Client Update
September 8, 2016
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Client Update
The SEC Adopts Form ADV
and Recordkeeping Rule
Amendments
On August 25
th
, the Securities and Exchange Commission (the “SEC”) adopted
final rules, forms, and amendments to modernize and enhance data reporting
requirements for investment advisers.
1
The amendments are primarily designed
to provide the SEC with the data that it believes that it needs to oversee the asset
management industry, including monitoring systemic risks and assisting the
SEC staff in examination and enforcement efforts. Among other things, the
amendments (i) codify the “umbrella registration” approach that many private
fund sponsors use to register multiple affiliates on Form ADV under the
Investment Advisers Act of 1940 (the “Advisers Act”); (ii) require significant
new information concerning separately managed accounts to be reported on
Form ADV; and (iii) impose new books and records requirements on advisers
relating to performance information. The amendments also require a registrant
to report if it outsources its chief compliance officer (“CCO”) function.
Private fund sponsors should review these amendments to prepare for future
revisions to Part 1A of Form ADV as well as changes to their recordkeeping
policies relating to performance information and investor communications.
2
The
compliance date for the amendments is October 1, 2017. Therefore, any initial
1
See Form ADV and Investment Advisers Act Rules, Advisers Act Release No. IA-4509 (Aug.
25, 2016), available at https://www.sec.gov/rules/final.shtml (the “Adopting Release”). The
amendments were originally proposed in May 2015 and discussed in an earlier Client Alert.
See Amendments to Form ADV and Investment Advisers Act Rules, Advisers Act Release
No. IA-4091 (May 20, 2015), available at http://www.sec.gov/rules/proposed.shtml.
Debevoise & Plimpton Client Update: Proposed Form ADV Amendments: The New SEC
Focus on Data . . . and Other Matters (Jun. 9, 2015), available at
http://www.debevoise.com/insights/publications/2015/06/proposed-form-adv-amendments.
2
The Adopting Release notes that securities authorities also intend to consider similar
changes that affect advisers registered with the states, who are also required to complete
Part 1B of Form ADV as part of their state registrations.
WASHINGTON, D.C.
Kenneth J. Berman
Gregory T. Larkin
NEW YORK
Jonathan Adler
Andrew M. Ahern
Erica Berthou
Michael P. Harrell
mpharrell@debevoise.com
Jordan C. Murray
David J. Schwartz
Rebecca F. Silberstein
rfsilberstein@debevoise.com
Julie Baine Stem
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September 8, 2016
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registrations or amendments filed on Form ADV on or after that date will be
required to comply with the amended Form.
Umbrella Registration for Relying Advisers
In its current form, Form ADV is designed for the registration of investment
advisers who conduct their business through a single legal entity. Many private
fund sponsors provide their investment advisory services through several legal
entities (including affiliated general partners and management companies) for a
range of tax, legal and regulatory reasons. In recognition that multiple filings by
private fund sponsors would not serve any regulatory purpose, the SEC staff has
permitted private fund sponsors to file a single Form ADV that covers the “filing
adviser” (generally, the primary U.S.-based investment adviser) as well as certain
affiliated advisers (“relying advisers”).
3
The amendments codify the umbrella registration approach for private fund
advisers that consist of multiple entities that operate a single advisory business,
subject to the following conditions (which largely reflect the SEC staff’s no-
action guidance):
Clients Are Private Funds and Related Separately Managed Accounts. The
filing adviser and relying advisers must advise only (i) private funds or
(ii) separately managed accounts (A) whose investors are qualified clients
that are otherwise eligible to invest in the advisers’ private funds and (B) that
pursue investment objectives and strategies that are substantially similar or
otherwise related to the advisers’ private funds;
U.S. Principal Place of Business. The filing adviser must have its principal
office and place of business in the United States (and, therefore, all of the
substantive provisions of the Advisers Act would apply to all of the filing
adviser’s and relying advisers’ investment advisory activities);
Subject to Filing Adviser’s Supervision and Control. Each of the relying
advisers and its employees and other persons acting on its behalf must be
subject to the supervision and control of the filing adviser;
Subject to the Advisers Act. The filing adviser and each relying adviser must
be subject to the Advisers Act and examination by the SEC; and
3
See American Bar Association, Business Law Section, SEC Staff No-Action Letter (Jan. 18,
2012), available at http://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm
at Question 4.
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September 8, 2016
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Single Code of Ethics and Compliance Program and Single CCO. The
advisers must operate under a single code of ethics and single set of written
compliance policies and procedures administered by a single CCO.
In addition, each of the relying advisers must be eligible to register with the SEC
(e.g., either because it has more than $100 million in assets under management,
because it is under common control and has the same principal place of business
as the filing adviser, or because its principal place of business is outside of the
United States).
Revised Form ADV includes general instructions for umbrella registration and
changes in format to accommodate multiple legal entities. The revised
instructions specify those questions that should be answered solely with respect
to the filing adviser and those that require the filing adviser to answer on behalf
of itself and its relying advisers. In addition, a new Schedule R must be filed with
respect to each relying adviser. Schedule R requires specified information for
each relying adviser, including its eligibility for SEC registration, form of
organization, and ownership information with respect to the relying adviser
(substantially the same as the reporting for direct and indirect ownership on
existing Schedules A and B). In addition, Schedule D requires advisers to identify
the filing advisers and relying advisers that manage or sponsor private funds
reported on Form ADV. This information will allow the SEC to identify the
specific adviser managing the private fund reported on Form ADV.
Of particular note, the umbrella filing approach is not being made available to
non-U.S. investment advisers or exempt reporting advisers. The Adopting
Release states that the SEC was concerned that a group of related registered
investment advisers based inside and outside the United States could designate a
non-U.S. adviser as the filing adviser and assert that the Advisers Act’s
substantive provisions would not apply to the U.S.-based relying advisers’
dealings with their non-U.S. clients. In the case of registered investment advisers
that do not have any offices in the United States, the SEC concluded that
umbrella registration is intended to apply only where its staff “has access to and
can readily examine the filing and relying advisers and where the Advisers Act
and rules thereunder fully apply to all advisers (and clients) under the umbrella
registration.” This would not be the case for a related group of non-U.S. advisers.
In the case of exempt reporting advisers, the SEC concluded that it would need
to develop different conditions to determine whether a group of exempt
reporting advisers is operating a single advisory business. To the extent that
exempt reporting advisers, including private fund sponsors that are exempt from
registration under Section 203(m) (the so-called private fund adviser exemption),
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September 8, 2016
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have affiliated entities that might also be entitled to rely on this exemption, each
adviser will have to file a separate Form ADV.
Existing SEC staff positions permit certain exempt reporting advisers to file a
single Form ADV on behalf of multiple special purpose entities (“SPEs”). The
Adopting Release states that these positions are not being withdrawn.
4
Separate Account Disclosure
Several of the amendments to Form ADV are designed to collect more specific
information about advisers’ separately managed accounts—that is, any client
that is not a pooled investment vehicle (i.e., registered investment companies,
business development companies, and pooled investment vehicles that are not
investment companies (i.e., private funds)). The charts that will have to be
completed are attached as Appendix 1 and have been modified from the proposed
versions in certain respects. In most circumstances, the SEC is seeking to collect
information that is comparable to information provided with respect to private
funds on Form PF, but unlike the information provided on Form PF, this
information will be public.
Investment advisers will be required to report the approximate percentage of
separately managed account regulatory assets under management that are
invested in 12 broad asset categories (an expansion from the 10 originally
proposed).
5
Advisers will be required to include end of year information as part
of their annual filing, and advisers with more than $10 billion in regulatory
assets under management attributable to separately managed accounts will also
4
Frequently Asked Questions on Form ADV and IARD, Reporting to the SEC as an Exempt
Reporting Adviser (Mar. 2012) available at
https://www.sec.gov/divisions/investment/iard/iardfaq.shtml#exemptreportingadviser. The
FAQ states that the exempt reporting adviser may include an SPE on its Form ADV rather
than filing a separate Form ADV for the SPE where, among other things, the SPE (i.e., a
private fund’s general partner or managing member) does not exercise discretionary
authority over the fund’s assets other than the hiring or firing of the adviser to the fund and
acts as the SPE only for private funds or other pooled investment vehicles advised by the
exempt reporting adviser. In addition, the FAQ does not require a separate Form ADV for an
SPE that has no employees or other persons acting on its behalf other than officers,
directors, partners or employees of the exempt reporting adviser even if the SPE retains and
exercises discretionary authority over the private fund's assets. In these circumstance,
(i) the SPE may act as the SPE only for private funds or other pooled investment vehicles
advised by the exempt reporting adviser, (ii) the exempt reporting adviser must control the
SPE, (iii) the investment advisory activities of the SPE must be subject to the Advisers Act,
and (iv) the SPE, its officers, directors, partners, employees and persons acting on its behalf
must be subject to the exempt reporting adviser’s supervision and control.
5
In response to suggestions, the SEC added new categories for “Cash and Cash Equivalents”
and “Non-Exchange-Traded Equity Securities.”
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be required to include mid-year information as part of their annual filing.
Advisers will be permitted to use their own consistently applied methodologies
in determining how to categorize assets that may be classified into multiple
categories.
Investment advisers with at least $500 million in regulatory assets under
management attributable to separately managed accounts will be required to
report information regarding the use of borrowings and derivatives in those
accounts (an increase from the originally proposed minimum threshold of $150
million). Further detailed information about derivatives exposures will be
required from investment advisers with at least $10 billion in regulatory assets
under management attributable to separately managed accounts.
A number of commenters had expressed concerns about the public disclosure of
the information contained in the charts. While the SEC did not adopt
suggestions that this information be provided to the SEC on a confidential basis,
it believes that certain of the changes from the proposal will mitigate these
concerns.
Finally, the proposals require investment advisers to identify any custodians that
account for at least 10 percent of separately managed account regulatory assets
under management. This information must be reported whether or not the
adviser or the adviser’s related person has custody of assets in separately
managed accounts.
Other Form ADV Amendments; Outsourced CCOs
The amendments require investment advisers to report additional information
on Form ADV. Set forth below is a summary of the amendments that may be
particularly relevant for private fund sponsors:
Social Media Presence. An investment adviser will be required to disclose the
adviser’s accounts on social media platforms (e.g., Twitter, Facebook and
LinkedIn) where the adviser controls the content.
Office Information. An investment adviser will be required to provide the
total number of offices at which it conducts investment advisory business
and additional information about its 25 largest offices, including the number
of employees who perform advisory functions and the nature of business
activities conducted from each office.
Assets on the Adviser’s Balance Sheet. An investment adviser with assets of
$1 billion or more will be required to report its assets within three ranges:
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(1) $1 billion to less than $10 billion; (2) $10 billion to less than $50 billion;
and (3) $50 billion or more.
Additional Information about Advisory Business. There are certain
amendments to the information currently required from an investment
adviser regarding the number of advisory clients, the types of advisory
clients, and regulatory assets under management attributable to client types.
Additional Private Fund Reporting. The amendments includes several
changes to the private fund disclosure in Section 7.B.(1) of Schedule D of
Part 1A of Form ADV, including requiring an adviser to a private fund that
qualifies for the exclusion from the definition of investment company under
section 3(c)(1) of the Investment Company Act of 1940 to report whether it
limits sales of the fund to qualified clients.
In addition, an investment adviser will be required to report whether its CCO is
compensated or employed by any person other than the adviser or a related
person of the adviser for providing CCO services and identify the service
provider. This amendment reflects SEC skepticism concerning the outsourcing
of the CCO function. The Adopting Release reiterates that the SEC’s
examination staff “has observed a wide spectrum of both quality and
effectiveness of outsourced [CCOs] and firms” and that the disclosure will allow
the SEC “to identify all advisers relying on a particular service provider and could
be used to improve [its] ability to assess potential risks.”
Performance Information
Reflecting the SEC’s focus on the calculation of performance information
(which has been highlighted as a priority by the SEC’s Office of Compliance
Inspections and Examinations), the SEC adopted amendments to Rule 204-2
under the Advisers Act relating to books and records concerning performance
information. Specifically, the amendments require investment advisers to retain
(i) materials supporting performance claims (i.e., materials that demonstrate the
calculation of the performance or rate of return) in communications that are
distributed to any person (removing the current 10 or more persons condition)
and (ii) originals of all written communications received and sent relating to the
performance of managed accounts or securities recommendations.
These amendments place greater emphasis on the need to ensure that all
communications by an adviser and its employees are captured on the adviser’s
recordkeeping system and that performance information contained in any
e-mails or other communications by employees (including one-on-one client
communications) is substantiated in the adviser’s books and records (and thus
subject to SEC examination).
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* * *
As a practical matter, the amendments to Form ADV will not impact current
registrants until they update their Form ADVs in the first quarter of 2018.
However, private fund sponsors should begin the process of identifying the type
of information that they will have to include in their updating amendments.
Investment advisers filing an initial Form ADV on or after October 1, 2017 will
be required to provide responses to the form revisions
Private fund sponsors should also prepare for changes to their recordkeeping
policies relating to performance information and investor communications.
Investment advisers that circulate or distribute communications after October 1,
2017 that include performance information (including performance information
that predates that date) will be required to maintain the materials that
demonstrate the calculation of the performance in accordance with the
amendments.
* * *
Please contact us with any questions you may have.
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Appendix 1
SECTION 5.K.(1) Separately Managed Accounts
After subtracting the amounts reported in Item 5.D.(3)(d)-(f) from your total regulatory assets under
management, indicate the approximate percentage of this remaining amount attributable to each of the
following categories of assets. If the remaining amount is at least $10 billion in regulatory assets under
management, complete Question (a). If the remaining amount is less than $10 billion in regulatory assets
under management, complete Question (b).
Any regulatory assets under management reported in Item 5.D.(3)(d), (e), and (f) should not be reported
below.
If you are a subadviser to a separately managed account, you should only provide information with respect to
the portion of the account that you subadvise.
End of year refers to the date used to calculate your regulatory assets under management for purposes of your
annual updating amendment. Mid-year is the date six months before the end of year date. Each column should
add up to 100% and numbers should be rounded to the nearest percent.
Investments in derivatives, registered investment companies, business development companies, and pooled
investment vehicles should be reported in those categories. Do not report those investments based on related
or underlying portfolio assets. Cash equivalents include bank deposits, certificates of deposit, bankers’
acceptances and similar bank instruments.
Some assets could be classified into more than one category or require discretion about which category applies.
You may use your own internal methodologies and the conventions of your service providers in determining
how to categorize assets, so long as the methodologies or conventions are consistently applied and consistent
with information you report internally and to current and prospective clients. However, you should not double
count assets, and your responses must be consistent with any instructions or other guidance relating to this
Section.
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(a)
Asset Type Mid-year End of year
(i) Exchange-Traded Equity
Securities
_____%
(ii) Non Exchange-Traded Equity
Securities
(iii) U.S. Government/Agency Bonds
(iv) U.S. State and Local Bonds
(v) Sovereign Bonds
(vi) Investment Grade Corporate
Bonds
(vii) Non-Investment Grade
Corporate Bonds
(viii) Derivatives
(ix) Securities Issued by Registered
Investment Companies or
Business Development
Companies
(x) Securities Issued by Pooled
Investment Vehicles (other than
Registered Investment
Companies or Business
Development Companies)
(xi) Cash and Cash Equivalents
(xii) Other
Generally describe any assets included in “Other”
(b)
Asset Type End of year
(i) Exchange-Traded Equity Securities _____%
(ii) Non Exchange-Traded Equity Securities
(iii) U.S. Government/Agency Bonds
(iv) U.S. State and Local Bonds
(v) Sovereign Bonds
(vi) Investment Grade Corporate Bonds
(vii) Non-Investment Grade Corporate Bonds
(viii) Derivatives
(ix) Securities Issued by Registered Investment
Companies or Business Development Companies
(x) Securities Issued by Pooled Investment Vehicles
(other than Registered Investment Companies or
Business Development Companies)
(xi) Cash and Cash Equivalents
(xii) Other
Generally describe any assets included in “Other”
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SECTION 5.K.(2) Separately Managed Accounts - Use of Borrowings and Derivatives
If your regulatory assets under management attributable to separately managed accounts are at least $10
billion, you should complete Question (a). If your regulatory assets under management attributable to
separately managed accounts are at least $500 million but less than $10 billion, you should complete
Question (b).
(a)
In the table below, provide the following information regarding the separately managed accounts you advise.
If you are a subadviser to a separately managed account, you should only provide information with respect to
the portion of the account that you subadvise. End of year refers to the date used to calculate your regulatory
assets under management for purposes of your annual updating amendment. Mid-year is the date six months
before the end of year date.
In column 1, indicate the regulatory assets under management attributable to separately managed accounts
associated with each level of gross notional exposure. For purposes of this table, the gross notional exposure of
an account is the percentage obtained by dividing (i) the sum of (a) the dollar amount of any borrowings and (b)
the gross notional value of all derivatives, by (ii) the regulatory assets under management of the account.
In column 2, provide the dollar amount of borrowings for the accounts included in column 1.
In column 3, provide aggregate gross notional value of derivatives divided by the aggregate regulatory assets
under management of the accounts included in column 1 with respect to each category of derivatives specified
in 3(a) through (f).
You may, but are not required to, complete the table with respect to any separately managed account with
regulatory assets under management of less than $10,000,000.
Any regulatory assets under management reported in Item 5.D.(3)(d), (e), and (f) should not be reported
below.
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(i) Mid-Year
Gross
Notional
Exposure
1
Regulatory
Assets Under
Management
2
Borrowings
3
Derivative Exposures
(a) Interest
Rate
Derivative
(b) Foreign
Exchange
Derivative
(c) Credit
Derivative
(d) Equity
Derivative
(e) Commodity
Derivative
(f) Other
Derivative
Less than
10%
10-149%
150% or more
Optional: Use the space below to provide a narrative description of the strategies and/or manner in which
borrowings and derivatives are used in the management of the separately managed accounts that you advise.
(ii) End of Year
Gross
Notional
Expo- sure
1
Regulatory
Assets Under
Management
2
Borrowings
3
Derivative Exposures
(a) Interest Rate
Derivative
(b) Foreign
Exchange
Derivative
(c) Credit
Derivative
(d) Equity
Derivative
(e) Commodity
Derivative
(f) Other
Derivative
Less than 10%
10-149%
150% or more
Optional: Use the space below to provide a narrative description of the strategies and/or manner in which
borrowings and derivatives are used in the management of the separately managed accounts that you advise.
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(b)
In the table below, provide the following information regarding the separately managed accounts you advise as
of the date used to calculate your regulatory assets under management for purposes of your annual updating
amendment. If you are a subadviser to a separately managed account, you should only provide information
with respect to the portion of the account that you subadvise.
In column 1, indicate the regulatory assets under management attributable to separately managed accounts
associated with each level of gross notional exposure. For purposes of this table, the gross notional exposure of
an account is the percentage obtained by dividing (i) the sum of (a) the dollar amount of any borrowings and (b)
the gross notional value of all derivatives, by (ii) the regulatory assets under management of the account.
In column 2, provide the dollar amount of borrowings for the accounts included in column 1.
You may, but are not required to, complete the table with respect to any separately managed accounts with
regulatory assets under management of less than $10,000,000.
Any regulatory assets under management reported in Item 5.D.(3)(d), (e), and (f) should not be reported
below.
Gross Notional Exposure
1
Regulatory Assets Under Management
2
Borrowings
Less than 10%
10-149%
150% or more
Optional: Use the space below to provide a narrative description of the strategies and/or manner in which
borrowings and derivatives are used in the management of the separately managed accounts that you advise.
