SEC Adopts New Disclosure and Recordkeeping Requirements for Advisers
Monday, September 26, 2016

On August 25, 2016, the SEC approved the adoption of amendments to Form ADV to enhance and modernize certain disclosure requirements and to codify the requirements for “umbrella registration,” streamlining the registration and reporting requirements for multiple private fund advisers that operate as a single advisory business. The SEC also adopted certain revisions to the books and records rule, Rule 204-2 under the Advisers Act, requiring the retention of additional records relating to the calculation and distribution of performance information.

Form    ADV    Reporting    Changes

Separately    Managed    Accounts

The amendments to Form ADV include several new disclosure requirements relating to separately managed accounts (SMAs)3 that are intended to enhance the SEC staff’s ability to effectively carry out its risk-based examination program and other risk assessment and monitoring activities. The amendments will require advisers to SMAs to report, among other things:

• the approximate percentage of “regulatory assets under management” (RAUM) attributable to SMAs (SMA RAUM) invested in 12 broad asset categories (e.g., exchange-traded equity securities, U.S. government/agency bonds and sovereign bonds);

• for advisers with at least $500 million but less than $10 billion in SMA RAUM, the amount of SMA RAUM and the dollar amount of borrowings attributable to those assets that correspond to three levels of gross notional exposures (i.e., less than 10%, 10%-149%, and 150% or more);

• for advisers with at least $10 billion in SMA RAUM, the same information described above with respect to gross notional exposure and the dollar amount of borrowings, as well as the derivative exposures attributable to those SMAs within six specific categories of derivatives; and
 

• the identity of custodians (and location of their offices) that hold at least 10% of SMA RAUM and the amount of the adviser’s SMA RAUM held at the custodian.
Other    Reporting    Changes
In addition to the enhanced reporting for SMAs described above, the SEC adopted several changes to Form ADV disclosure requirements, in addition to various technical revisions and clarifications. Of note, the amendments to Form ADV will require disclosure of the following information:

• all adviser websites as well as all social media platforms (e.g., Twitter, Facebook, LinkedIn) on which the adviser has an account;

• the total number of offices at which the adviser conducts business and certain information about the size of and business activities conducted at each of the adviser’s 25 largest offices by headcount;

• whether the adviser’s chief compliance officer is compensated or employed by a person other than the adviser (or a related person) and, unless the other person is a registered investment company, the name and IRS Employer Identification Number (if any) of the other person;

• the number of advisory clients, the types of advisory clients and the amount of total regulatory assets under management (as opposed to the range of regulatory assets under management, as is currently required) attributable to each category of advisory clients;

• the RAUM of all parallel managed accounts related to registered investment companies (or series thereof) or business development companies that the adviser advises; and

• whether the adviser participates in a wrap fee program and, if so, the RAUM attributable to acting as a sponsor to or portfolio manager for a wrap fee program.

Umbrella  Registration

The amendments to Form ADV also include amendments codifying prior SEC guidance regarding umbrella registration for certain advisers to private funds. Consistent with prior guidance, one adviser (the filing adviser) may file a single Form ADV on behalf of itself and other advisers controlled by or under common control with the filing adviser (each, a relying adviser), subject to five conditions set forth in the adopting release, including that the filing adviser and each relying adviser advise only private funds and clients in SMAs that are “qualified clients,” as defined in Rule 205-3 under the Advisers Act, and otherwise eligible to invest in such private funds and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds. In addition, umbrella registration requires that the filing adviser and each relying adviser operate under a single code of ethics administered by a single chief compliance officer. The conditions are intended to limit eligibility for umbrella registration to groups of private fund advisers that operate a single advisory business.

Books  and  Records Concerning  Performance Information

The SEC adopted two amendments to the books and records rule, Rule 204-2 under the Advisers Act (the Recordkeeping Rule), that will require advisers to maintain additional records relating to the calculation and distribution of performance information.

The amendments revise the Recordkeeping Rule to require an adviser to maintain materials demonstrating the calculation of performance or rate of return in any communication that the adviser circulates or distributes, directly or indirectly, to any person. Currently, the Recordkeeping Rule requires an adviser to maintain such materials only for performance claims in communications distributed or circulated to 10 or more persons.

The amendments also revise the Recordkeeping Rule to require an adviser to maintain originals of all written communications received and copies of written communications sent by the adviser relating to the performance or rate of return of any or all of the adviser’s managed accounts or securities recommendations.

The amendments will become effective on October 31, 2016, but advisers will not be required to comply with the amendments until October 1, 2017. Consequently, any adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after October 1, 2017 will be required to provide responses to the Form revisions adopted by the SEC. Similarly, the adopting release states that amendments to the Recordkeeping Rule will apply to communications circulated or distributed after October 1, 2017.

 

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