New SEC Rule Impacts Adviser Reporting

The SEC adopted new final rules to enhance information reported by registered investment advisers under Form ADV. 

The Securities and Exchange Commission (SEC) adopted amendments to several Investment Advisers Act rules and the investment adviser registration and reporting form (Form ADV) to enhance the reporting and disclosure of information by investment advisers.

According to SEC, the amendments will improve the quality of information that investment advisers provide to investors and the commission. 

“These amendments are an important step in a series of rulemakings to enhance the SEC’s monitoring and regulation of the asset management industry,” says SEC Chair Mary Jo White.  “Requiring investment advisers to report this additional information will provide investors and the Commission with a better understanding of the risk profile of each adviser and the industry as a whole.”

In short, the amendments will require investment advisers to provide additional information regarding their separately managed account business, “including aggregate data related to the use of borrowings and derivatives, and information about other aspects of their advisory business, including branch office operations and the use of social media.”  In addition, the amendments “will facilitate streamlined registration and reporting for groups of private fund adviser entities operating a single advisory business.”  

Further amendments to Investment Advisers Act Rule 204-2 will require advisers to maintain additional records related to the calculation and distribution of performance information. According to the SEC, these records will be useful to the commission’s examinations staff in evaluating adviser performance claims, “and could reduce the incidence of misleading or fraudulent advertising and communications by advisers.”

By way of background, on May 20, 2015, SEC proposed amendments to Part 1A of Form ADV in three areas: revisions to fill certain data gaps and to provide additional information about investment advisers, including their separately managed account business; amendments to incorporate a method for private fund adviser entities operating a single advisory business to register with us using a single Form ADV; and clarifying, technical and other amendments to existing items and instructions.

“Several of the amendments to Form ADV relate to separately managed accounts,” SEC explains. “These amendments will require advisers to provide certain aggregate information about separately managed accounts that they advise. Other amendments to Form ADV that we are adopting are designed to improve the depth and quality of information that we collect on investment advisers, facilitate our risk monitoring initiatives and assist our staff in its risk-based examination program. Moreover, because Form ADV is available to the public on our website, these amendments also are intended to provide advisory clients and the public additional information regarding registered investment advisers.”

NEXT: Breaking down the rulemaking 

SEC officials note the are also adopting amendments to Part 1A that will “provide a more efficient method for the registration on one Form ADV of multiple private fund adviser entities operating a single advisory business (umbrella registration).”

“The SEC staff has provided guidance to private fund advisers regarding umbrella registration, and the amendments to incorporate umbrella registration into Form ADV will make the availability of umbrella registration more widely known to advisers,” SEC explains. “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 last set of amendments to Part 1A of Form ADV includes clarifying, technical and other amendments that are based on SEC staff’s experience with the form and responding to inquiries from advisers and their service providers. The amendments are designed to make it easier for advisers to understand and complete the form.

Separate from Form ADV, SEC is also adopting amendments to several Advisers Act rules: “First, we are adopting 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. 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.” Finally, SEC is further adopting “several technical amendments to rules under the Advisers Act to remove transition provisions that were adopted in conjunction with previous rulemaking initiatives, but that are no longer necessary.”

“We received 50 comment letters on our proposals, most of which were from investment advisers, trade or professional organizations, law firms and consultants. Commenters generally supported the goals of the proposal,” SEC concludes. “The majority of comments focused on reporting of separately managed accounts and umbrella registration. Several commenters supported collection of information on separately managed account clients, but many raised concerns about the public availability of the information and reporting on derivatives and borrowings. A diverse group of commenters supported umbrella registration. Commenters also generally supported the amendments to certain Advisers Act rules. We are adopting the proposed amendments with several modifications to address commenters’ concerns.”

The amendments have been published in full on the SEC website, and advisers will need to begin complying with the amendments on October 1, 2017.