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Monday, July 27 2015

SEC Proposes Amendments to Form ADV and Books and Records Rule

Certain Investment Advisers need to get ready for another round of changes. On June 12, 2015, the U.S. Securities and Exchange Commission (“SEC”) published a proposed rule recommending amendments to the Form ADV, the Books and Records Rule, Rule 204-2 and several other technical amendments. The proposed amendments to the Form ADV would require investment advisers to provide additional information that will help the SEC and investors to better understand the risk profile of the individual investment advisers and the industry in general. The proposed amendments to Rule 204-2 would expand the records investment advisers are required to maintain related to performance calculations communications. The following are some of the highlights of some of the proposed changes:

PROPOSED FORM ADV AMENDMENTS

Separately Managed Accounts

Several of the proposed Form ADV amendments would require investment advisers to provide more detailed information concerning separately managed accounts. The proposal states, “For purposes of reporting on Form ADV, we consider advisory accounts other than those that are pooled investment vehicles…to be separately managed accounts.” Under the proposed rule, investment advisers would be required to provide information about the types of assets held and, for certain investment advisers, the use of derivatives and borrowings in the account. Additionally, in certain circumstances, the proposed rule would require investment advisers to identify any custodians where separately managed account assets are held.

Additional Information about Investment Adviser

Under the proposal, additional questions would be added to the Form ADV. Some examples of the additional information that would be included in this area would be:

  • expanded branch office information;
  • information regarding the use of websites for social media platforms;
  • information regarding whether the investment adviser’s chief compliance officer is compensated or employed by anyone other than the investment adviser;
  • more specific information related to client types and regulatory assets under management attributable to client types;
  • information regarding the number of clients that the investment adviser provided investment advisory services to but does not have regulatory assets under management for; and
  • information regarding the amount of regulatory assets under management that is attributable to non-U.S. clients.

Umbrella Registration

Some investment advisers to private funds may be organized as a group of related investment advisers that are separate legal entities operating as, and appearing to investors and regulators to be, a single advisory business. Because of the way the Form ADV is currently organized, private fund advisers organized as a group of related investment advisers could have to file multiple investment adviser registration forms for the same advisory business. The SEC has proposed amendments to the Form ADV Part 1A that would simplify the process of registration for these investment advisers while providing additional and more consistent data about private fund advisers that operate in this manner.

PROPOSED RECORD KEEPING REQUIREMENTS AMENDMENTS

One of the proposed revisions to Rule 204-2 would require investment advisers to maintain performance calculations and communications that the investment adviser circulates or distributes to “any person” instead of “ten or more persons” as currently stated in Rule 204-2. Additionally, the SEC is proposing an amendment to require investment advisers to maintain originals of all written communications received and copies of written communications sent by an investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

The SEC has opened a 60 day response period for investment advisers to provide feedback regarding the proposed amendments. Comments will be accepted until August 11, 2015. To read the full please, please click here.

Investment advisers should continue to monitor developments regarding the proposed changes. Red Oak Compliance Solutions can help you with any questions and provide assistance with getting your documents in order.