At an open meeting held on May 20, 2015, the Securities and Exchange Commission (SEC) proposed amendments to Form ADV to modernize and enhance the disclosure of information by registered investment advisers.1 The proposals, among other things, would require advisers to provide specific information about separately managed accounts (SMAs), including the types of assets held and the use of derivatives and borrowings in the accounts, and facilitate and standardize the process of “umbrella” registration of related advisers on one Form ADV. Other proposals would amend the books and records rule under the Investment Advisers Act of 1940 (Advisers Act) to require advisers to maintain records of performance calculations and performance-related communications.
The SEC also proposed disclosure changes designed to enhance data reporting for mutual funds, exchange-traded funds and other investment companies registered under the Investment Company Act of 1940 (Investment Company Act), including a new monthly portfolio reporting form and a new annual reporting form.2 These proposals are covered in a separate Sidley Update.3
The Form ADV and Advisers Act proposals (as well as the Investment Company Act proposals) are part of a broader rule-making agenda announced by SEC Chair Mary Jo White in December 2014 to address the risk of the “increasingly complex” asset management industry, including improving the data used to draw conclusions about risks posed by the industry and develop appropriate regulatory responses.4 In her statement at the May 20th open meeting, White stated that the proposed reforms “will enable the [SEC] to monitor and address as appropriate any risks that asset managers’ activities may pose to the overall stability of the U.S. financial system” and in this regard complement the ongoing efforts of the Financial Stability Oversight Council (FSOC).5 The SEC takes the position that while FSOC provides an important forum for studying and identifying systemic risks across different markets and participants, the SEC is the appropriate agency to monitor and address any risks associated with the asset management industry.
Proposed Amendments to Form ADV Part 1A
Information Regarding SMAs
The Release noted that registered investment companies and business development companies report information about their portfolio holdings and investment strategies in SEC filings, and advisers to private funds file reports on Form PF, but the SEC currently collects little specific information regarding SMAs (i.e., advisory accounts that are not pooled investment vehicles). According to White’s statement, approximately 73 percent of registered investment advisers manage a wide variety of client assets in SMAs and the [SEC] needs a “wider and deeper lens” to assess possible risks.
The proposed amendments would require all advisers to SMAs to report the approximate percentage of SMA assets under management invested in 10 broad asset categories, such as exchange-traded equity securities, U.S. government/agency bonds and derivatives. Advisers with at least $10 billion in regulatory assets under management (RAUM) attributable to SMAs (SMA RAUM) would be required to report, on an annual basis, both mid-year and year-end data.
Advisers with at least $150 million in SMA RAUM would be required to provide additional information, on an aggregate basis, on the use of borrowings and derivatives in SMA accounts with a net asset value (NAV) of at least $10 million.
- Advisers with at least $150 million but less than $10 billion in SMA RAUM would be required to report the number of accounts that correspond to certain categories of gross notional exposure and the weighted average amount of borrowings (as a percentage of NAV) in those accounts.
- Advisers with at least $10 billion in SMA RAUM would have to report the gross notional exposure and borrowing information described above, as well as the weighted average gross notional value of derivatives (as a percentage of NAV) in each of six different categories of derivatives.
- When filing their annual updating amendment, advisers with at least $150 million in SMA RAUM would be required to update the derivatives and borrowings information on a year-end basis, while advisers with at least $10 billion in SMA RAUM would be required to report both mid-year and year-end information.
Additional Information Regarding Investment Advisers
The SEC also proposed to add several new, and amend certain existing, items regarding advisers and their advisory businesses and proposed other clarifying and technical amendments to Form ADV. The proposed revisions and additions include:
- Information regarding an adviser’s use of social media platforms, such as Twitter, Facebook and LinkedIn, including the adviser’s social media addresses. According to the Release, the SEC staff could use this information to help prepare for adviser examinations and compare information that advisers disseminate across different social media platforms.
- A requirement that advisers report the RAUM of all parallel managed accounts related to a registered investment company or business development company that is advised by the adviser. According to the Release, this requirement would help the staff consider how an adviser manages conflicts of interest between parallel managed accounts and the registered investment companies or business development companies it advises.
- Information regarding outsourced chief compliance officers and firms.
The SEC also proposed amendments that would clarify and codify the process for “umbrella” registration, previously outlined in SEC staff guidance provided in 2012.6 Under this guidance, one adviser (the “filing adviser”) may elect to file a single Form ADV on behalf of itself and one or more other advisers (each, a “relying adviser”), provided that they conduct a single advisory business. Under the proposals, the conditions for umbrella registration set forth in the previous guidance would be set forth in revised Form ADV instructions. These conditions include:
- Each relying adviser is controlled by, or under common control with, the filing adviser, and the filing adviser and the relying adviser(s) conduct a single private fund advisory business.
- The filing adviser and each relying adviser advise only private funds and clients in SMAs that are “qualified clients” and are otherwise eligible to invest in the private funds advised by the pertinent adviser, and whose accounts pursue investment strategies that are substantially similar to those private funds. This condition caused some confusion regarding the extent to which a filing adviser can advise clients other than private funds and SMAs (e.g., whether the adviser can advise or sub-advise a registered investment company and still qualify as an umbrella registration filing adviser).
- The filing adviser’s principal office and place of business is in the United States, so that all of the 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 adviser or relying adviser providing the advice is a United States person. This condition is also somewhat perplexing, since it submits a non-U.S. relying adviser to Advisers Act requirements with respect to its non-U.S. clients that such adviser would not be required to meet if it registered on its own separate Form ADV.
- The advisory activities of each relying adviser are subject to the Advisers Act and its rules, and each relying adviser is subject to the filing adviser’s supervision and control.
- The filing adviser and each relying adviser operate under a single code of ethics and a single compliance program, administered by a single chief compliance officer.
New Schedule R would be filed for each relying adviser, including identifying information, the adviser’s basis for SEC registration and information regarding the adviser’s owners and executive officers.
The Release stated that the “umbrella” approach of filing of single Form ADV for multiple advisers would not be available to exempt reporting advisers, noting that the conditions of a single advisory business are designed, in part, to reflect Advisers Act rule requirements that only apply to registered investment advisers, including the compliance program and code of ethics requirements.7
Proposed Amendments to Books and Records Rule
Proposed Amendments to Books and Records Rule
Two proposed amendments to Rule 204-2, the Advisers Act books and records rule, would require registered investment advisers to maintain additional materials related to the calculation and distribution of performance information.
- The Rule currently requires advisers to maintain records supporting performance claims in communications that are distributed or circulated to 10 or more persons. A proposed amendment would remove the “ten or more persons” condition, requiring advisers to retain the required materials demonstrating the calculation of the performance or rate of return in any communication that is circulated or distributed, directly or indirectly, to any person.
- The Rule currently requires advisers to maintain certain categories of written communications received and copies of written communications sent. The amended Rule would add a new category of communications that must be maintained — i.e., those relating to the performance or rate of return of all managed accounts or securities recommendations.
Looking toward the future, White indicated at the open meeting that, among other things, the staff is studying new requirements for stress testing by large investment advisers and large funds, as well as provisions for transition plans after a major disruption in an investment adviser’s operations.
Public comments on the proposed amendments must be received by the SEC on or before 60 days after publication in the Federal Register.
1 “Amendments to Form ADV and Investment Advisers Act Rules,” Investment Advisers Act Release No. 4091 (May 20, 2015) (The “Release”), available at: http://www.sec.gov/rules/proposed/2015/ia-4091.pdf.
2 “Investment Company Reporting Modernization,” Investment Company Act Release No. 31610 (May 20, 2015), available at: http://www.sec.gov/rules/proposed/2015/33-9776.pdf.
3 Sidley Austin LLP, Investment Funds, Advisers and Derivatives Update, “SEC Proposes Amendments to Modernize and Enhance Reporting by Investment Companies” (June 2, 2015), available at: http://www.sidley.com/en/news/06-02-2015-investment-funds-advisers-and-derivatives-update-2.
4 Speech by SEC Chair Mary Jo White, “Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry” (Dec. 11, 2014), available at: http://www.sec.gov/News/Speech/Detail/Speech/1370543677722.
5 Statement at Open Meeting by SEC Chair Mary Jo White: “Modernizing and Enhancing Investment Company and Investment Adviser Reporting” (May 20, 2015), available at: http://www.sec.gov/news/statement/modernizing-investment-company-and-investment-adviser-reporting.html.
6 American Bar Association, Business Law Section, SEC Staff Letter (Jan. 18, 2012), available at: http://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm. See also Sidley Austin LLP, Investment Funds Update, “SEC Issues Much Anticipated Investment Adviser ‘Umbrella’ Registration Guidance” (Jan. 26, 2012).
7 However, the proposals regarding umbrella registration do not appear to affect previous SEC staff guidance regarding combined use by a registered adviser or an exempt reporting adviser of a single Form ADV filing for affiliated advisory entities that are special purpose vehicles or special purpose entities.
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