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The New Form ADV: What Advisors Need to Know and Do

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Every year RIAs are required to update their Form ADVs with the Securities and Exchange Commission within 90 days of the end of their fiscal year; this year those filings will be a lot more complicated. RIAs have to complete a revised ADV Part 1A form, which requires far more disclosure about separately managed accounts (SMAs), social media, multiple offices and more.

Although this new filing requirement, took effect Oct. 1, many RIAs whose fiscal year ends with the calendar year will be filling out the new form this quarter, before March 31.

The ACA Compliance Group, a risk management and technology solutions company, and boutique law firm Kleinberg, Kaplan, Wolff and Cohen held a meeting in New York focusing on some of the major changes in the new ADV and reporting requirements. They called the educational session “Attacking the New Form ADV.”

Jamie Nash, partner at Kleinberg Kaplan, noted that the new ADV formers covers “every investment advisor under the sun,” including RIAs, financial planners, wrap fee program advisors and private fund managers such as hedge funds and private equity funds, which is something RIAs should keep in mind when trying to understand how the rules apply to them.

(Related: Big Form ADV Changes Coming Soon. Are You Ready?)

Nash and others mentioned the FAQs released by the SEC about the ADV, which can be helpful to advisors. And Maurice Collada, an associate of the firm, noted the redlined Form ADV, which shows what changes were made to the old Form ADV.

(Related: SEC Issues More Guidance on Form ADV Changes)

Here are some highlights of the presentation:

Social media. Advisors must disclose all the websites and publicly available social media platforms they use where they control the content, such as Twitter, Facebook and LinkedIn. Advisors also need to update this section promptly when changes are made, Nash said. Firms do not have to disclose the social media accounts of employees or of unregistered affiliates that are used solely for the business of the affiliate.

Client referrals. Firms need to disclose compensation for client referrals, whether paid to employees or non-employees, in cash or otherwise.

Client and asset counts. Advisors need to show the number of clients in each category, and the amount of assets under management for each category, not their percentages. Client categories include high-net-worth individuals and non-HNW individuals, banks, BDCs and more.

Number of offices. Firms should disclose the total number of offices plus data about their 25 largest, based on the number of people working there. Disclosure should include the number of employees performing advisory functions, security-related activities and a description of investment-related business.

Separately managed accounts. These accounts are the subject of numerous requirements on the new ADV form. For starters, SMAs are broadly defined, covering all advisory accounts that are not pooled investment vehicles such as mutual funds, ETFs and business development companies (BDCs).

RIAs are required to report the approximate percentage of SMA assets invested in 12 broad categories of assets including ETFs; government, corporate and muni bonds; cash and cash equivalents; and derivatives.

The requirements, however, differ based on a firm’s SMA regulatory assets under management (RAUM) — a term that comes from Dodd-Frank. Advisors with less than $10 billion in SMA RAUM must report the breakdown annually based on year-end SMA holdings. Advisors with over $10 billion must also report the data annually but include the midyear breakdown in addition to year-end holdings.

“This will present challenge for firms who don’t have good data,” said Ted Eichenlaub, partner at the ACA Compliance Group. Advisors can use their own internal methodologies for categorizing assets, but they need to be consistent across SMA accounts and avoid double counting.

SMA Derivatives and Borrowing Disclosures. Here, too, disclosure requirements vary based on the SMA RAUM of advisors. Those with less than $500 million RAUM are exempt from this disclosure (the original SEC proposal had a $150 million threshold). Advisors with $500 million to $10 billion in SMA RAUM must report the dollar amount of assets attributable to borrowing and the level of gross notional exposures, whether it’s less than 10%, 10%-149% or over 150%.

Gross notional exposure refers to the amount of borrowings plus the notional value of the derivatives — an S&P 500 futures contract with an obligation to buy 250 units has a notional value of $250,000 if the index is trading at $1,000 — divided by the RAUM of the account.

Advisors with over $10 billion in SMA RAUM must report the same data as advisors with $500 million to $10 billion SMA RAUM plus the gross notional values of derivatives within six different categories, including interest rate foreign exchange and commodity derivatives. Securities lending and repos are not to be considered borrowings.

SMA custodians. Advisors must identify the custodians of SMAs that account for at least 10% of the firm’s total SMA RAUM, including the name, address, location and SEC registration number if the custodian is a broker-dealer.

Outsourced chief compliance officers. Advisory firms must disclose the use of an outsourced chief compliance officer and whether the compliance officer is compensated or employed by someone other than the investment advisor, a related person of the advisor or a registered investment management company managed by the advisor. If the outsourced compliance officer is the employee of another company, that firm’s name and IRS employer identification number must be disclosed.

Balance sheet assets. If a firm’s balance sheet assets exceed $1 billion excluding regulatory assets under management, that should be disclosed per ranges of $1-$10 billion, $10-$50 billion, and more than $50 billion.

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