Compliance FAQ: SEC Releases New RIA Form ADV Filing Requirements Effective October 2017

This month, Lexington Compliance looks at new RIA Form ADV filing requirements released by the SEC and effective October 2017:

On Aug. 25, 2016, the Securities and Exchange Commission (“SEC”) adopted a series of rule amendments that will impact all federally-registered investment advisory firms. In particular, the SEC is requiring additional Form ADV disclosures for registered investment adviser (“RIA”) firms related to separately managed accounts, social media accounts, types of clients, branch offices, and the use of an outsourced Chief Compliance Officer (CCO). However, the SEC has delayed the effective date of the new requirements to Oct. 1, 2017. Thus, any SEC-registered RIA filing an amendment beginning on Oct. 1, 2017, will likely be required to provide additional information on the Form ADV Part 1 and other related filings.

The SEC is set to implement a number of new investment adviser filing requirements that largely mirror the initial rule proposal released by the SEC on May 20, 2015. While the finalized rule also includes some new books and records requirements related to maintaining client performance information, this particular update is exclusively focused on the new Form ADV filing requirements that are bucketed into four categories:

  • New filing requirements for all SEC-registered RIA firms
  • New filing requirements for SEC-registered RIA firms that offer wrap fee programs
  • New filing requirements for larger SEC-registered RIA firms that have many branch offices
  • New filing requirements for larger SEC-registered RIA firms that offer separately managed accounts

The SEC staff notes that "these items were developed through our staff’s experience in examining and monitoring investment advisers, and are designed to enhance our understanding and oversight of investment advisers and to assist our staff in its risk-based examination program." As RIA compliance consultants, we believe it is likely that many, if not all, of the states will adopt similar new requirements in the coming months.

1. All SEC-registered RIA firms will need to disclose company social media pages, more details on client types, additional information related to separately managed accounts, and the use of outsourced chief compliance officers

The most notable new requirement is related to Item 1.I. of Schedule D which will require advisory firms to disclose all social media pages (e.g. Twitter, LinkedIn, Facebook, etc.) for which the "adviser controls the content" on "publicly available social media platforms." The firm will not be required to disclose details on individual social media pages for individual staff members. The SEC staff notes that this new requirement will help them prepare for examinations, track continuity of advertising messaging across various platforms, and identify new emerging social media platforms.

All SEC-registered RIA firms will also need to disclose additional information in Item 5 of the Form ADV. In particular, the agency notes that "Item 5 currently requires an adviser to provide approximate ranges for three data points concerning the adviser’s business – the number of advisory clients, the types of advisory clients, and regulatory assets under management (AUM) attributable to client types." In the new rule, the SEC will now "require an adviser to report the number of clients and amount of regulatory assets under management attributable to each category of clients as of the date the adviser determines its regulatory assets under management." Furthermore, the agency will also now require "advisers to report the number of clients for whom they provided advisory services but do not have regulatory assets under management in order to obtain a more complete understanding of each adviser’s advisory business."

In addition, in Section 5.K.(1) of Schedule D, "advisers will be required to report the approximate percentage of separately managed account regulatory assets under management that are invested in twelve broad asset categories." Also, the SEC is "adopting amendments to add Section 5.K.(2) of Schedule D to Form ADV to require advisers to separately managed accounts to report information regarding the use of borrowings and derivatives in those accounts." Furthermore, the SEC is amending "Form ADV to require advisers to identify any custodians that account for at least ten percent of separately managed account regulatory assets under management, and the amount of the adviser’s regulatory assets under management attributable to separately managed accounts held at the custodian."

Lastly, the agency continues to demonstrate its focus on advisory firms that use an outsourced, third- party Chief Compliance Officer (CCO) by making an update to Item 1.J. of the Form ADV. The SEC staff notes that "Item 1.J. of Form ADV currently requires each adviser to provide the name and contact information for the adviser’s chief compliance officer." In the new amendment, Item 1.J. will now "require an adviser to report whether its chief compliance officer is compensated or employed by any person other than the adviser (or a related person of the adviser) for providing chief compliance officer services to the adviser, and if so, to report the name and IRS Employer Identification Number (if any) of that other person." This new requirement should put any RIA firms that have used an outsourced CCO on high alert as the SEC notes that "our examination staff has observed a wide spectrum of both quality and effectiveness of outsourced chief compliance officers and firms. Identifying information for these third-party service providers, like others on Form ADV, will allow us to identify all advisers relying on a particular service provider and could be used to improve our ability to assess potential risks."

2. SEC-registered RIA firms that offer wrap fee programs will need to disclose attributable regulatory AUM and additional information.

As the SEC continues to look into wrap fee programs as an area of focus, they are also "amending Item 5.I. of the Form ADV to ask whether the adviser participates in a wrap fee program, and if so, the total amount of regulatory assets under management attributable to acting as a sponsor to or portfolio manager for a wrap fee program." Furthermore, the SEC is amending Section 5.I.(2) for advisory firms acting as portfolio managers to wrap fee programs to "add questions that require an adviser to provide any SEC File Number and CRD Number for sponsors to those wrap fee programs."

3. Larger SEC-registered RIA firms will now need to disclose information on 25 largest offices.

The SEC is also updating Item 1.F. of the Form ADV and Section 1.F. of Schedule D to require RIA firms to disclose total number of branch offices and "provide information in Schedule D about their 25 largest offices in terms of number of employees.” In addition, the SEC is amending Section 1.F. of Schedule D "to require advisers to report each office’s CRD branch number (if applicable) and the number of employees who perform advisory functions from each office, identify from a list of securities-related activities the business activities conducted from each office, and describe any other investment-related business conducted from each office" as part of annual updating amendment.

4. Larger SEC-registered RIA firms will need to disclose additional details on separately managed accounts.

Larger investment advisory firms that have separately managed account (SMA) assets under management will now be required to disclose additional information related to such accounts. The SEC adopted amendments to "add Section 5.K.(2) of Schedule D to Form ADV to require advisers to separately managed accounts to report information regarding the use of borrowings and derivatives in those accounts." Firms with between $500 million and $10 billion in SMA assets will now be required to disclose such information related to categories of gross national exposure on an annual basis. Firms with $10 billion or more in such assets will be required to report such details twice during a year in a mid-year and annual filing.

For further details, the final rule release is available for download here.

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