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SEC Amends Recordkeeping Rules

SEC Amends Recordkeeping Rules

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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.


On August 25, 2016, the Securities and Exchange Commission (“SEC”) adopted amendments to the Investment Advisers Act of 1940 (the “Advisers Act”) and Form ADV to enhance and improve the reporting requirements for registered investment advisers (“RIAs”). The Amendments become effective on October 1, 2017. According to the Adopting Release, the purpose of the Amendments is to:

  • Improve the depth and quality of information that the SEC collects on RIAs;
  • Make it easier for advisers to understand and complete the Form ADV;
  • Facilitate the SEC’s risk monitoring initiatives; and
  • Provide advisory clients and the public with additional information regarding RIAs

The most noteworthy requirements are summarized below.

1.     Increased Disclosures Concerning Separately Managed Accounts (“SMAs”)

The Amendments will require increased information concerning SMAs (advisory accounts other than those that are pooled investment vehicles) by adding specific questions to Section 5 of Form ADV with respect to a) the type of asset(s) held by the SMAs; b) the use of derivatives and borrowing; and c) the role of custodians.

  • Type of Asset(s) held by the SMAs
    The Amendments require investment advisers who have investment discretion with respect to SMAs to report the approximate percentage of their SMA assets invested in twelve broad asset categories:

    • Exchange-Traded Equity
    • Non-Exchange Traded Equity Securities
    • U.S. Government Bonds
    • U.S. State and Local Bonds
    • Sovereign Bonds
    • Corporate Bonds-Investment Grade
    • Corporate Bonds-Non-Investment Grade
    • Derivatives
    • Securities Issued by Registered Investment Companies and Business Development Companies
    • Securities Issued by other Pooled Investment Vehicles
    • Cash and Cash Equivalents
    • Other

    To the dismay of many commenters who expressed concern regarding the public disclosure of SMA information, the SEC disagreed that the new reporting requirements could compromise trading strategies of advisers. The SEC stated in the Adopting Release that since the required SMA disclosure includes a limited number of data points that are presented both in aggregate and in broad categories and since there is a time lag between those data points and any public reporting, the public disclosures would not reveal proprietary investment strategies.

    The SEC, however, is mindful of commentators’ concerns regarding disclosure of client-specific information and related competition concerns. Accordingly, the SEC revised Section 5.D., which lists the number of advisory clients in categories, to include a “fewer than 5 clients” column and Section 5.K.(2) no longer requires reporting of the number of accounts.

  • Disclosure of SMA Derivatives and Borrowing (Section 5.K.(2))
    The Amendments will require RIAs with $500 million to $10 billion in RAUM attributable to SMAs to report information on the use of borrowing and derivatives in such SMAs. In response to commenters, the SEC will require RIAs to base both the RAUM and borrowings in their SMAs that correspond to ranges of gross notional exposure of those accounts, rather than net asset value as proposed.

    The SEC stated that these changes should reduce the burdens for advisers completing this section while providing SEC staff with additional information regarding borrowings and derivatives exposures in SMAs.

  • SMA Custodian Identification (Section 5.K.(3))
    RIAs will be required to:

    • Identify any custodian that accounts for at least 10 percent (10%) of total RAUM attributable to such investment adviser’s SMAs and such custodian’s office location.
    • Disclose the amount of RAUM held at each such custodian.

2.     Umbrella Registration

Because Form ADV was designed for a single legal entity, it did not address private fund advisers that operate as a single advisory business but are organized as separate legal entities. The Amendments to Form ADV will make it possible for multiple legal entities that operate as a single advisory business to take advantage of umbrella registration.

  • Requirements to Rely on Umbrella Registration
    The Amendments update Form ADV’s General Instructions and establish five preconditions (consistent with those set forth in the previous guidance) that must be satisfied in order for a group of private fund advisers that operate as a single advisory business to qualify for Umbrella Registration:

    • The Filing Adviser and each Relying Adviser advise only private funds and/or “qualified clients” in SMAs that are otherwise eligible to invest in the private funds advised by the Filing Adviser or a Relying Adviser and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds;
    • The Filing Adviser’s principal office and place of business is in the United States, and all of the substantive provisions of the Advisers Act and rules apply to the Filing Adviser and each Relying Adviser;
    • Each Relying Adviser, its employees, and persons acting on its behalf are subject to the Filing Adviser’s supervision and control;
    • Each Relying Adviser’s advisory activities are subject to the Advisers Act and rules, and subject to SEC examination; and
    • The Filing Adviser and each Relying Adviser operate under a single Code of Ethics and written policies and procedures adopted and implemented in accordance with Rule 206(4)-7 of the Advisers Act and administered by a single chief compliance officer in accordance with the rule.

3.     Additional Information on Form ADV

The Amendments require investment advisers to disclose the following additional information on Form ADV:

  • Adviser’s Internet Presence (Section 1.I)
    RIAs were previously required to provide their website address only. They are now also required to disclose all publicly available social media platforms where the RIA has a presence for which it controls the content (e.g., Twitter, Facebook, LinkedIn).
  • Adviser’s Physical Office Locations (Section 1.F.)
    Form ADV previously requested general information about an adviser’s principal office and place of business and the locations in which the firm’s books and records are held. RIAs are now required to provide the total number of offices in which they conduct business as well as information about their 25 largest offices, based on the number of personnel. Such information includes:

    • each office’s CRD branch number (if applicable);
    • the number of employees performing advisory functions from such office;
    • the identity from a categorical list of securities-related activities that are conducted from such office; and
    • a narrative description of any other investment-related business conducted from such office.
  • Chief Compliance Officer Designation (Section 1.J.)
    RIAs were previously required to provide the name and contact information of their CCO. They are now required to confirm whether the CCO is employed by someone other than the RIA or a related person of the RIA (unless it is a registered investment company advised by the investment adviser), and if so, the name and EIN (if any) of that person.
  • Balance Sheet Assets (Section 1.O.)
    RIAs were previously required to indicate whether they had assets greater than $1 billion (i.e., assets on the adviser’s own balance sheet, not assets under management). RIAs with assets of $1 billion or more are now required to provide a range for their total assets: $1-10 billion; $10-50 billion; or $50 billion or more.
  • Financial Industry Affiliations; Private Fund Updates
    The Amendments require RIAs to:

    • Provide identifying numbers of their related persons listed on Schedule D, Section 7.A. (e.g., CIK numbers and Public Company Accounting Oversight Board registration numbers).
    • With respect to any private fund listed on Schedule D, Section 7.B.(1) that is relying on the exemption set forth in Section 3(c)(1) of the Investment Company Act of 1940, confirm whether sales of the private fund are limited to “qualified clients”.

4.     Clarifying Amendments and Technical Changes

Two notable clarifying changes relate to solicitation of an investment adviser’s clients and audited financial statements:

  • Soliciting Adviser’s Clients to Invest in a Private Fund (Section D, Question 19, Section 7.B.(1))
    The Amendments clarify that when answering whether the investment adviser’s “clients” are solicited to invest in the private fund, investment advisers should not consider feeder funds as “clients” of the investment adviser (i.e., the master fund in a master-feeder structure).
  • Audited Financial Statements (Section D, Question 23(g), Section 7.B.(1) and Question and 23(h))
    The Amendments clarify that when answering whether a private fund’s audited financial statements are distributed to the fund’s investors, RIAs 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, RIAs should answer considering the reports prepared by the auditing firm since the RIA last filed its annual amendment.

5.     Performance Advertising Books and Records
Previously, RIAs were only required to maintain records supporting performance claims that were distributed to 10 or more persons. Now the amended rule will require advisers to maintain originals of all written communications received and copies of written communications sent by the adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

In light of the multitude of the amendments, this summary does not address each and every change adopted. We will be working directly with our clients to implement all of these changes prior to the effective date of the Amendments. For more in depth information on the amendments or for help updating your firm’s Form ADV and related policies and procedures, please contact ICSGroup.

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