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.”
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.
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).