SEC Proposes Changes to Form ADV & Recordkeeping Requirements

Investment Management Update

Date: June 08, 2015

On May 20, 2015, the Securities and Exchange Commission (SEC) proposed amendments to Form ADV and Rule 204-2 under the Investment Advisers Act of 1940, as amended (Advisers Act).1 The proposed amendments would require investment advisers to provide additional information on Form ADV and expand their recordkeeping obligations with respect to performance calculations and performance-related communications.

Form ADV

The proposed amendments to Form ADV include three important changes intended to assist the SEC in gathering additional information to better understand the risk profile of investment advisers and the advisory industry. The amendments would add questions requiring an investment adviser to report additional information on its separately managed account clients and other facets of its advisory business. The amendments also would codify no-action relief provided by the SEC’s staff in 2012 with respect to the registration process for private fund adviser entities operating as a single advisory business, commonly referred to as “umbrella registration.”

Separately Managed Accounts

Under the proposed amendments, an investment adviser would be required to report more specific information on its separately managed accounts (SMAs).2 Investment advisers would be required to identify each custodian that holds more than 10 percent of the investment adviser’s regulatory assets under management (RAUM) attributable to SMAs and the amount of SMA assets held by each such custodian. The amount and types of other information that would be required to be reported is based on the adviser’s RAUM attributable to SMAs:

  • Up to $150 million. Such advisers would need to report the approximate percentage of SMA assets invested in each of 10 broad asset categories.3 This information would need to be provided annually as of the end of the adviser’s fiscal year.
  • $150 million to $10 billion. Such advisers would have to provide the information above, as well as identify the use of derivatives and borrowings in SMAs. They would also have to report the number of accounts that correspond to certain categories of gross notional exposure4 and the weighted average amount of borrowings (as a percentage of net asset value) in accounts with a net asset value of at least $10 million. This information would need to be provided annually as of the end of the adviser’s fiscal year.
  • $10 billion or more. Such advisers would have to provide all of the information described above, as well as the weighted average gross notional value of derivatives (as a percentage of the net asset value) in six different categories of derivatives.5 This information would need to be provided annually, as of both the midpoint of the adviser’s fiscal year and as of its end.
Investment Advisory Business

In addition to the SMA data, the proposal would also amend Part 1A of Form ADV to collect additional information about an adviser and its clients. Advisers would also need to disclose:

  • Web addresses of the adviser’s social media accounts (such as Twitter, LinkedIn and Facebook). The SEC also asked for comment as to whether it should require reporting of information regarding individual employees’ use of social media for business purposes, which could have implications regarding SEC scrutiny of whether such use complies with applicable advertising restrictions under the Advisers Act.
  • The total number of offices at which the adviser conducts investment advisory business and information regarding the 25 largest offices (in terms of number of employees). Currently, advisers are only required to disclose their top five offices. For many advisers, this change would effectively require them to disclose information regarding all their offices.
  • Whether the adviser’s chief compliance officer (CCO) is compensated or employed by any other person and identifying information relating to such other person. The Proposing Release noted that the SEC seemed to have concerns regarding the quality and effectiveness of outsourced CCOs, stating that its examination staff has “observed a wide spectrum of both quality and effectiveness of outsourced chief compliance officers and firms.”
  • Whether the adviser’s balance sheet assets not only exceed $1 billion, as is currently required, but also whether such assets fall into ranges between $1 billion and $10 billion, $10 billion and $50 billion, or $50 billion or more. The SEC is proposing this change to help it implement rulemaking for stress testing financial risk, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
  • The total amount of RAUM attributable to an adviser acting as sponsor and/or portfolio manager of a wrap fee program and certain identifying information for sponsors of each wrap fee program for which the adviser serves as portfolio manager. In the Proposing Release, the SEC explained that this information would make it easier to identify whether a particular adviser acts as sponsor or portfolio manager and to “collect information across investment advisers involved in a particular wrap fee program.”
Umbrella Registration

The proposed rules also seek to amend Form ADV to better facilitate consolidated, or “umbrella,” registrations through which private fund advisers that operate a single advisory business through multiple entities could register by filing a single Form ADV. In 2012, the SEC issued a no-action letter offering guidance on when multiple private fund adviser entities may be deemed as operating a single advisory business and therefore would be eligible to file a joint Form ADV. Advisers’ ability to rely on this relief has been limited by the fact that Form ADV is designed for an adviser operating as a single legal entity. The proposed amendments would revise Form ADV and its general instructions to allow one adviser (filing adviser) to file a single Form ADV (umbrella registration) on behalf of itself and other advisers that are controlled by, or under common control with, the filing adviser (each, a relying adviser), provided they operate a single advisory business and meet all of the following conditions:

  • The filing adviser and each relying adviser advise only private funds and clients in SMAs that are qualified clients and otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser, and the SMAs pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds. This condition limits advisers’ ability to file an umbrella registration to those managing private funds and certain separate accounts of sophisticated investors and would largely prevent advisers with multiple lines of business from filing an umbrella registration.
  • The filing adviser has its principal office and place of business in the United States, and, therefore, all substantive provisions of the Advisers Act and its rules apply to the filing adviser’s and each relying adviser’s dealings with each of its clients, regardless of whether any client or the filing or relying adviser providing the advice is a U.S. person. Because the Advisers Act would apply to their dealings with non-U.S. clients, non-U.S. advisers may not be willing to use an umbrella registration.
  • Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control. As a result, they are all considered “persons associated with” the filing adviser (as defined in Section 202(a)(17) of the Advisers Act).
  • The advisory activities of each relying adviser are subject to the Advisers Act and its rules, and each relying adviser is subject to examination by the SEC.
  • The filing adviser and each relying adviser operate under a single code of ethics and a single set of written policies and procedures administered by a single CCO.
Rule 204-2 Recordkeeping Requirements

The SEC is proposing certain other changes to Form ADV to, among other things, amend the books and records rule on the retention of records relating to advertisements and other written communications.6

Under Rule 204-2 of the Advisers Act, registered investment advisers are currently required to maintain supporting documentation for performance claims contained in any communication that is distributed to 10 or more persons. The proposed amendments would remove this condition and expand the obligation to require maintaining records backing up performance claims made in communications to any person. In addition, the proposed amendments would require registered investment advisers to maintain records of all communications sent or received by the investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations. Currently, an investment adviser is only required to maintain records of such correspondence that fall into certain narrow categories.


For more information, please contact:

Andrew J. Davalla

Tanya L. Goins

Michael V. Wible

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1SEC Release No. IA-4091 (Proposing Release).

2SMAs are any advisory accounts other than those that are pooled investment vehicles for purposes of Form ADV.

3The categories are: exchange-traded equity securities, U.S. government/agency bonds, U.S. state and local bonds, sovereign bonds, corporate bonds – investment grade, corporate bonds – noninvestment grade, derivatives, securities issued by registered investment companies or business development companies, securities issued by pooled investment vehicles (other than registered investment companies) and other. “Other” must be generally described.

4Gross notional exposure is determined by the following calculation: (the dollar amount of any borrowings + the gross notional value of all derivatives) ÷ the net asset value of the account.

5The categories are: interest rate derivatives, foreign exchange derivatives, credit derivatives, equity derivatives, commodity derivatives and other derivatives. Each type of derivative would be defined in the new proposed glossary.

6The SEC also proposes numerous minor amendments to Form ADV to clarify areas by removing expired provisions and providing further instruction. In addition, it proposes to amend certain Advisers Act rules to remove transition provisions imposed under Dodd-Frank that are no longer applicable.