SEC Proposes Significant Changes to Reporting Obligations for Investment Advisers

May 27, 2015

On May 20, 2015, the SEC proposed a set of new rules under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), that will modify and, in most cases, increase an investment adviser’s reporting obligations under Form ADV.  The SEC has also proposed several modifications to an investment adviser’s record-keeping obligations relating to performance advertising under Rule 204-2.  A short summary of proposed rule changes follows. 

            1.         Proposed Amendments to Form ADV.

The SEC is proposing to modify Form ADV in three significant ways.  First, the proposed rules would codify and formally incorporate into Form ADV the no-action relief provided by the SEC’s Staff in 2012 enabling a private fund adviser to file a so-called "umbrella registration."  Second, new questions would be added to the Form that would increase the amount of information that an investment adviser would be required to provide with respect to its separately managed accounts ("SMAs").  Third, the proposed new rules would generally require an investment adviser to provide more detailed information regarding its investment advisory operations.  Each of these three proposed modifications is discussed in greater detail below.

                        a.         Umbrella Registration for Private Fund Advisers.

In 2012, the SEC’s Staff issued a no-action letter to the American Bar Association (the "2012 ABA No-Action Letter"), that enabled a private fund adviser (the "filing adviser") to register multiple affiliated legal entities ("relying advisers") as investment advisers under the Advisers Act using a single Form ADV.[1]  The 2012 ABA No-Action Letter imposed a number of conditions on the use of umbrella registration, including (i) a requirement that the filing adviser be a private fund adviser whose principal place of business is located in the United States, and (ii) a series of conditions designed to ensure that the filing adviser and each relying adviser are operated together as a single investment advisory business.

For the most part, the changes to Form ADV proposed by the SEC would merely formalize and codify the no-action relief granted in the 2012 ABA No-Action Letter.  In particular, the SEC is proposing to add new Schedule R to Form ADV that would need to be completed for each relying adviser and to add a number of clarifying instructions addressing the manner in which relying advisers should be treated in responding to various items in Form ADV.  In general, these proposed modifications to Form ADV are improvements that would eliminate a number of ambiguities with respect to the manner in which Form ADV applies to relying advisers.  In particular, except as noted below, the substantive conditions that must be satisfied in order for a filing adviser to rely on umbrella registration would not change. 

Private fund advisers should take note of several aspects of the proposed amendments: 

• First, the SEC has introduced a new interpretive element into the requirements for umbrella registration that was not previously apparent in the 2012 ABA No-Action Letter.  Specifically, in order to qualify for umbrella registration, the SEC has taken the position that each relying adviser must be "independently eligible" to register with the SEC as an investment adviser.  As proposed, Schedule R would therefore require a filing adviser to specifically identify the grounds on which each relying adviser can independently claim SEC jurisdiction over its investment advisory activities.  In practice, many relying advisers should be able to satisfy this new requirement.  For example, a relying adviser would be independently eligible to register with the SEC if:

(i)   it independently has more than $100 million in regulatory assets under management,

(ii)  it has its principal place of business outside of the United States, or

(iii) it controls, is controlled by or is under common control with the filing adviser, but only if such relying adviser shares the same principal place of business as the filing adviser. 

In some cases, an investment adviser that is currently filing as a relying adviser in reliance on the 2012 ABA No-Action Letter may not be able to satisfy this new independent eligibility requirement.  For example, unless the SEC modifies this proposed new requirement, a relying adviser with less than $100 million in regulatory assets under management whose principal place of business is located in the United States at a location other than the filing adviser’s principal place of business may find itself ineligible to be registered with the SEC and required instead to register with a State. 

• Second, new Schedule R would require a filing adviser to provide detailed information regarding the ownership structure of each of its relying advisers.  The level of detail to be required under new Schedule R would be the same as the level of detail that is currently required of the filing adviser under Schedules A and B of Form ADV. 
• Finally, the proposed revisions to the instructions to Form ADV state very clearly that umbrella registration is not available for exempt reporting advisers.  This is consistent with the conditions of the 2012 ABA No-Action Letter.  However, the SEC has not yet clarified whether the interpretive position adopted by the Staff in its FAQs relating to Form ADV (which permits an exempt reporting adviser to file umbrella registrations under slightly different conditions than the 2012 ABA No-Action Letter) will continue to apply.

                        b.         Separately Managed Accounts.

With respect to SMAs,[2] the proposed new rules will, among other things, require an investment adviser to provide a breakdown of its assets under management attributable to SMAs into 10 broad asset categories (e.g., publicly traded equity securities, US government bonds, state and municipal bonds, sovereign bonds, etc.) and to provide additional information concerning the use of borrowing and derivatives in such accounts.  In general, an investment adviser would need to provide such information as of the end of that investment adviser’s fiscal year.  However, an investment adviser with more than $10 billion in regulatory assets under management attributable to SMAs will be required to provide such information as of the end of each semi-annual period in an applicable fiscal year.[3]  In addition, an investment adviser will be required to identify each custodian that holds more than 10% of the investment adviser’s regulatory assets under management attributable to SMAs. 

                        c.         Other Proposed Amendments to Form ADV.

The SEC has proposed a number of other amendments to Form ADV that will increase the amount and types of information an investment adviser will need to report relating to its investment advisory business.  For example:

Item 1.  As proposed, Item 1 would be amended to require an investment adviser to provide all social media website addresses it uses, detailed information relating to its top 25 largest branch offices (including the number of investment professionals located at each such office), whether it outsources the Chief Compliance Officer function, and, to the extent the investment adviser’s own assets exceed $1 billion, the level of such proprietary assets within certain specified ranges.[4]

Item 5.  Item 5 would also be amended to require an investment adviser to provide a more detailed breakdown of its regulatory assets under management, including the number of clients and the amount of regulatory assets under management attributable to each of 14 specified classes of clients.  

The SEC has also proposed a number of other, more technical, changes to Form ADV.  These changes appear to be primarily intended to clarify ambiguities or request certain additional data points (such as CIK numbers) that will allow the SEC’s Staff to more readily cross-check information provided in the Form ADV against an investment adviser’s other regulatory filings.

             2.         Record-Keeping Obligations with Respect to Performance Advertising.

The SEC is also proposing several rule changes unrelated to the proposed changes to Form ADV described above.  Of these, the most significant is a tightening of the record-keeping obligations that apply to an investment adviser in respect of its performance advertising materials.[5]  In particular, the SEC is proposing to amend Rule 204-2 under the Advisers Act to require an investment adviser to maintain records backing up its performance claims made in communications to any person.  Currently, an investment adviser is only required to maintain such records with respect to communications sent to 10 or more persons.  In addition, the SEC is proposing to amend Rule 204-2 to require an investment adviser to maintain records of all communications sent to or received by the investment adviser relating to the investment performance of or the rate of return on any or all managed accounts or securities recommendations.  Currently, an investment adviser is only required to maintain records of such correspondence that fall into certain narrower categories.  

   [1]   See American Bar Association, Business Law Section, SEC Staff Letter (Jan. 18, 2012), available at http://www.sec.gov/divisions/investment/noaction/aba011812.htm.

   [2]   Assets managed in SMAs are essentially defined as all assets managed by an investment adviser other than regulatory assets under management attributable to registered investment companies, business development companies and other pooled investment vehicles.

   [3]   Such large SMA investment advisers will not be required to file Form ADV twice a year.  

   [4]   An investment adviser is required to file an interim amendment to its Form ADV promptly if any of the information provided in response to Item 1 becomes inaccurate in any way.  Although the SEC has proposed an exception to this requirement for changes in the levels of an investment adviser’s own assets, the SEC has not proposed such an exception for the other proposed items of additional information (e.g., the information relating to the adviser’s branch offices).

   [5]   The SEC is also proposing a number of other technical rule changes that will remove various transition rules adopted in connection with changes to the Advisers Act imposed under Dodd-Frank, which are no longer necessary.

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