Amendments to Form ADV and Books and Records Rule

By September 6, 2016New in Compliance, SEC

August 25, 2016:  The SEC adopted amendments to several Investment Advisers Act rules and the investment adviser registration and reporting form to enhance the disclosure of information by investment advisers. These changes include reporting of social media sites, Regulatory Assets under Management (RAUM) by client category, SMA AUM by custodian, outsourced CCO information, use of derivatives, and retention of performance advertising records, among others.

The rule takes effect 10/31/16, with a compliance date of 10/01/17. Any adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after 10/01/17 will be required to provide responses to the form revisions. For advisers with a 12/31 year-end, the real impact will come in the first quarter of 2018. Amendments to Books and Records Rule 275.204-2 will apply to communications circulated or distributed after 10/01/17. Details of new and amended sections of Form ADV and record retention rules are outlined below. Access the final rule here:

Amendment Details of Amendment Amplification
General Instructions to Form ADV Part 1A The Amendments facilitate and standardize umbrella registration made available to registered private fund advisers that operate a single advisory business through multiple legal entities. The Amendments codify requirements set forth in the existing SEC guidance, and update certain portions of Form ADV to require additional disclosure. Uniform filing requirements for umbrella registration in Form ADV will provide more consistent data about, and create a clearer picture of, groups of private fund advisers that operate as a single business. The following factors indicate a single advisory business: commonality of advisory services and clients; a consistent application of the Advisers Act and the rules thereunder to all advisers in the business; and a unified compliance program. In 2012, the SEC issued guidance with respect to umbrella registration whereby one investment adviser (a “Filing Adviser”) would be permitted to file a single Form ADV on behalf of itself and other investment advisers (each, a “Relying Adviser”), provided that the Filing Adviser and each Relying Adviser were controlled by one another or under common control of a parent entity and conducted a single advisory business. Form ADV was designed to accommodate the registration request of an adviser structured as a single legal entity. As a result, private fund advisers that operated as a single advisory business but were organized as separate legal entities may have had to file multiple registration forms, even though the registration effectively was for the same advisory business.  Similar to the SEC’s prior guidance, the Amendments only allow Relying Advisers to use umbrella registration where their advisory business involves private funds.


Amendment to Item 5 of Form ADV Part 1A Item 5 currently requires an adviser to provide approximate ranges for three data points concerning the adviser’s business – the number of advisory clients, types of advisory clients, and RAUM attributable to client types.  The SEC is amending this disclosure to require an adviser to report the number of clients and the amount of RAUM for each category of clients as of the date the adviser determines its RAUM. Item 5 also has a new disclosure which requires advisers to report the number of clients to whom they provided advisory services but do not have RAUM.


Replacing ranges with more precise information will provide more accurate information about advisers and will enhance SEC analytics across investment advisers, i.e., providing actual numbers of clients and RAUM will allow the SEC to see the scale and concentration of assets by client type.
Amendment to Item 5.D. of Form ADV Part 1A


The instructions in the text preceding this Item are amended to state that if a client fits into more than one category, then the adviser should select the category that most accurately represents the client in order to avoid double counting clients and assets.


Amendment to Section 5 of Form ADV Schedule D An adviser that elects to report client assets in Part 2A of Form ADV differently from the RAUM it reports in Part 1A of Form ADV is now required to check a box noting that election.


New Item 5.F.(3) of Form ADV Part 1A


Disclosure of the approximate amount of the adviser’s total RAUM that is attributable to non-United States persons.


The Glossary to Form ADV provides that “United States person” has the same meaning as in Rule 203(m)-1 under the Advisers Act, which includes any natural person that is resident in the United States.


Amendment to Item 5.G.(3) of Form ADV Part 1A


Disclosure of the RAUM associated with all parallel managed accounts related to a registered investment company (or series thereof) or business development company that they advise.


The value of derivatives held in a parallel managed account should be calculated using the market value of the derivatives rather than the gross notional value, if that is how the value of the account is reported to the account holder.
Amendment to Item 5.I. of Form ADV Part 1A Wrap program disclosure – in addition to current information the adviser must disclose the total RAUM attributable to acting as a sponsor to and portfolio manager for a wrap fee program. Advisers will have to report the SEC file number or CRD number for any wrap fee sponsors they work with.


To prevent advisers from double-counting assets, the SEC added an instruction that assets reported in this new category should not be reported elsewhere in Item 5.I.(2).
New Item 5.K.(1) of Form ADV Part 1A Indicate RAUM in SMAs.


New Section 5.K.(1) of Form ADV Schedule D If 5.K.(1) is affirmative, the adviser is required to report the approximate percentage of separately managed account RAUM that are invested in twelve broad asset categories. Advisers with RAUM of $10 billion or more must report mid-year and end of year percentages.


Advisers with RAUM of less than $10 billion must report every year end.


New Instruction to Section 5.K. of Form ADV Schedule D Advisers may use their own methodologies and the conventions of their service providers in determining how to categorize RAUM. Methodologies must be consistently applied and consistent with information the advisers report internally and to current and prospective clients, but should not double count assets.
New Section 5.K.(2) of Form ADV Schedule D – 5.K.(2)(a) and 5.K.(2)(b)


SMA advisers must report information regarding the use of borrowings and derivatives in those accounts. Advisers with at least $500 million but less than $10 billion in RAUM attributable to SMAs are required to annually report in Section 5.K.(2)(b) the number of accounts and average borrowings that corresponded to ranges of net asset values and gross notional exposures, as of the date the adviser used to calculate its RAUM for purposes of the adviser’s annual updating amendment.


Advisers with at least $10 billion RAUM attributable to SMAs are required to annually report in Section 5.K.(2)(a) the number of accounts, average borrowings, and average derivatives exposures across six categories of derivatives, based on the same ranges of net asset values and gross notional exposures in Section 5.K.(2)(b), as of the date used by the adviser to calculate its RAUM for purposes of its annual updating amendment, and six months before that date.


Advisers with at least $500 million but less than $10 billion in SMA RAUM will be required to report on Section 5.K.(2)(b) the amount of SMA RAUM and the dollar amount (rather than the proposed average amount) of borrowings attributable to those assets that correspond to three levels of gross notional exposures.


Advisers with at least $10 billion in SMA RAUM will be required to report on Section 5.K.(2)(a) the information required in Section 5.K.(2)(b) as well as the derivative exposures across the six derivatives categories.  Advisers may limit their reporting for both (a) and (b) to individual accounts of at least $10 million.




The specific gross notional metrics used in Section 5.K.(2) are “gross notional value” and “gross notional exposure,” The calculation of gross notional exposure includes borrowings and the gross notional value of derivatives. The definition of “gross notional value” specifies how derivatives are measured when determining an account’s gross notional exposure.


Advisers will be required to report both the amount of RAUM and borrowings in their SMAs that correspond to ranges of gross notional exposure of those accounts.


Section 5.K.(2) include 3 categories of gross notional exposure by which accounts and borrowings are reported: less than 10%, 10% – 149% and 150% or more.


In the Adopting Release, the SEC clarified that an investment adviser should only report with respect to SMAs for which it has investment discretion. Furthermore, the SEC clarified that a sub-adviser to an SMA should only provide information about the portion of an account that it sub-advises. The SEC recognizes that this instruction may require both advisers and sub-advisers to report on the same RAUM (i.e., assets they both manage in an account), but believed this was consistent with the current reporting structure of RAUM in Form ADV.

New Section 5.K.(3) of Form ADV Schedule D


Advisers must identify any custodians of SMA RAUM, and the amount of the adviser’s RAUM attributable to SMAs held at the custodian. All custodians that account for 10% or more of RAUM that are SMA must be identified.  Additionally, similar disclosures apply for pooled investments and investment companies.





Amendment to Sections 7.A. and 7.B.(1) of Form ADV Schedule D


Additional disclosure regarding adviser financial affiliations are required under the Amendments. Advisers will now be required to provide identifying numbers, i.e., Public Company Accounting Oversight Board (“PCAOB”)-assigned numbers and CIK Numbers of accounting firms and affiliated entities.


The Amendments further require advisers to provide beneficial ownership data for every 3(c)(1) private fund it advises by requiring a simple yes or no response as to whether the adviser limits sales of a fund to qualified clients.


As long as an investor met the definition of a “qualified client” when it entered into the advisory contract with the adviser, then the investor is considered a “qualified client” even if it no longer meets the dollar amount thresholds of the rule.


Amendment to Form ADV –       Item 1.I. of Part 1A and Section 1.I. of Schedule D


Amending Item 1.I. to inquire whether the adviser has one or more accounts on social media platforms, (such as Twitter, Facebook or LinkedIn) and requesting the address of each of the adviser’s social media pages in addition to the address of each of the adviser’s websites in Section 1.I. of Schedule D. Limited to accounts referenced on social media platforms where the adviser controls the content. Neither an investment adviser’s employees’ social media accounts, nor the social media account of an investment adviser’s unregistered affiliate that is used solely to promote the business of such affiliate, are required to be disclosed. The stated intent for this change is to provide information to assist the SEC in targeting examinations of investment advisers, i.e., to compare the information advisers disseminate across social media strata with Form ADV and other disclosures, as well as to identify and monitor new platforms. The required reporting is limited to accounts on publicly available social media platforms.


Amendment to Form ADV – 1.F. of Part 1A and Section 1.F. of Schedule D Expand the information provided about an adviser’s offices other than its principal office and place of business.

¨       Intended to provide the SEC with the total number of offices at which advisers conduct advisory business and to provide information in Schedule D about the Firm’s 25 largest offices in terms of number of employees.

¨       The amendments require advisers to report each office’s CRD branch number (if applicable) and the number of employees who perform advisory functions from each office.

¨       The disclosure also requires the Firm to identify, from a list of securities-related activities, the business activities conducted from each office, and describe any other investment-related business conducted from each office.

¨       The IAPD system is “updated” so that by entering a branch’s CRD number, the address, phone number, and facsimile number of all additional offices will automatically populate on Section 1.F. of Schedule D.

Part of annual updating requirement (unless the change qualifies for an “other than annual” amendment).



Amendment to Item 1.J. of Form ADV Part 1A In addition to currently required information, the amendment requires an adviser to report whether its Chief Compliance Officer (CCO) is compensated or employed by any person other than the adviser (or a related person of the adviser) for providing CCO services to the adviser, and if so, to report the name and IRS Employer Identification Number (if any) of that other person unless that affiliate is a registered investment company in which case the adviser is not required to provide the identity of the affiliate.


SEC exam Staff has observed a wide spectrum of both quality and effectiveness of outsourced Chief Compliance Officers and firms. Identifying information for these third-party service providers, like others on Form ADV, will allow the exam Staff to identify all advisers relying on a particular service provider and could be used to improve the Staff’s ability to assess potential risks.
Amendment to Item 1.O. of Form ADV Part 1A Amendments require advisers to report their RAUM within three ranges: (1) $1 billion to less than $10 billion; (2) $10 billion to less than $50 billion; and (3) $50 billion or more.


The item specifies balance sheet assets of the adviser for the most recent fiscal year end.
Clarification of Section 7.B.(1) of Form ADV Schedule D Soliciting Adviser’s Clients to Invest in a Private Fund – the Amendments clarify that when answering whether the investment adviser’s “clients” are solicited to invest in the private fund in Question 19 in Section 7.B.(1) of Schedule D, investment advisers should not consider feeder funds as “clients” of the investment adviser (i.e., the master fund in a master-feeder structure).


Clarification of Section 7.B.(1) of Form ADV Schedule D Audited Financial Statements – the Amendments clarify that when answering whether a private fund’s audited financial statements are distributed to the fund’s investors in Question 23(g) in Section 7.B.(1) of Schedule D, investment advisers should answer considering the private fund’s audited financial statements from the most recently completed fiscal year.


Additionally, the Amendments clarify that when answering whether a report prepared by an auditing firm contains an unqualified opinion in Question 23(h) in Section 7.B.(1) of Schedule D, investment advisers should answer considering the reports prepared by the auditing firm since the investment adviser last filed its annual amendment.





Advisers Act Books and Records Rule 204-2 Amendments


The Amendments require investment advisers to maintain additional written materials related to the calculation and distribution of performance information.


Removal of the 10-Person Limitation for Communication Record Retention – the Amendments modify Rule 204-2(a)(16) of the Advisers Act to provide for the retention of all communications (whether distributed directly or indirectly) to any person demonstrating calculation of performance or rate of return.


Written Material Related to Performance Information – the Amendments also require investment advisers to maintain communications relating to the performance or rate of return of any or all managed accounts or securities recommendations; this requires originals of all communications received and sent relating to the performance of managed accounts or securities recommendations to be maintained.

Prior to the effectiveness of the Amendments, investment advisers were only required to maintain records supporting performance claims that were distributed to 10 or more persons.


The Amendments effectively expand Rule 204-2(a)(7) of the Advisers Act, which previously only required certain categories of written communications to be maintained. Therefore, investment advisers will now be required to ensure that all communications by the investment adviser and its employees are retained on the investment adviser’s recordkeeping system and that any e-mails or other communications by employees that use performance information have appropriate books and records back-up so as to comply with the Amendments.



This summary has been prepared by Horrigan Resources, Ltd. [] for reference purposes only. This document does not represent legal advice and is not intended to replace a thorough reading of new Amendments to Form ADV and revisions to the Books and Records Rule.

Access the final rule here:

©2016 Horrigan Resources, Ltd.


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