12-22-16 SEC ADOPTS AMENDMENTS TO FORM ADV AND BOOKS AND RECORDS RULE

Posted on December 21, 2016

On August 25, 2016, the Securities and Exchange Commission (the “SEC”) adopted new rules to augment certain disclosures under Form ADV, and to amend the books and records rule.[1]  Investment advisers filing an initial Form ADV or an amendment to an existing Form ADV on or after October 1, 2017 will need to comply with these changes.

 A.      Significant New Disclosure Requirements

 Under the new rules, advisers will be required to report on Form ADV the approximate percentage of regulatory assets under management (“RAUM”) that are invested in separately managed accounts in each of  twelve (12) broad asset categories.  These asset categories are listed,[2] but not specifically defined.  Regardless, advisers should use consistent, reasonable methodologies in selecting a category in which to report an asset, without double counting the assets.  Advisers should also avoid looking through investments in funds to report the underlying asset type.

Advisers with at least $10 billion in RAUM attributable to separately managed accounts will report annually, both the mid-year and end of year percentages.  Advisers with less than $10 billion RAUM attributable to separately managed accounts will report only end of year percentages

New sections are added to require advisers of separately managed accounts to report information regarding the use of borrowings and derivatives in those accounts.  Advisers with $500 million to $10 billion in RAUM attributable to separately managed accounts will be required to report the amount of RAUMs attributable to separately managed accounts and the dollar amount of borrowings attributable to those assets corresponding to three levels of “gross notional exposure”.[3]  The three levels are: (1) less than 10%, (2) 10 - 149%, and (3) 150% or more.  Advisers with at least $10 billion in RAUM attributable to separately managed accounts will be required to report the same information as advisers with $500 million in RAUM, and also report the derivative exposure for six different categories of derivatives.[4]  These requirements only apply to individual accounts of at least $10 million.

 Advisers must identify any custodians that hold at least ten percent (10%) of separately managed account RAUMs, and the amount of the adviser’s RAUM attributable to separately managed accounts held at the custodian.

B.      Amendments to Umbrella Registration

The amendments also now formally permit multiple private funds adviser entities to file a single Form ADV, or “Umbrella Registration”, on behalf of itself and the other advisers (each, a “relying adviser”) that are controlled by or under common control with this “filing adviser”.

In assessing whether Umbrella Registration is available, advisers should consider whether:

  • The filing adviser and each relying adviser advise only private funds and clients in separately managed accounts that are “qualified clients” as defined in the Investment Advisers Act;
  • The filing adviser has its principal office in the U.S. and all relying advisers are subject to examination by the SEC;
  • Each relying adviser is subject to the filing adviser’s supervision and control; and
  • The filing and relying advisers have a single code of ethics under the Investment Advisers Act, managed by one compliance officer.

 An additional schedule must be filed for each relying adviser, which requires identifying information, basis for SEC registration, and ownership information about each relying adviser, including the form of organization of each relying adviser and a list of control persons.

  C.      Other Form ADV Changes

 The new rules add further disclosure requirements, including requiring the adviser to provide: (1) its social media accounts; (2) the total number of offices at which it conducts business; and (3) if the adviser’s chief compliance officer is compensated or employed by any person other than the adviser, and to identify this person. 

Currently, advisers are required to provide in Form ADV a range of the number of advisory clients, the types of advisory clients (e.g., individuals, high net worth individuals, banking or thrift institutions, etc.) and a range of RAUM attributable to the client types.  The amendments add reporting requirements of additional information regarding these matters, including:

The number of clients and the amount of RAUM attributable to each category of clients (rather than a range for such information);

  • The number of clients for whom it provides advisory services, but do not have RAUM; 
  • The approximate amount of RAUM attributable to non-U.S. clients;
  • The RAUM of all parallel managed accounts related to a registered investment company or a business development company that they advise;
  • The total amount of RAUM attributable to acting as a sponsor or portfolio manager of a wrap fee program; and
  • For advisers to private funds, whether they limit sales of the fund to “qualified clients”.

  D.     Amendments to the Books and Records Rule

 The SEC made two amendments under the books and records rule. First, advisers will now be required keep supporting documentation that demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person.  Second, advisers will be required to retain originals of all written communications received and copies of written communications sent by an investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

 This article has been prepared for general information purposes only and is not intended as legal advice, nor does it create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. If you should have questions regarding how these new rules may impact your firm, please contact Greg Gribben at 585-987-2875, or Steven Suozzi at 585-445-2753, or another member of the Firm’s Investment Management practice group.


Woods Oviatt Gilman LLP - Copyright 2016

[1] Form ADV and Investment Advisers Act Rule, Rel No., IA-4509 (Aug. 25, 2016), available at https://www.sec.gov/rules/final/2016/ia-4509.pdf.

[2] The twelve asset categories include: (1) Exchange Trade 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) Corporate Bonds - Investment Grade, (7) Corporate Bonds - Non-Investment Grade, (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), (11) Cash and Cash Equivalents, and (12) Other.

[3] “Gross Notional Exposure” is defined as the percentage obtained by dividing (a) the sum of (i) the dollar amount of any borrowings and (ii) the gross notional value of all derivatives, by (b) the RAUM of the account.

[4] The six categories are: commodity derivative, credit derivative, equity derivative, foreign exchange derivative, interest rate derivative and “other” derivative (derivative that is not in one of the other five categories)

Steven A. Suozzi