Brief Summary of the Amendments
Among other things, the Amendments:
- Require advisers that file Form ADV (i.e., SEC-registered investment advisers (RIAs), exempt reporting advisers (ERAs), state-registered advisers and applicants for registration) to provide disclosure, as pertinent, in Part 1A, Item 1, regarding social media, outsourced compliance officers and multiple office locations;
- Require RIAs, state-registered advisers and applicants for registration to provide specific information about separately managed accounts (SMAs) (i.e., advisory accounts that are not pooled investment vehicles) in Part 1A, Item 5, including the types of assets held and the use of derivatives and borrowings (NOTE: ERAs do not complete Item 5);
- Streamline and standardize the process of “umbrella” SEC registration of related advisers that satisfy certain conditions2 on one Form ADV using a new Schedule R (NOTE: related advisers that are special purpose vehicles (SPVs) or special purpose entities (SPEs) will NOT be reported on Schedule R3);
- Require RIAs to maintain additional materials related to the calculation and distribution of performance information per changes to the Books and Records Rule; and
- Make additional clarifying, technical and other amendments to Form ADV and technical amendments to certain Advisers Act rules.
For a more detailed summary of the Amendments, please refer to the Sidley Update published September 9, 2016.4
ALL Investment Advisers Initially Filing or Updating a Form ADV on or after October 1, 2017 Must Use the Revised Form ADV Part 1A
The Staff recently sent an email notification to RIAs and ERAs regarding implementation of the Amendments. The notification indicates that, beginning on October 1, 2017, ALL advisers (i.e., advisers applying for registration, RIAs, ERAs and state-registered advisers) filing an initial Form ADV or a Form ADV amendment (annual updating amendment or other-than-annual amendment) must use the revised version of Form ADV and provide responses to the Part 1A revisions (including all new and amended questions). Completeness checks in the Investment Adviser Registration Depositary (IARD) system will not allow the submission of filings with incomplete responses.
Most of the substantive changes to Part 1A appear under Item 1 and Item 5 (and the Schedule D sections relating to those Items) or are in connection with using the form to effect an “umbrella” SEC registration for certain types of related advisers. The Amendments do not affect Form ADV Part 1B (only used regarding state registration) or Part 2 (the brochure and brochure supplements). Advisers should allocate additional time and resources for completion of the revised form.
Addressing the Part 1A Revisions
Most RIAs and ERAs have a December 31 fiscal year-end and will likely first address the revised Part 1A requirements when preparing and filing their annual updating amendment in the spring of 2018. An RIA or ERA that files an other-than-annual amendment on or after October 1, 2017 but before its next annual updating amendment, however, must address the revised Part 1A requirements in the earlier amendment.
An RIA and an ERA must file an other-than-annual amendment “promptly” to report certain changes in the adviser’s business. These include, among others, a change to the adviser’s:
- Name or address;
- Form of organization (e.g., LP to LLC);
- Required ownership information;
- Control person and/or executive officer information (e.g., the appointment of a new Chief Compliance Officer); or
- Narrative Part 2 brochure or brochure supplement, if applicable and if the change is material (e.g., a new material conflict of interest or certain legal or disciplinary events).
Additionally, an RIA may be required to file an other-than-annual amendment to:
- Secure a private fund identification number (PFID) for a new private fund, which must be included on its Form PF filings (including those for the periods ending September 30 and December 31); and
- Update its eligibility information under Part 1A, Item 2, if the RIA (1) is newly registered based on the reasonable expectation it would meet the SEC’s eligibility requirements within 120 days of effectiveness and (2) in fact, has become eligible.
A state-registered adviser should consult the requirements of the relevant state(s) to determine its obligations regarding the filing of annual updating and other-than-annual Form ADV amendments.
An adviser that knows that it will make a change requiring an other-than-annual amendment or otherwise be required to file such an amendment in the next several months may prefer to file such amendment prior to October 1, 2017, if possible. That way, the adviser will file on the current Form ADV and perhaps avoid the need to complete the revised Form ADV prior to preparing its annual updating amendment.
In August 2017, the Staff issued an IM Information Update5 (Information Update) in response to inquiries received about circumstances in which an adviser determines that it must file an
other-than-annual Form ADV amendment on or after October 1, 2017 but before its next annual updating amendment would be due.
In the Information Update, the Staff addressed situations in which a Form ADV filer is required to make an unanticipated other-than-annual amendment before its next annual amendment is due. Under those circumstances, the filer must respond to new or amended items in Item 5 and the related Schedule D sections that would otherwise be required to be filled out on an annual basis; however, some filers noted that, in certain cases, this information may not be available as it was previously not required to be reported on Form ADV. For example, a filer asked:
[H]ow should an other-than-annual filer respond if the filer’s books and records did not capture the data necessary to respond completely to new Schedule D. Section 5.K.(2), which asks for the amount of regulatory assets under management and borrowings in a filer’s separately managed accounts that correspond to ranges of gross notional exposure as of the end of the filer’s fiscal year?
As noted above, the IARD system will not allow the submission of filings with incomplete responses.
According to the Information Update, in these circumstances, if the adviser does not have sufficient data to provide a complete response to a new or amended question in Item 5 or the Schedule D sections associated with that Item during the period ranging from October 1, 2017 to the filer’s next annual updating amendment, the Staff would not recommend enforcement action to the SEC if the adviser responds with a “0” as a placeholder in order to submit its Form ADV, with a corresponding note in the Schedule D Miscellaneous section to identify that a placeholder value of “0” was entered.
RIAs Must Comply With the Amended Books and Records Rule Regarding Communications Circulated or Distributed After October 1, 2017
In accordance with the amended Books and Records Rule, an RIA that distributes performance-related communications after October 1, 2017 must maintain additional records as follows:
- Records specified in Advisers Act Rule 204-2(a)(16) supporting performance claims in communications that are distributed or circulated to “any person” (previously an RIA was required to maintain such records if the communication was distributed or circulated to 10 or more persons); and
- Originals of all written communications received and copies of written communications sent by an RIA relating to the performance or rate of return of any or all managed accounts or securities recommendations.
These changes require an RIA that circulates or distributes any communication after October 1, 2017 that includes performance information generated prior to that date to maintain the materials listed in Advisers Act Rule 204-2(a)(16) that are necessary to form the basis for, or demonstrate the calculation of, such prior performance or rate of return.
1 “Form ADV and Investment Advisers Act Rules,” Investment Advisers Act Release No. 4509 (Aug. 25, 2016), available at: https://www.sec.gov/rules/final/2016/ia-4509.pdf. The amended Form ADV is available at: https://www.sec.gov/rules/final/2016/ia-4509-appendix-d.pdf. A summary of the amendments to Form ADV Part 1A is available at: https://www.sec.gov/rules/final/2016/ia-4509-form-adv-summary-of-changes.pdf. “Frequently Asked Questions on Form ADV and IARD” (Modified: June 12, 2017) (FAQs) are available at: https://www.sec.gov/divisions/investment/iard/iardfaq.shtml. See also “Amendments to Form ADV and Investment Advisers Act Rules,” Investment Advisers Act Release No. 4091 (May 20, 2015), available at: http://www.sec.gov/rules/proposed/2015/ia-4091.pdf.
2 American Bar Association, Business Law Section, SEC Staff No-Action Letter (Jan. 18, 2012), available at: https://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm; ABA Subcommittee on Private Investment Entities, SEC Staff No-Action Letter (Dec. 8, 2005), available at: https://www.sec.gov/divisions/investment/noaction/aba120805.htm.
3 Related advisers that are SPVs and SPEs continue to report in accordance with existing SEC staff (Staff) guidance. There is no provision for related ERAs to use Form ADV as an “umbrella” report;
i.e., each related ERA that is not an SPV or SPE must file its own separate Form ADV). See FAQs, note 1 above, Schedule R.
4 “SEC Adopts Form ADV Amendments to Require Reporting on Separately Managed Accounts and Clarify ‘Umbrella’ Registration” (Sept. 9, 2016), available at: https://www.sidley.com/en/insights/newsupdates/2016/09/sec-adopts-form-adv. See also Sidley Update, “SEC Proposes Form ADV Amendments to Require Reporting on Separately Managed Accounts and Clarify ‘Umbrella’ Registration” (June 2, 2015), available at: http://www.sidley.com/en/news/06-02-2015-investment-funds-advisers-and-derivatives-update.
5 IM Information Update “Information Update for Advisers Filing Certain Form ADV Amendments,”
IM-INFO-2017-06 (August 2017), available at: https://www.sec.gov/investment/im-information-updates.html.
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