September 2, 2016

Final Rules: Updated Form ADV & Books and Records

The Securities and Exchange Commission (the “SEC”) published final rules to amend the Form ADV in order to gather additional about separately managed accounts, create an umbrella registration for affiliated private fund advisors operating a single advisory business, and to add additional identifying questions to the Form ADV. The final rules also amend the books and records rule to clarify the obligation to keep supporting information on performance and rate of return calculations. Please note that these final rules become effective in 60 days; however, compliance with these requirements does not become effective until October 1, 2017.
Click here for a link to the SEC's press release. A link to the Final Rule is included on the right.

Separately Managed Accounts

The final rules will require advisors to aggregate information about the separately managed accounts, in order to improve the SEC’s risk management initiatives and risk-based exam program. The aggregate information about separately managed accounts will include types of assets held and the use of derivatives and borrowings in the accounts. The updated form will also ask that assets in separately managed accounts be reported on Schedule D. Finally, the final rules require advisors to identify the custodians with at least ten percent of separately managed account assets under management, and the amount of the assets under management attributable to the separately managed accounts held at the custodian.

Umbrella Registration for Private Fund Advisors

The final rules also create a process for umbrella registration of private fund advisors that operate a single advisory business through multiple legal entities. Umbrella registration is not mandatory, but will simplify the registration process for these advisors. To qualify for an umbrella registration, the advisor must have a principal place of business in the United States and must advise only private funds and qualified clients in separately managed accounts. Also all of the advisors must operate under the same policies and procedures (including a single code of ethics and single CCO) and be subject to the filing advisor’s supervision and control. Finally, all the advisor must agree to be subject to examination by the SEC.

Additional Form ADV Information Required

In addition to requiring reporting for separately managed accounts and creating umbrella registrations, the final rules also require additional identifying information be provided on the Form ADV.
  1. All Central Index Key numbers (“CIK Number”) for:
    1. The advisor.
    2. Private funds managed by the advisor (or Public Company Accounting Oversight Board, or “PCAOB”-assigned numbers).
  2. The addresses for each social media account where the advisor controls the content, such as Twitter, Facebook or LinkedIn. This does not require the listing of the social media accounts of the employees of an advisor, just the accounts where the advisor control the content.
  3. The total number of offices at which investment advisory business is conducted and details of the 25 largest offices in terms of number of employees.
  4. Report whether the advisor’s chief compliance officer is compensated or employed by any person other than the advisor (or a related person of the advisor or a registered investment company) and if so, the name and IRS Employer Identification Number.
  5. Advisors with assets of $1 billion or more report their assets within three ranges: (a) $1 billion to $10 billion; (b) $10 billion to $50 billion; (c) $50 billion or more.
  6. The number of clients and amount of assets under management attributable to each category of clients.
  7. The number of clients that do not have assets under management.
  8. Amount of assets under management:
    1. Attributable to non-United States clients.
    2. Of all parallel managed accounts related to an investment company (or series thereof) or business development company.
    3. Attributable to acting as a sponsor to or portfolio manager for a wrap fee program.

Books and Records Updates

Currently advisors are required to maintain records supporting performance claims in communications that are distributed or circulated to ten or more persons. However, the final rule requires that advisors maintain:

  1. Records supporting performance claims in any communication that is circulated or distributed, directly or indirectly, to any person.
  2. The originals of written communications received relating to the performance or rate of return of any managed accounts or securities recommendations.
  3. Copies of written communications sent by the advisor relating to the performance or rate of return of any managed accounts or securities recommendations.

How should a Chief Compliance Officer respond to the Rule?

To prepare for the implementation of these rule updates at your firm for the October 1, 2017 compliance date, AdvisorAssist recommends the best practices of:

  1. Review separately managed accounts to ensure that the amount of assets being held, types of assets held, and the use of derivatives and borrowings in the accounts is easily reportable.
  2. Perform an annual review of custodians for separately managed accounts to ensure you can identify the accounts and assets under management with each custodian.
  3. If you operate a single advisory business through multiple legal entities, review whether an umbrella registration is best for your business.
  4. Start tracking and reviewing the additional identifying information that will be required on the Form ADV.
  5. Prepare and maintain comprehensive records supporting performance and rate of return calculations.
  6. Perform an annual review of the advisor’s books and records archive to ensure you are keeping the required documentation for the required duration.

Brendan Furey
Michael Conlon


Post a Comment