RIA Compliance Blog
Amendments have been proposed to form ADV and certain rules under the Investment Advisers Act of 1940 that would have significant effects on reporting requirements for investment advisers. In addition to codification of “umbrella registration” which was initially proposed in an SEC no action letter to the American Bar Association in 2012, new information would be required regarding separately managed accounts and general advisory business.
Umbrella Registration
Larger investment managers to private funds or other pooled vehicles are often comprised of many legal entities conducting a single advisory business. The proposed modifications to form ADV, which are a codification of the SEC no action letter, would if approved allow for umbrella registration which would permit multiple private fund investment advisers that operate as a single business, on an affiliate basis, to register on a single form ADV as opposed to individual registrations. This new codification would require that the principal office of the filing investment adviser be located within the United States, that each investment adviser operate under a single code of ethics under the Advisers Act, that each adviser be subject to the Advisers Act (and therefore subject to SEC examination), and that the filing advisor and each relying advisor would advise only private funds or qualified clients (as defined in Rule 205-3 under the Advisers Act). While this is a more efficient method of reporting, as only one Form ADV would be required to be submitted by the filing adviser, it would require additional information on proposed Schedule R to Form ADV which includes more detailed information on the ownership structure of each relying investment adviser falling under the umbrella of the filing investment adviser submitting the Form ADV. Under proposed Schedule R each relying adviser would be required to provide identifying information, basis for registration and ownership information.
Separately Managed Accounts
In order for the SEC to better manage its risk assessment it has proposed requirements that would require additional information from investment advisers regarding separately managed accounts (“SMA”). Advisers would now be required to annually report, with such disclosures being broken down annually or semi-annually depending on the adviser’s amount of SMA AUM, their percentage of SMA assets in a set of ten broad categories. Under the proposed amendment all investment advisers with SMA AUM would be required to disclose their percentage of SMA assets which are invested in derivatives. In addition, there would be a new two-tiered system for reporting further information which would assist the SEC in reviewing how advisers use derivatives in their SMAs. For those advisers with SMA AUM between $150 million and $10 billion, there is a proposed requirement to report the number of accounts corresponding to certain categories of gross national exposure as well as the weighted average amount of borrowing in the adviser’s SMA accounts. Those advisers with more than $10 billion of SMA AUM would be required to report the aforementioned information as well as more detailed information regarding their use of derivatives.
Additional Identifying Information
In addition to the proposed umbrella registration and SMA regulations, there are additional amendments designed to gather additional information about the investment adviser, affiliations and business operations. These amendments would allow the SEC to enhance its risk-based assessment examination program. This new potential required information includes: (1) the investment adviser’s use of social media and all addresses associated therewith; (2) the number of the investment adviser’s offices where advisory business is conducted, along with information regarding location, number of employees which provided advisory functions at the largest 25 office locations and securities-related activities performed at the offices; (3) identification of any investment adviser’s CCOs which are also employed by a party other than the investment adviser; (4) information regarding the amount of assets each investment adviser manages for different client types and the adviser’s AUM attributable to foreign clients; and (5) enhanced recordkeeping rules designed to provide additional performance information and would no longer be limited to only those communications distributed to 10 or more people.
Implications
The purpose of all the proposed amendments is to assist the SEC in examination efforts and work to help the SEC better recognize any fraudulent activities related to investment advisers and hopefully reduce any such incidents. Comments regarding the amendments should be submitted on or before August 11, 2015.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.