SEC Adopts Rule Changes to Investment Advisers’ Act, Registration Requirements

The Securities and Exchange Commission (“SEC”) has adopted amendments to several Investment Advisers Act (“the Act”) rules, as well as changes to the Form ADV.

The amendments, announced on Aug. 25, are designed to enhance the reporting and disclosure of information by investment advisers, while improving the SEC and investors’ access to quality information. Once effective, advisers will be required to disclose more information in their Form ADV filings regarding several aspects of their operations, including their separately managed account business, branch office operations and use of social media. In addition, the amendments codified previous SEC guidance that allowed private fund advisers operating a single advisory business to register with the SEC using a single Form ADV.

The SEC’s Form ADV is the standard form investment advisers are required to file when registering with both the SEC and applicable states’ securities agencies. It requires information outlining an adviser’s business, including ownership, clients, employees, practices, affiliations and any disciplinary events involving the adviser or its employees. This information, which becomes publicly available, is used to process registrations and manage regulatory and examination programs. The form also requires investment advisers to create narrative brochures to be provided to clients. Written in “plain English,” these must convey such information as advisory services offered, fee schedule, disciplinary information and conflicts of interest.

Additional Information 

With the overarching goal of strengthening regulatory efforts and protecting investors, the amendments follow the SEC’s proposal from May 20, 2015, which included potential changes to various parts of Form ADV. The adopted amendments will require investment advisers to include additional information on their separately managed account business, including figures on the use of borrowing, derivatives and other aspects of their activities. Further changes to the Act’s Rule 204-2 will also require advisers to keep records related to the calculation and distribution of performance information, which will be used by SEC examinations staff to evaluate adviser performance claims for potentially misleading or fraudulent communications with investors. This will be required to be retained if these records are provided to any person. It previously only had to be retained if it was provided to 10 or more persons.

Umbrella Registration 

Other amendments to Part 1A of Form ADV codify a more efficient process for the registration of multiple private fund adviser entities operating a single advisory business on a single form, colloquially known as “umbrella registration.” The Dodd-Frank Act ended the previous exemption that allowed many advisers to private funds, such as hedge funds and private equity funds, to remain unregistered. However, since private fund advisers often organize as a group of separate but related advisers due to regulatory, tax and legal considerations, some advisers filed multiple registration forms with the SEC for each of their legal entities – creating cost, inefficiencies and confusion for regulators and investors alike. Although the SEC provided guidance on umbrella registrations in 2012, uncertainty persisted since the registration form is designed for use by a single legal entity.

The amendments seek to address this obstacle by providing a series of five conditions advisers can use to determine whether umbrella registration is an option. If eligible, advisers are then required to file a single Form ADV that includes all information related to the filing adviser and each relying adviser, and must also include this information in any other reports or filings required by the Act or its rules. Although umbrella registration is not mandatory, the SEC believes its use will both simplify the registration process for affected advisers and provide the regulator with improved, more consistent data that will create a clearer picture of their activities and better allow for comparison between private fund advisers.

Social Media and Other Changes 

The SEC is also amending sections of Form ADV that require an adviser to disclose and identify any affiliated websites. The form will be expanded to also ask whether the adviser has any accounts on social media platforms, such as Twitter, Facebook or LinkedIn, and to request the address of each of the adviser’s social media pages. This information will be used to help prepare examinations of advisers’ activities and also to compare the information circulated via social media. In so doing, the SEC is notifying advisers that any activities on social media are being monitored and will be considered alongside websites and other more traditional means of promotion for compliance and regulatory purposes.

Finally, the SEC is adopting amendments to the Act’s books and records rule and technical amendments to several rules to eliminate outdated transition provisions. Investment advisers are required to be in compliance with the amended rules by Oct. 1, 2017. Accordingly, given the annual updating process most advisers go through in the first quarter of each year, this means that most advisers will not have to adjust to the new Form ADV until their 2018 annual update.