On 25 August 2016, the US Securities and Exchange Commission adopted a final rule that amends Form ADV — the filing that investment advisers registered with the SEC use to apply for and maintain their registration and that exempt reporting advisers utilize to claim and maintain their registration exemption. The SEC also amended its books and records rule to require more documentation with respect to performance reporting records. While these amendments will go into technical effect in this calendar year, the SEC has delayed the substantive effectiveness of the amended ADV and the new books and records requirements until October 2017. This means that many advisers will not implement these new requirements until their first quarter 2018 annual updating amendment.
The proposed rule  generated a good amount of concern and consideration; the SEC received nearly 50 comment letters on the proposal from US and non-US industry participants, trade groups and law firms. Industry commenters focused on one large conceptual point (the new requirement to publicly disclose Form PF-style information for an adviser’s managed accounts) and several practical points (including the need to preserve, clarify and expand the ability of a family of advisers to file a single “umbrella registration”).
The final rule, however, is substantially similar to the proposed one, which means that managers will need to prepare to make more disclosures in their Form ADV, and many managers (especially non-US managers) will need to file multiple Form ADVs to cover their family of affiliated managers. In particular, the final rule contains the following provisions and requirements:
Separately Managed Accounts. Form ADV currently requires registered and reporting investment advisers publicly to schedule a good deal of information with respect to each private fund advised by them. The amended Form ADV will require new disclosures with respect to the portfolio investments of separately managed accounts, including — for certain advisers — with respect to asset categories and borrowings. These disclosures will be publicly available. This contrasts with the confidential treatment afforded by Form PF, which is currently required of certain registered investment advisers and which requires detailed disclosures of information with respect to the portfolio investments of private funds.
Umbrella Registration. The amended Form ADV incorporates the “umbrella registration” concept from the SEC Staff’s no-action letter to the American Bar Association on Jan. 18, 2012. The adopting release states the Commission’s view that the final rule is codifying the SEC Staff’s umbrella registration regime.
Social Media Disclosures. The proposed rule would have required expanded disclosure of social media sites and portals. The final rule largely gives effect to the proposal.
Other Offices. The amended Form ADV will continue to require disclosures of other offices.
Employee Compensation. If an adviser compensates an employee for finding “clients,” the amount of the compensation paid will need to be disclosed in the new Form ADV.
Use of Third-Party Compliance Auditors. The SEC did not include in the amended Form ADV a requirement that RIAs disclose third-party compliance auditors. (But note that the SEC Staff had previously indicated that they are working on a proposal that would involve mandatory annual audits of the private fund management business).
The Commission has adopted several final rules requiring registered advisers to retain a broader set of books and records related to performance advertising. First, advisers will be required to retain copies of all written communications sent by any such investment adviser relating to “the performance or rate of return of any or all managed accounts or securities recommendations.” Second, advisers will now be required to retain records that demonstrate the calculation of the performance or rate of return in any communication to any person (as opposed to the prior rule, which was limited to communications circulated to 10 or more persons). Accordingly, registered advisers should review their approval and retention procedures for both broadly distributed and narrowly tailored performance presentations. THFJ
1. Form ADV and Investment Advisers Act Rules, IA-4509 (Aug. 25, 2016). The Commission also made certain clarifying, technical and other amendments to Form ADV.
2. Amendments to Form ADV and Investment Advisers Act Rules, Release No. IA-4091 (May 20, 2015) (the “Proposing Release”).