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ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions.
The amendments to Form ADV became effective on October 1st. Unless you registered with the SEC on or after October 1st or have had a material change requiring an “other-than-annual” amendment since that date, you have not yet seen the following on the amended Form ADV.
1. Separately Managed Accounts
Prior to the amendments, investment advisors disclosed information on their pooled investment vehicles and the amount of total assets under management. They were also required to report information on the types of clients they serve and the total assets they manage for those clients.
The new Form ADV requires investment advisors to also report on their separately managed accounts. The following information is requested: the percentage of assets in separately managed accounts, the use of derivatives, and borrowings in their accounts by gross notional exposure. Advisors with less than $10 billion in regulatory assets under management will continue to update Form ADV annually while advisors with more than $10 billion in regulatory assets under management are now required to report two times a year.
2. Outsourced CCO
The SEC has previously stated its concern with CCOs who are not employed by the advisor. While the practice is not prohibited, the SEC does feel that having a CCO who is not an employee of the firm creates additional risks in that the CCO may not be as engaged in the day-to-day operations of the firm. The amended Form ADV specifically requests disclosure of a CCO’s employer when the CCO is employed by a person other than the advisor or a related person of the advisor. Retaining a compliance consultant to assist the advisor’s CCO in carrying out the compliance functions does not require disclosure.
Separate from Form ADV, the SEC also adopted amendments to the books and records rule, Rule 204-2, to require advisers to make and keep supporting documentation that demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person. Previously advisors were only required to retain supporting documentation for performance advertising. Advisers also will be required to maintain originals of all written communications received and copies of written communications sent by them related to the performance or rate of return of any or all managed accounts or securities recommendations.
There was a long list of changes made to Form ADV that range from technical changes made to questions and changes to clarify instructions to what is required for the form. Changes include a question on Schedule D requiring disclosure of the number of employees performing investment advisory functions in each of the advisor’s offices. Advisors are also now required to report advisor controlled social media profiles.
The SEC hopes that these amendments will close data gaps, and help the commission with evaluation reports, risk evaluation, and provide more detailed information to the general public about the industry.
The changes made to Form ADV are extensive and will also require more time and attention to complete so plan accordingly. The new Form ADV will also require advisors to separately managed accounts to keep good records of all the information requested. The SEC has acknowledged these unintended consequences but believes the new information requested is essential to closing data gaps and improving the overall understanding of the investment advisory industry.
It is imperative that advisors understand the information required to avoid penalties. As we have seen with cases settled by the SEC earlier this year, mistakes and misunderstandings resulting in erroneous disclosures on Form ADV can be quite expensive. Advisors are cautioned to begin the annual updating process earlier than usual to allow time to review and gather the new information. As always, ICSGroup is here to help.