New SEC Requirements for Form ADV and Recordkeeping

The SEC kicked off September by finalizing its Form ADV and adviser recordkeeping changes. IA Release No. IA-4509 was issued on September 1, 2016 with an effective date of October 31, 2016. Compliance with the new requirements will be required for all SEC registered advisers as of October 1, 2017.

The Form ADV changes add additional disclosures on separately managed accounts, modify how private fund managers’ report certain information, and add other technical amendments to several areas of Part 1 of the Form.

Rule 204-2, the Books and Records Rule, is updated to require that advisers must retain all supporting documentation for any performance information distributed to any person. Specifically, Rule 204-2(a)(16) was changed to remove the “ten or more persons” provision regarding distribution of performance data. Now, all performance information distributed to anyone must have the appropriate backup support for the calculation.

The primary changes to Form ADV come under Item 5 Part 1A which has historically served as the client and account type disclosure section.This section of the Form has been expanded to allow for additional disclosures on separately managed accounts under both Item 5 as well as a new Section 5 of Schedule D.

Some highlights of the new Item 5 and Schedule D Section 5 are as follows:

  1. Additional separately managed account data by asset category, with frequency of reporting determined by overall size of the adviser ($10 bil+ RAUM advisers report twice per year and all others annually at year-end)
  2. Data regarding borrowings and derivatives exposure in separately managed accounts
  3. Disclosure of any separately managed account custodians that account for over 10 percent of assets

Item 1 of the Part 1A is also being revised to require more details on the Chief Compliance Officer. The rationale behind this is to assist the SEC in identifying those firms utilizing outsourced CCOs. Outsourced CCOs were a focus of scrutiny this past fiscal year via targeted exams.

Private fund advisers will also see changes to how they report. Section 7 of Schedule D will be even longer and require new data fields, while at the same time making it easier for advisers to report utilizing an umbrella registration for all relying advisers that operate as one business. A new Schedule R will be filed for each relying adviser.

View IA Release No. IA-4509, September 1, 2016