United States: Revised Form ADV Part 1A Becomes Effective October 1, 2017

Last Updated: October 25 2017
Article by Kevin S. Woodard

The Form ADV amendments adopted August 25, 2016 become effective October 1, 2017. Therefore, advisers filing an initial Form ADV or an amendment to an existing Form ADV will be required to provide responses to the Form ADV revisions beginning October 1, 2017. Advisers that may be required to make an other-than-annual amendment filing beginning October 1, 2017 have noted that in certain cases the information may not be available to respond to the revised Form ADV. In response to this, the Division of Investment Management issued Information Update 2017-06 which provides the following: "[I]f the filer does not have enough data to provide a complete response to a new or amended question in Item 5 or Schedule D sections related to Item 5 during the period from October 1, 2017 to the filer's next annual amendment to the form, the staff would not recommend enforcement action . . . if the filer responds "0" as a placeholder to submit its Form ADV, with a corresponding note in the Miscellaneous section of Schedule D to identify that a placeholder value of "0" was entered." Note that this interim waiver only applies to revised Item 5 and the corresponding sections of Schedule D.

Among other things, the revisions to Form ADV Part 1A are designed to collect more specific information about advisers' separately managed accounts. For purposes of Form ADV Part 1A, separately managed accounts are advisory accounts other than those that are pooled investment vehicles (i.e., registered investment companies, business development companies and pooled investment vehicles that are not registered/private funds). The revisions to Part 1A also provide new questions and amendments to existing questions relating to an adviser's advisory business and affiliations.

In addition, a new Schedule R has been added to Form ADV Part 1A. Schedule R is applicable to umbrella registrations utilized by a filing adviser and one or more relying advisers. An umbrella registration is a single registration by a filing adviser and one or more relying advisers who advise only private funds and certain separately managed account clients that are qualified clients and collectively conduct a single advisory business. Umbrella registrations and Schedule R are addressed in a different DCS client update.

Following is a non-exhaustive summary of the changes – excluding umbrella registrations and Schedule R ...

Item 1: Identifying Information

D(3)

Advisers must now report all of their Central Index Key numbers assigned by the SEC.

E(2)

Advisers must now report all of their CRD Numbers. As before revisions, CRD Numbers of officers, employees or affiliates are not to be included in response to this question.

F(1)

Advisers applying for SEC registration or reporting as an exempt reporting adviser must now list on Section 1.F. of Schedule D the largest 25, rather than 5, offices in terms of number of employees as of the end of the adviser's most recently completed fiscal year. See also the revisions to Schedule D below for additional information.

F(5)

Advisers must provide the total number of offices, other than the adviser's principal office and place of business, at which the adviser conducts investment advisory business as of the end of the adviser's most recently completed fiscal year.

I

In addition to any websites, advisers must now list the addresses for each of the adviser's accounts on publicly available social media platforms. These must be included on Section 1.I of Schedule D. The response to this question should not include the social media accounts of employees.

J(2)

A new question J.2. is now included. This question requests the name and IRS Employer Identification Number (if any) of any person, other than the adviser or a related person of the adviser, that employs or compensates the adviser's chief compliance officer.

O

Previously Question O requested a yes or no answer as to whether an adviser has $1 billion or more in assets on the last day of the adviser's most recent fiscal year. The revised Question O requires advisers with more than $1 billion in assets to provide the range of assets, i.e. $1 billion to less than $10 billion, $10 billion to less than $50 billion or $50 billion or more. In addition, the revised Question O provides the following clarifying instruction: "For purposes of Item 1.O. only, "assets" refers to your total assets, rather than the assets you manage on behalf of clients. Determine your total assets using the total assets shown on the balance sheet for your most recent fiscal year end."

Item 5: Information About Your Advisory Business

C(1)

Question C.1. is revised to require an approximate number of clients for whom the adviser does not have regulatory assets under management but provided investment advisory services during the most recently completed fiscal year. This question will generally capture non-discretionary accounts for which the adviser does not submit approved trades.

D

Question D now requires specific numbers of clients and regulatory assets under management for various client types, as compared to the previous Question D which required that information by percentages. For specific client types advisers must now provide the number of clients and amount of regulatory assets under management. If the number of clients is fewer than five for a client type an adviser is to check that option in responding to this question. The client types are as follows:

  • Individuals (other than high net worth individuals);
  • High net worth individuals;
  • Banking or thrift institutions;
  • Investment companies;
  • Business development companies;
  • Pooled investment vehicles (other than investment companies and business development companies);
  • Pension and profit sharing plans (but not the plan participants or government pension plans);
  • Charitable organizations;
  • State or municipal government entities (including government pension plans);
  • Other investment advisers;
  • Insurance companies;
  • Corporations or other businesses not listed above;
  • Other.

The amount of regulatory assets under management reported here must equal the amount of regulatory assets under management reported in response to Item 5.F.(2)(c). In addition, if a client fits more than one category, the adviser should select one category that most accurately represents the client.

F(2)

Advisers must now include the approximate amount of total regulatory assets under management that are attributable to clients that are non-United States persons.

I

The information to be provided regarding wrap fee programs has been expanded. Now an adviser must provide the amount of regulatory assets under management attributable to it acting as a sponsor, portfolio manager and/or sponsor and portfolio manager for the same wrap fee program.

J(2)

A new Question J.2. has been added which requires an adviser to answer yes or no as to whether the adviser reports client assets in its brochure differently than it reports regulatory assets under management in Part 1A.

K

A new Section K has been added. This new section requests the additional information regarding an adviser's separately managed account clients referenced above. If an adviser has separately managed account clients, the adviser must answer yes or no to the following:

  • Does the adviser engage in borrowing transactions on behalf of any of its separately managed account clients;
  • Does the adviser engage in any derivative transactions on behalf of any separately managed account clients; or
  • Does any custodian hold 10 percent or more of the adviser's regulatory assets under management attributable to the adviser's separately managed account clients.

For any of the above that are answered yes, the adviser is required to provide additional information in Schedule D. See below for information regarding the revisions to Schedule D.

Item 8: Participation or Interest in Client Transactions

H

Question H has been revised to delineate between employee and non-employee solicitors.

Question H.1. asks whether an adviser compensates any person who is not an employee of the adviser for client referrals.

Question H.2. asks whether an adviser provides to any employee compensation that is specifically related to obtaining clients for the firm (cash or non-cash compensation in addition to the employee's regular salary).

In addition, please remember such types of compensation arrangements must be disclosed in the brochure supplements for investment adviser representatives.

Schedule D

Section 1.F. Other Offices

Section 1.F. now requests the following information regarding any disclosed other offices:

  • How many employees perform investment advisory functions from the office location.
  • Whether any of the following business activities are conducted from the office location:
    • Broker/dealer (registered or unregistered);
    • Bank;
    • Insurance broker or agent;
    • Commodity pool operator or commodity trading advisor;
    • Registered municipal advisor;
    • Accountant or accounting firm;
    • Lawyer or law firm.
  • A description of any other investment-related business activities conducted from the office location.

Section 1.I. Website Addresses

Section 1.I. now includes disclosure of any utilized publicly available social media platform as described above.

Section 5.K. Separately Managed Accounts

As detailed above, advisers must now provide additional information regarding their separately managed accounts.

Section 5.K.(1) Separately Managed Accounts

For their separately managed accounts advisers must now provide information regarding the asset types in which their separately managed accounts are invested. Advisers must provide the percentage of their separately managed account regulatory assets under management attributable to each of the following categories of assets.

  • Exchange Traded Equity Securities
  • Non Exchange-Traded Equity Securities
  • U.S. Government / Agency Bonds
  • U.S. State and Local Bonds
  • Sovereign Bonds
  • Investment Grade Corporate Bonds
  • Derivatives
  • Securities Issued by Registered Investment Companies or Business Development Companies
  • Securities Issued by Pooled Investment Vehicles (Other than Registered Investment Companies or Business Development Companies)
  • Cash and Cash Equivalents
  • Other

Advisers with separately managed account regulatory assets under management of $10 billion or more must provide this information as of mid-year and year-end. Advisers with less than $10 billion of such assets must provide this information as of year-end. Year-end refers to the date an adviser used to calculate their regulatory assets under management for purposes of their annual updating amendment, with mid-year being the date six months before that year-end date.

Section 5.K.(2) Separately Managed Accounts – Use of Borrowing and Derivatives

Advisers with regulatory assets under management attributable to separately managed accounts of $10 billion or more must provide the following information on both a year-end and mid-year basis.

  • The gross notional exposure for such accounts delineated by the following scale: less than 10%; 10% -149%; or 150% or more.
  • The regulatory assets under management of the account(s).
  • The amount of borrowings for the various gross notional exposure categories.
  • The amount of derivative exposure for the various gross notional exposure categories. The derivative information must also further delineate by the type of derivative exposure:
    • Interest rate derivative;
    • Foreign exchange derivative;
    • Credit derivative;
    • Equity derivative;
    • Commodity derivative; or
    • Other derivative.

Advisers with separately managed account regulatory assets under management of at least $500 million but less than $10 billion are to provide the following information on a year-end basis.

  • The gross notional exposure for such accounts delineated by the following scale: less than 10%; 10% -149%; or 150% or more.
  • The regulatory assets under management of the account(s).
  • The amount of borrowings for the various gross notional exposure categories.

For purposes of this section, gross notional exposure of an account is 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 regulatory assets under management of the account. Gross notional value is defined as the nominal or notional value of all transactions that have been entered into but not yet settled as of the reporting date.

Section 5.K.(3) Custodians for Separately Managed Accounts

Advisers are required to complete a separate Schedule D Section 5.K.(3) for each custodian that holds 10 percent or more of the adviser's aggregate separately managed account regulatory assets under management. Section 5.K.(3) entails the following information.

  • Legal and primary business name of the custodian.
  • The location(s) of the custodian's office(s) responsible for custody of the assets (city, state and country).
  • Whether the custodian is a related person.
  • If the custodian is a broker/dealer its SEC registration number.
  • If the custodian is not a broker/dealer or otherwise does not have an SEC registration number, provide its legal entity identifier (if any).
  • The amount of regulatory assets under management attributable to separately managed accounts held at the custodian.

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