The SEC recently adopted rules, originally proposed in May 2015, that expand the disclosure requirements in Form ADV, Part 1A. These amendments will be effective 60 days after the publication in the Federal Register and investment advisors will need to start complying starting on October 1, 2017. This means that if your firm’s fiscal year ends on December 31, 2017, you will need to comply with the Form ADV changes no later than your annual amendment filing in March 2018.
A summary of the more substantive enhancements to Part 1A is provided below.
1) Separately Managed Accounts (SMAs)
The changes to Form ADV, Part 1A are quite significant with respect to SMAs, which are defined in the adopting release as any advisory accounts other than pooled investment vehicles (e.g., investment company, private fund). Specifically, advisors will be required to provide information on an aggregate level regarding the SMAs they manage as well as the types of assets and the use of derivatives and borrowings in these accounts. Advisors will also be required to identify any custodians that hold at least 10% of the SMA assets under management.
2) Umbrella Registration for Private Fund Advisors
The SEC also adopted amendments that will allow advisors to more efficiently register on one Form ADV multiple private fund advisors that are operating as one single business. Umbrella registration can help make the registration process for such entities considerably easier. In order to take advantage of this option, advisors must meet the following conditions:
A) Each advisor entity advises only private funds and qualified clients in SMAs
B) The filing advisor’s principal office and place of business is in the United States
C) Each advisor entity, its employees, and persons acting on its behalf must be subject to the filing advisor’s control and supervision
D) Each advisor entity is subject to the Advisers Act and the rules thereunder and is also subject to examination by the SEC
E) Each advisor entity operates under a single code of ethics
3) Social Media Accounts
Item 1.I. of Schedule D was amended to require advisors to list their social media accounts and the addresses of their social media pages. Advisors need only to disclose accounts on social media platforms where they have control over the content. The social media accounts of an advisor’s employees need not be disclosed.
4) Office Locations
Advisors must now disclose the 25 largest office locations at which they conduct advisory activities, based on number of employees. Previously, advisors needed only to disclose their five largest offices.
5) Chief Compliance Officer
Advisors will now be required to disclose whether their chief compliance officer is compensated or employed by any entity other than the advisor or a related person of the advisor. In addition, the name and IRS Employer Identification Number of that entity must also be disclosed.
6) Performance Returns
Rule 204-2(a)(16), which currently requires SEC registered advisors to maintain records that support claims of performance in communications distributed to 10 or more persons, has been amended. Under the amended rule, records supporting such claims in communications that are distributed or circulated to even just one person must be maintained.
Additional substantive and technical changes were also made under the amendments. For more information, please contact NCA Compliance at contact@ncacompliance.com or 877-456-1380.
Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm specializing in SEC mock audits and forensic testing. Previously, she worked for the Securities and Exchange Commission and a large investment manager in New York.
