SEC Proposes Extensive Amendments to Form ADV as Well as New Reporting Requirements for RIAs and RICs

On May 20, 2015, the SEC unanimously approved extensive proposed amendments to Form ADV that, if adopted, would require registered investment advisers to provide new information, including additional disclosure relating to separately managed accounts (“SMAs”) similar to the information currently required for private funds under Form PF.


New Disclosures for Advisers to SMAs

The SEC noted that very little information is currently collected for SMAs when compared to private funds. According to the SEC, approximately 73% of SEC-registered advisors manage a wide variety of client assets in SMAs, which makes for a significant part of the market. The proposed additional disclosures include:

  1. Categories of Assets Held: the percentage of SMA regulatory assets under management invested in ten asset categories such as exchange-traded equity securities and U.S. government bonds;

  2. Use of Borrowings and Derivatives: significant information concerning the use of borrowings and derivatives. All advisers will report the amount of SMA assets held in derivatives. Advisers with at least $150 million in SMAs (same threshold used for Form PF reporting) will also report information about gross notional exposure, borrowings and gross notional value of derivatives which is similar to the data reported on Form PF. Further, advisers managing over $10 million in SMAs will provide mid-year and end-year information about their use of derivatives;

  3. Custodians: information about the SMA’s custodians that account for at least 10% of assets under management. Form ADV currently requires disclosures about custodians used by private funds on Schedule 7.B.1., while there are no disclosure requirements with respect to SMAs.

New Disclosures for All Registered Investment Advisers

Enhanced disclosures will be required in the Form ADV for all advisers, in particular:

  1. Social Media Platforms Used: identification of all social media platforms used by an adviser such as Twitter, Facebook and LinkedIn. Currently, the SEC only asks information about an adviser’s own website. Disclosure of all platforms used will enable the SEC to monitor dissemination of information about the adviser to the public and prepare for examinations.

  2. Branches Offices:enhanced information about a firm’s branch offices. Currently, Form ADV requests information about an adviser’s principal place of business and the largest five offices in terms of employees. The proposed amendments would require information about 25 offices. This emphasis on branch offices is consistent with the SEC Examination Priorities for 2015 which identifies supervision of branch offices as a top area of review.

  3. CCOs: information about the adviser’s CCO and whether it has been outsourced or not.

  4. Categories of Clients and Assets Held by Each Category.Additional information will be required about investors serviced by an adviser adding, among others, sovereign wealth funds and foreign official institutions. The proposed Form ADV would also replace the ranges of clients currently disclosed in Form ADV with more precise information about the number of clients and amount of regulatory AUM attributable to each category of client.

  5. Compensation of employees. Compensation received in addition to their regular salaries for obtaining clients for the adviser.

Umbrella Registration

The SEC’s proposal would also codify the 2012 ABA no-action letter permitting relying advisers to rely on an affiliated adviser’s SEC registration, and provide more clarity on the matter. A new Schedule R would be filed for each relying adviser. The revised Form ADV will thus provide a better picture of groups of advisers that operate as a single business and simplify the registration of such advisers.

Performance Information—Additional Books and Records Required

The proposed rules would amend Rule 204-2 under the Investment Advisers Act of 1940 to require advisers to maintain records of the calculation of performance information that is distributed to anyperson. Currently, an adviser is required to maintain performance information that is distributed to 10 or more persons. In addition, amended Rule 204-2 would require advisers to maintain written communications related to performance or rate of return of all accounts, as well as securities recommendations.

New Reporting Forms for Registered Investment Companies

The SEC’s proposal would also impact registered investment companies (“RICs”) by requiring completion of forms containing monthly and annual portfolio information and new reporting Forms that will replace Form N-SAR and Form N-Q. Specifically, the amended SEC rules propose a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that would require census-type information. The information would be reported in a structured data format, which would allow the SEC and the public to better analyze the information. The proposals would also require enhanced and standardized disclosures in financial statements regarding derivatives, and would permit RICs to provide shareholder reports by making them accessible on a website.

The SEC’s proposal is subject to a 60 day comment period during which the public can submit comments to the SEC through their online form on the SEC’s website.

Private funds and RICs are well advised to pay close attention to the proposed changes. If adopted, they will trigger an important overhaul of the reporting regime. Extensive reporting and disclosures would also mean that new policies and procedures may need to be adopted in the new areas of reporting, such as social media, to respond to the SEC’s enhanced focus.

SEC3 can assist your firm in creating, implementing and maintaining your policies and procedures. For further information, please contact your SEC3 representative or contact us at info@seccc.com.