SEC Adopts Form ADV Part 1 Amendments

August 29, 2016


On August 25, 2016, the SEC adopted amendments that it proposed in May 2015 to require more data to be reported on Form ADV Part 1, to permit a single registration for groups of private funds advisers operating as a single advisory business, and to require advisers to maintain more records regarding performance of accounts. This rulemaking appears to be an important step in a series by the SEC to enhance its monitoring and regulation of the asset management industry.


In their August 25th alert, the US Investment Advisor Association (IAA) informed RIAs of the following:


The IAA will analyze the releaserevised Instructions, amended Instructions for Part 1Aamended Glossary, and amended Part 1 and provide further information to members about the rule in the coming days. Initially, we note the following:


Information to be Reported about Separately Managed Accounts

Types of Assets. Advisers will have to categorize the approximate percentage of types of assets owned by separately managed account (SMA) clients (i.e., all client accounts except registered investment companies, BDCs, and pooled vehicles managed by the adviser). The categorization may be based on advisers’ own methodologies, without double counting.


Derivatives Use and Borrowing; Threshold Raised for Reporting Requirement.

Advisers will have to disclose, publicly, the aggregate gross notional exposure of derivatives held in advisers’ SMAs. In its comment letter to the SEC on the proposal, IAA voiced support for the SEC’s goals for enhanced oversight but urged the SEC to raise the assets under management threshold for reporting derivatives from the proposed $150 million in RAUM attributable to an adviser’s SMA clients to $500 million in such RAUM. We are pleased the SEC agreed with our recommendation, which alleviates the burden of this reporting item for more than 2800 smaller firms. Any SMA of less than $10 million may be excluded from the reporting.


The IAA had also expressed concern that reporting on the gross notional exposure of derivatives in SMAs with the number of accounts specified could raise client confidentiality issues and that gross notional numbers could be misinterpreted. While the SEC declined the IAA’s request to file the information on a non-public basis, it acknowledged that gross notional is not a risk measure and revised the proposal to require less granular information to address confidentiality concerns.


Performance Records. The SEC amended the books and records rule to require advisers to maintain performance records distributed to any person and to keep all communications related to performance.


More Data on Social Media, Branch Offices, Custodians. The amendments will require advisers to disclose more information about their advisory business and branch office locations, as well as website addresses of publicly available social media sites over which the adviser controls the content (and not of its employees). Advisers will also have to identify custodians that account for at least ten percent of SMA RAUM and the amount of such RAUM held at the custodian, as well as its location. Advisers will also have to report if they have outsourced their CCO.


Compliance Date. The IAA asked for at least a one year compliance date. The SEC agreed, and will require advisers to file the newly amended Form ADV Part 1 with their first amendment filed after October 1, 2017. For most advisers with a calendar year filing, this will be when they file their annual updating amendment in April 2018. Compliance with the amended recordkeeping rules related to communicating performance will apply after October 1, 2017.


The IAA comment letter had recommended a number of other changes to the rule, many of which the SEC appears to have addressed. We will analyze the full text of the rulemaking to assess whether those concerns were addressed adequately and to determine whether further clarifications from the SEC are necessary.

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