In August, the SEC adopted a final rule that substantially amends Form ADV — the form Registered Investment (and exempt reporting) Advisors file with the SEC and many state securities authorities. The new rule contains several important changes regarding Separately Managed Accounts (SMAs), umbrella registrations, and books and records.
SMAs are defined as advisory accounts other than registered investment companies, business development companies, and other pooled investment vehicles (including private funds). Currently, the SEC collects little specific information about SMAs. The new form will require advisors to provide details about SMAs comparable to what they now provide for private funds. This includes the approximate percentage of SMA Regulatory Assets Under Management (RAUM) invested in each of twelve broad asset categories, the use of derivatives and borrowing, and information about custodians that hold 10% or more of an advisor’s SMA RAUM.
The level of detail required regarding derivatives and borrowing will increase when SMA RAUM reaches $500 million and again when it reaches $10 billion. In addition, advisors with at least $10 billion in SMA RAUM will have to include both annual and semi-annual data in their annual updates to Form ADV.
On the new form, an advisor will also be required to provide:
- Its website and social media account addresses;
- Information about employees and business activities at its 25 largest offices;
- Whether or not it uses an outsourced Chief Compliance Officer;
- The approximate amount of its own assets, within a specified range, if they total $1 billion or more;
- The number of clients in various categories and amount of RAUM attributable to each category;
- The number of clients with nondiscretionary accounts;
- Information about wrap fee programs, and
- Identifying information about service providers to the private funds it advises.
In addition, advisors that rely on the 100-or-fewer-holders exclusion to avoid investment company status must indicate whether they limit sales of private fund interests to “qualified clients.”
In a 2012 no-action letter to the American Bar Association, the SEC permitted certain affiliated private fund advisors operating as a single advisory business to file an “umbrella registration” on a single Form ADV. The revised form accommodates multiple entity registrations, essentially codifying the relief provided by the no-action letter and streamlining filing procedures. To qualify for umbrella registration, the group must meet several conditions and file a new Schedule R, which provides ownership information and other details about covered advisors.
As it currently stands, advisors must maintain records supporting performance claims in communications they circulate or distribute to 10 or more persons. The final rule now requires advisors to maintain such documentation for communications circulated or distributed to any number of people. Advisors must also maintain all written communications received and copies of written communications sent by them which are related to the performance or rate of return of any or all managed accounts or securities recommendations, though previously this requirement applied only to certain types of communications.
Although the final rule technically goes into effect October 31, 2016, the SEC has delayed compliance until October 1, 2017. The new recordkeeping requirements apply to communications circulated or distributed after that date. Additionally, advisors must comply with the new reporting requirements starting with initial Form ADVs or updating amendments to existing Form ADVs filed after October 1, 2017.
If you need guidance regarding Form ADV, please contact your Untracht Early advisor for assistance.