. 1, 2017. These compliance dates assume that the SEC and FINRA can update the IARD and CRD systems prior to that date.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Kelley A. Howes
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.