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Regulation and Compliance > Federal Regulation > SEC

Big Form ADV Changes Coming Soon. Are You Ready?

By Melanie Waddell

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Registered investment advisors are bracing for major reporting changes regarding their Form ADVs that begin Oct. 1. Monique Botkin, associate general counsel at the Investment Adviser Association, assembled a working group about eight months ago to help RIAs get up to speed on what’s required.

“It is a very significant change” in the way advisors must report information, Botkin told me in a recent interview. RIAs “have to collect more information in a different way than they had in the past; firms have the information, but they don’t have it the exact way the Securities and Exchange Commission is asking for it.”

(Related: Latest DOL Fiduciary Fight Zeros In on Advice vs. Sales)

Former SEC Chairwoman Mary Jo White announced last August that the commission had adopted final amendments requiring advisors to disclose more information on Forms ADV Part 1A about their use of separately managed accounts, branch office operations and social media.

The amendments also incorporate a method for private-fund advisor entities operating a single advisory business to register using a single Form ADV.

The new changes impact Form ADV Part 1, the form that the SEC uses to analyze the industry and that its exam unit, the Office of Compliance Inspections and Examinations, relies on to assess a firm’s risk.

Form ADV Part 2 is the narrative document that explains an advisor’s business model as well as potential conflicts and must be shared at the beginning of the advisor/client relationship.

Botkin says the upcoming changes require firms to report additional data about an RIA’s use of separately managed accounts and to provide more information about its advisory business.

Drilling Down

As it stands now, RIAs must list clients in different categories, but under the new requirements, the SEC also wants to see “the number of clients” in each category — such as 70% individuals — and “the AUM per client type,” Botkin said.

The law firm Dechert LLP explained in a client alert that the final SEC rule requires advisors to SMAs to provide additional information on an aggregate basis, including regulatory assets under management (RAUM) in 12 categories of assets; the use of derivatives and borrowings; and the role of custodians.

The “clarifying amendments” adopted to Form ADV include: registration requirements for newly created entities (including advisors who changed their structure or legal status due to succession planning); and disclosure requirements related to funds of funds.

Also, certain recordkeeping rules have been amended that require advisors “to now maintain records related to communications distributed directly or indirectly to any person, where such communications demonstrate the calculation of performance or of a rate of return, or include securities recommendations,” the Dechert alert states.

Location, Location …

As for branch offices, the SEC currently requires an advisor to provide contact and other information about its principal office and place of business, and, if an advisor conducts advisory activities from more than one location, about its largest five offices in terms of the number of employees.

To help exam staffers learn more about an advisor’s business and identify locations to conduct exams, the new SEC rule requires advisors to provide information on the “total number of offices at which they conduct investment advisory business,” as well as about their 25 largest offices (as measured by the number of employees).

In early January, the SEC launched a multi-branch advisor initiative targeting the “unique risks and challenges” for advisors operating through branch offices geographically separate from their principal place of business.

Challenges in the branch office model specifically include designing and implementing compliance programs, as well as supervising people and processes in branch offices, the SEC said at the time.

Social Media

The SEC states that “because the social media environment is rapidly evolving, we think it will be useful to the commission and investors to have current information on an advisor’s use of social media on Form ADV.”

Advisors now must list their websites on Form ADV, but the revised form will require them to also list their social media platforms, such as Twitter, Facebook or LinkedIn, and provide the addresses.

Advisors will only list their publicly available sites if they control the content, IAA says. The agency is not requiring information about employees’ social media accounts.

Ups & Downs

IAA’s “2017 Evolution Revolution” report, a snapshot of the RIA industry derived from Form ADV Part 1 data, found that the number of RIAs, as well as the assets they manage, continues to grow — with SEC-registered advisors jumping to 12,172 in 2017, a net increase of 2.7%.

RIAs’ aggregate AUM hit a record high of $70.7 trillion, according to the report, which IAA conducts with National Regulatory Services.

The report found that assets managed by advisors grew a healthy 5.8%, up from $66.8 trillion in 2016, which IAA and NRS attribute to strong stock market performance over the past year.

“This year’s findings demonstrate that the investment advisor industry remains robust and continues to expand, providing high-quality jobs to our economy,” said Karen Barr, IAA’s president and CEO, in releasing the report. “More importantly, they demonstrate that our industry is flexible and resilient, adapting successfully to the rapid pace of change in the financial services ecosystem.”

Another finding: As the number of advisors has risen, the number of broker-dealers has dropped. As of March, the number of securities registered reps has “reversed its five-year growth trend, dropping slightly from 635,902 in 2016 to 633,822,” the report says.

More than half of these reps (about 60%) are employed by SEC-registered investment advisors (SEC-registered advisors reported employing 386,413 registered reps in 2017), the report points out: “This signifies a 1.5% increase in the number of registered representatives employed by registered investment advisors (380,853 in 2016).”

Online Advice

Internet advisors are also growing, with the number of such firms increasing since last year’s report to 146 — a 15.9% increase.

“While the growth of internet advisors continued at a brisk pace, ostensibly due to the ongoing interest in robo-advisors and robo-technology, it did not eclipse the previous year’s growth rate of 59.5%,” the report said.

Certain internet advisors, it explained, “have a website but do not appear to be actually doing business — they are essentially shelf registrations. As the robo-tech industry has evolved, many advisors have evolved into hybrid or ‘bionic’ advisors, and have incorporated human advice alongside robo-advisory solutions.”

— Read Opening New Accounts Is About to Get a Lot Easier on ThinkAdvisor. 

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