It is of extreme importance that investment advisors provide accurate and complete information when responding to these new questions on Part 1 of Form ADV.
Separately Managed Accounts: When you are preparing your ADV Annual Amendment, forget your current understanding as to what an “SMA” is. For ADV purposes, the SEC defines SMAs as advisory accounts that are not pooled investment vehicles.
This means that for purposes of completing Form ADV, any client account that is not a registered investment company, Business Development Company or pooled investment vehicle must be treated as an SMA for ADV reporting purposes.
The amendments will require advisors to categorize their regulatory assets under management (RAUM) attributable to SMAs as a percentage of one of 12 asset categories found in Section 5.K.1 of the revised Form ADV Part 1 (e.g. Exchange-Traded Equity Securities, Securities Issued by a Registered Investment Company (mutual funds), Cash or Cash Equivalents, etc.).
Advisors with less than $10 billion in RAUM attributable to SMAs will be required to report year-end percentages, whereas advisors with more than $10 billion in RAUM attributable to SMAs will be required to report midyear and year-end percentages in their Form ADV filings.
Social media usage: Investment advisors must now disclose social media accounts (e.g. Facebook, LinkedIn, etc.) controlled by the advisor on Form ADV.
Social media accounts utilized by employees of the advisor or unregistered affiliates that are not subject to the advisor’s control need not be disclosed on Form ADV. However, social media accounts controlled by the advisor are required to be disclosed, even if they are not used to promote the advisor’s business.
Chief compliance officer disclosure: If an advisor’s chief compliance officer is compensated or employed by any third party, that relationship must now be disclosed on Form ADV Part 1.
Ostensibly, the SEC is concerned that a shared CCO may not be able to adequately perform their duties to the RIA if they are required to perform similar functions for other firms. Firms that are utilizing an “outsourced” chief compliance officer may be subjected to additional scrutiny pertaining to the potential risks associated with this practice.
Client information: With the revisions made to Item 5 for Form ADV Part 1, the advisor must now clearly disclose the number and type of advisory clients they service, the RAUM attributable to each category of client, the amount of RAUM attributable to non-U.S. persons, and the number of clients the advisor provides advisory services to for which it does not have RAUM (financial planning only clients).
Advisors with fewer than five clients in a particular category are not required to disclose the number of clients attributed to that category. The aggregate total of RAUM from this item must match the RAUM total disclosed in Item 5.F of Form ADV Part 1.
Custodial information: Advisors must disclose on Form ADV each qualified custodian where 10% or more of their RAUM, attributable to SMAs, are maintained and the amount of RAUM held at each disclosed custodian.
Wrap fee program participation: Advisors who participate, manage or both are now required to disclose the amount of their RAUM attributable to such roles.
Branch office information: Advisors must now report information about their twenty-five largest offices. Specifically, advisors with branch offices must report each branch’s CRD number, the total number of employees working from that branch office who perform investment advisory functions, and to the extent applicable, any business activities, other than investment advisory services, conducted from that location.
Umbrella registration: Under specific conditions, the SEC permits Umbrella Registration in the event multiple advisors are controlled by one another or are under common control of a parent entity, and those advisors conduct a single advisory business. In this scenario, one advisor serves as the Filing Advisor while the others serve as Relying Advisors.