Securities and Exchange Commission adopted amendments to Investment Advisers Act rules in August 2016 that will result in significant changes to Form ADV for advisory firms working with SMA’s (Separately Managed Accounts).
The amendments require additional information about separately managed accounts, umbrella registration filing, and changes to the books and records rules of the Advisers Act. Compliance with these Investment Advisor Rules commence on October 1, 2017. Firms filing December 31 fiscal year end will report the changes on their annual amendment of March 2018.
The increased request for information is expected to reduce data gaps in private fund reporting while improving depth and quality of information for examination.
A look into SEC changes starting October 1, 2017
Disclosure rules for Separately Managed Accounts (“SMAs”)
For purposes of Form ADV, the SEC defines Separately Managed Accounts (SMAs) as advisory accounts other than ones that are for pooled investment vehicles. In the past Form ADV Part 1A only required minimal information about SMAs, such as percent of clients and assets under management (Graphic: page 8-9 Form ADV part 1). Amendments August 26, 2016 expand this section to include more specific details about SMAs. New questions will include; type of asset held by SMAs; use of derivatives and borrowing; role of custodians, and more. Questions will vary based on RAUM (Regulatory Assets under Management) in separately managed accounts, and threshold dollar amounts between; $0, $500 million, and $10 billion respectively.
About SMAs (Separately Managed Accounts)
A “Separately Managed Account” or “SMA” is a private portfolio of actively managed individual securities. By not commingling these assets with other investors (managing separately), clients may closely monitor the portfolio’s performance and evaluate their individual securities and asset allocations. SMA fees are negotiated between the investor and money manager, rather than being provided for in a prospectus.
New: SMA Asset Categories
The SMA reporting amendment will require advisers to break out SMA assets into 12 categories by the addition of a new Item 5.(K) in Part 1A. A corresponding schedule D will also be required. Bi-annual reporting is required for firms with $10 billion or more in RAUM; while those with less than $10 billion will report annually.
The 12 SMA asset categories include; Exchange-traded equity securities; Non-exchange traded equity securities; US government bonds; US State and local bonds; Sovereign bonds; Corporate bonds – investment grade; Corporate bonds – non investment grade; Derivatives; Securities issued by registered investment companies and business development companies; Securities issued by pooled investment vehicles; Cash and cash equivalents; Other
Disclosing SMA Derivatives and Borrowing; and Custodian Identification
Another new Form ADV section for Investment advisers with $500 million or more in RAUM from Separately Managed Accounts will be used to report borrowing and derivatives information [Form ADV Item 5.K.(2)]. Reporting for these advisers will be based on RAUM levels and will break out borrowings from derivatives.
Custodian identification will be required in Item 5.K.(3) where 10% or more of total RAUM is attributed to an investment advisers SMAs. Information such as office location and amount of RAUM held in each custodian will be reported as well.
Umbrella registration controls will be stepped up with a request for more information on Form ADV starting October 1 2017.
SEC Umbrella Registration is used as a single registration to cover one or more advisers who handle only private funds and qualified SMA clients. The umbrella registration may also be used in situations where these advisers are controlled under a parent entity. Additional terms include;
- The filing adviser handles only private funds or SMAs and the accounts pursue similar investment strategies.
- The filing adviser is principally located in the United States and subject to Advisers Act rules regardless of whether the client or adviser is domiciled in the United States or abroad.
- Relying advisers, employees, and other persons acting on behalf of accounts under the Umbrella Registration are subject to supervision and control of the “filing adviser”.
- The advisory activities are subject to the Advisers Act and subject to SEC examination.
- Advisers of the accounts operate under a single code of ethics as well as written policies and procedures in accordance with rule 206(4)-7 of the Advisers Act, and under the supervision of a single chief compliance officer.
Schedule R helps match specific activity to each investment advisor
Questions added by amendments of August 25, 2016 require Form ADV information be completed from the standpoint of the ‘Filing Adviser’ separately with regards to; identifying information, SEC registration, organization type, and control persons. A new Schedule R of Form ADV will be required for each “Relying Adviser” as a means to consolidate identifying information. Relying advisers will be required to indicate their management of private funds reported in Section 7.B.(1) on Schedule D of Form ADV.
More information to be disclosed on Form ADV
The August 2016 approved amendments also expand general books and records questions related to; Adviser Internet presence, physical office locations, chief compliance officer, balance sheet assets, financial industry affiliations (CFP, CPA, PCOAB). Investment advisers will be reporting the number of clients and RAUM for each client category, and disclose the extent the advisor is working with pooled investment vehicles, investment companies, or business development companies, as well as sub-advises.
Concerned about the impact of these changes in the Advisers Act on your firm? RND Resources provides compliance support and consulting solutions for RIA and BD businesses. Our staff of veteran compliance professionals have expertise implementing vertically integrated compliance and risk management programs. We work directly with stakeholders and others to ensure business planning, operations, compliance, trading, and registration needs are built in to the solution. Reach out to us for assistance completing the new Form ADV which will be released October 1, 2017, and get support with written policy and procedures updates. Ask about outsourced compliance principal or audit needs.