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SEC Must Target Form ADV Changes to Reduce Advisor Costs: IAA

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The Investment Adviser Association in a comment letter urged the Securities and Exchange Commission on Tuesday to focus a “particularly keen eye” on the disproportionate costs that would be imposed on smaller advisors if the agency moves ahead with its plan to require advisors to provide more data on separately managed accounts on their Form ADV.

The SEC proposed in late May proposed amendments to Form ADV requiring advisors to not only provide more information about their use of derivatives in separately managed accounts, but also about their branch office operations and their use of social media.

On that point, Tom Giachetti, chair of Stark & Stark’s Securities Practice Group, wrote recently in Investment Advisor that while Form ADV Part 1 Item 1.I currently requires an advisory firm to identify its website, the proposed amendment would require an advisor to include any social media platforms it uses.

“This will not only make it easier for SEC examiners to locate and scrutinize online RIA advertisements, but could have a profound effect upon advisory firms whose representatives are using social media to advertise on behalf of the RIA without properly notifying management.”

The comment period on the proposal, designed to enhance risk monitoring and regulatory safeguards for the asset management industry, expired Tuesday.

Besides suggesting that the SEC amend questions on custody of assets in Form ADV, which IAA argues “are needlessly confusing for advisors and could be clarified to generate more accurate, consistent responses from the industry,” IAA told the agency to target its approach requiring advisors to report additional data about their business and their clients’ investments, particularly in client accounts that are managed individually–which the SEC refers to as separately managed accounts.

IAA agreed that the “collection and analysis of additional census-type data about SMAs will further strengthen the SEC’s ability to oversee the asset management industry, including assessing industry trends and risks” and will enhance the SEC’s ability to conduct risk-based exams of advisors.

However, IAA added that the agency should collect that information in the “most efficient and cost-effective” way possible so as not overburden smaller advisors with compliance costs.

IAA suggested the SEC target its approach by increasing the basic threshold for reporting the use of borrowings and derivatives from $150 million to $500 million, which IAA says would alleviate reporting burdens and associated costs on approximately 3,000 small firms while retaining more than 95% of the data the SEC is seeking.

Also, the IAA said the SEC should make the reporting of asset composition and derivatives exposures in SMAs “non-public to address concerns about disclosure of client confidential information and advisors’ proprietary information, and to address concerns that the derivatives disclosure could potentially confuse or mislead investors.”

Bob Plaze, a partner at the law firm Stroock & Stroock & Lavan in Washington, who spent 30 years at the commission, told ThinkAdvisor in a previous interview that it will “be interesting to see how the proposal defines what a derivative is. There is no data about this as far as I know, and that is probably why the SEC is proposing to collect the data.”