The SEC approved during the summer of 2016 revisions to Form ADV effective on October 1, 2017 (the “Compliance Date”). The changes are designed to increase the amount of data the SEC collects so it can better monitor potential systemic market risks. Advisers must provide greater transparency in several areas, including regulatory assets under management (“RAUM”) attributable to various client areas such as separately managed accounts (“SMAs”) and wrap-fee programs. Advisers must also indicate whether they use an outsourced chief compliance officer (“CCO”), disclose firm social media pages and provide details about their 25 largest branch offices.
The changes to Form ADV will be the biggest since the document was revised in 2010; which requires a narrative overview of an Adviser’s practice rather than the check-the-box description. As an example, an Adviser will need to provide on the Form ADV the addresses for the homepages, Twitter, LinkedIn, Facebook and other accounts giving the SEC an easier way to track what Advisers are posting.
Highlighted Form ADV Changes
Below are some of the amendments to Form ADV and to the books and records rules under the Investment Advisers Act of 1940:
- Require Advisers to provide specific information about SMAs (i.e. advisory accounts that are not pooled investment vehicles), including the type of assets held and the use of derivatives and borrowings to fill in existing data gaps;
- Streamline and standardize the process of “umbrella” registration of related advisers on one Form ADV;
- Require Advisers to maintain additional materials related to the calculation and distribution of performance information to better protect investors from fraudulent investment performance claims
According to the Release, the SEC believes that collecting additional information about SMAs will assist the staff’s risk-based examinations and other risk assessment and monitoring activities.
SMA Advisers will be required to report the approximate percentage of SMA RAUM invested in 12 broad asset categories, such as ETFs, U.S. government/agency bonds, derivatives and cash equivalents.
Borrowings and Derivatives
Advisers with at least $500 million in SMA RAUM, are required to provide additional information, on an aggregated basis, with respect to the use of borrowings and derivatives in individual SMA accounts with at least $10 million in RAUM.
SMA Advisers are also required to identify any custodians that account for 10% or more of their SMA RAUM, as well as the amount of RAUM attributable to SMAs held at the custodian.
With this update the SEC is requiring Advisers to provide more information regarding outsourced CCOs. Advisers must report whether the Adviser’s CCO is compensated or employed by any third party for providing such services, and if so, provide the name of the third party.
The update requires the Adviser to disclose all social media platforms as mentioned above, where the Adviser controls the content.
Any adviser filing an Initial Form ADV or an amendment to a Form ADV on or after the Compliance Date will be required to complete the revised Form ADV, to the extent applicable. More than likely most Advisers will first address the revised Form ADV requirements when filing their annual updating amendments in 2018.
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