The Securities and Exchange Commission's (SEC) Division of
Investment Management recently modified its "Frequently Asked Questions
on Form ADV and IARD," adding several new topics and updating
one existing item.
Released in June, the changes are intended to provide investment
advisers with additional guidance regarding specific questions with
respect to Form ADV, many of which relate to changes made following
the 2016 rulemaking titled "Form ADV and
Investment Advisers Act Rules" in August 2016, which are
scheduled to go into effect on Oct. 1, 2017.
In addition to the previously existing items, the SEC staff added
responses to the following items to the Frequently Asked Questions (FAQs):
- Form ADV: Item 1.I
- Form ADV: Item 1.J
- Form ADV: Item 5.D
- Form ADV: Item 5.K
- Form ADV: Item 7.B
- Form ADV: Schedule R
A summary of some of the more significant amendments to the FAQs
are set forth below.
Item 5.K
Significantly, six of the newly added FAQs address Item 5.K of Form ADV, which was created in the
2016 rulemaking and established reporting requirements for
separately managed accounts. For example, the SEC staff indicated
in the FAQs that an adviser to private funds that reports
information about parallel managed accounts to the private funds it
manages in Question 11 of Form PF should treat such parallel
managed accounts as separately managed accounts for purposes of
answering Item 5.K and Schedule D, Section 5.K, of Form ADV.
This section also clarifies which types of transactions should be
considered "borrowings" for purposes of reporting on Item
5.K.(2) and Schedule D, Section 5.K.(2). The staff indicated that
traditional lending activities — such as client bank loans
and margin accounts, other secured borrowings and unsecured
borrowings, synthetic borrowings and transactions involving
synthetic borrowings, transactions selling securities short, and
transactions in which variation margin is owed but, as a result of
not reaching a certain set threshold, has not been paid by the
client — should all be considered a "borrowing
transaction" for reporting purposes under these sections of
Form ADV. However, the FAQs further state that advisers
"should not report leverage embedded through the use of
derivatives, securities lending or repurchase agreements as
borrowings."
Finally, a question under Item 5.K asks whether an adviser would
be required to report a sub-custodian that has been appointed to
provide some custodial services such as settling trades or trade
execution by a custodian that holds 10% or more of the
adviser's separately managed account clients' regulatory
assets under management. For purposes of Item 5.K.(4) and Schedule
D, Section 5.K.(3), the staff expressed the view that an adviser
would be required to report the custodian only under such
circumstances.
Schedule R
In an added FAQ relating to Schedule R, the SEC staff said it will
withdraw its previous response to Question 4 of a 2012 letter to
the American Bar Association's Business Law Section, stating
that the response has been superseded by the 2016 rulemaking, which
adopted amendments to Form ADV, codifying umbrella registration for
certain advisers to private funds. In this section, the SEC staff
also confirmed that every nonresident general partner and managing
agent of a relying adviser is required to file Form ADV-NR, even if
the relying adviser itself is a resident in the United States. In
addition, the SEC staff indicated that umbrella registration is not
permitted for exempt reporting advisers, as it is available only
for "filing advisers" and "relying advisers" to
register with the SEC.
Additional Items
The SEC staff also added FAQs addressing a range of other sections
of Form ADV. With respect to the use of social media, the staff
advised that Item 1.I of Form ADV does not require an adviser to
list the websites or accounts on publicly available social media
platforms to the extent the adviser does not control the content,
such as those belonging to an employee or third-party
provider.
In connection with Item 1.J, an adviser is not required to
disclose that its chief compliance officer provides services to
another third-party adviser where such other third-party adviser
does not compensate your chief compliance officer for the services
provided to your firm.
Finally, the FAQs state that an adviser is required to disclose
under Item 7.B its auditor's assigned number from the Public
Company Accounting Oversight Board (PCAOB) and indicate whether the
audited financial statements have been distributed, adding that an
adviser may answer "yes" if it will distribute the
audited financial statements as required to the private fund's
investors, but has not yet done so at the time of filing the Form
ADV.
Item 1.O
In addition, the SEC staff updated the existing FAQ section
relating to Form ADV: Item 1.O, which requires an adviser to
indicate whether it had $1 billion or more in total assets shown on
its balance sheet as of the last day of its most recent fiscal
year-end. The SEC clarified that an adviser with more than $1
billion in regulatory assets under management may not be required
to answer "yes" to this question, since
"assets" refers to only the adviser's total assets,
not the assets managed on behalf of clients. Further,
nonproprietary assets, such as client assets under management,
should be excluded for purposes of responding to Item 1.O,
regardless of whether they appear on an investment adviser's
balance sheet.
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.