form adv and performance advertising amendments · (xi) cash and cash equivalents ... provides the...

Form ADV and Performance Advertising Amendments

Amendments to Form ADV

• Effective October 31, 2016

• Compliance date delayed until October 1, 2017

• Most likely apply to annual amendments due first quarter of 2018

• Issue of programming IARD

Performance Advertising

• October 31, 2017

• Applicable to advertisements after such date

• Performance information prior to such date must comply if distributed after such date

Effective and Compliance Dates

Copyright RCA 2005-2016 2

oOperations

•- Depth of disclosures may prompt changes in operations

- Privacy concerns about management delivery

- Sensitive business information as to clients

Compliance

•- Anticipate compliance issues from new required disclosures

- Disclosures reflect concerns of Securities and Exchange Commission in sensitive areas

oExaminations

- Overriding goals of all amendments to enhance risk-based examinations

- Indicative of areas likely to be subject to inquiry during examinations

- Reflect areas for potential enforcement actions emanating from risk-based examination program

Current Importance of Form ADV Amendments


Preface

Format follows the order of the Adopting Release for subject matters, as reflective of relative importance to Securities and Exchange Commission

See Form ADV and Investment Advisers Act Rules, Investment Advisers Act Release No. 4509 (August 25, 2016) (Adopting Release)

Assume working knowledge of Form ADV, not reference or repeat current disclosure requirements under Form ADV

Content repeats goals and purposes stated in the Adopting Release to further understanding of Commission’s examination and enforcement concerns

Plan accordingly both for operations and compliance efforts


Overriding Goals of Form ADV Amendments

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Provide additional information regarding advisers o Certain aggregate information about separately managed accounts

Improve the depth and quality of information collected by Commission o Facilitate its risk monitoring initiatives

o Assist its staff in risk-based examination program

Provide advisory clients and the public additional information on advisers

Umbrella registration for private fund advisers operating a single advisory business o Register using a single Form ADV o Make the availability of umbrella registration more widely-known

o Better information on groups of private funds

Copyright RCA 2005-2016

Performance Recordkeeping Amendments

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Better protect investors from fraudulent performance claims

Allow better examination practices in gathering required information

Expand performance recordkeeping to include maintenance of all performance advertising and communications to all persons

Not limit recordkeeping of performance advertising distributed to 10 or more persons, but if distributed to any person

Language amended for recordkeeping of written communications to include specifically if communications relate to performance

Reference to recent enforcement action by the Commission



Separately Managed Accounts (SMA’s)

Any Advisory Account

• Other than pooled investment vehicles

• Such as registered investment companies, business development companies and pooled investment vehicles that are not registered, including, but not limited to, private funds

Commission Statement

Currently collect detailed information about pooled investments

Collect little specific information about SMA’s

Goals and purposes

• Enhance staff's ability to carry out effectively:

Risk-based examination program

Other risk assessment and monitoring activities

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Separately Managed Accounts (cont.)

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Reporting required of advisers with at least $10 billion

attributable to SMA’s under management

Reporting requirements o Approximate percentage of regulatory assets under management

(RAUM) attributable to SMA’s

o Invested in twelve broad asset categories, see chart next slide


Adviser’s Range of RAUM Attributable to SMA’s

Reporting Requirements

At least $10 billion Annual basis, Both mid-year and year-end

percentages

Less than $10 billion Annual basis Only year-end percentages


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• Chart from amended Form ADV

Generally describe any assets included in “Other” ___________________


Asset Type Mid-year End of year

(i) Exchange-Traded Equity Securities ___%

(ii) Non Exchange-Traded Equity Securities

(iii) U.S. Government/Agency Bonds

(iv) U.S. State and Local Bonds

(v) Sovereign Bonds

(vi) Investment Grade Corporate Bonds

(vii) Non-Investment Grade Corporate Bonds

(viii) Derivatives

(ix) Securities Issued by Registered Investment Companies or Business Development Companies

(x) Securities Issued by Pooled Investment Vehicles (other than Registered Investment Companies or Business Development Companies)

(xi) Cash and Cash Equivalents

(xii) Other


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• Categorizing assets o Use own internal methodologies and service providers’ conventions

o Methodologies consistently applied and consistent with information

reported internally and to current and prospective clients

o Modeled after Form PF instruction

o Acknowledge assets categorized differently based on different methodologies

• Not double count assets

• No definitions of asset classes

• Derivatives, registered investment companies, business development companies, and pooled investment vehicles o Report assets in the referenced categories related to the entities

o Not look through investments in funds or ETFs, and report the underlying

asset type

o Intent to understand the extent to which SMA assets are invested in these asset classes



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Commentary

Disclosures to reflect a picture of firm’s management style, very acutely

Assure asset categorization reflects actual investment management style and actual risks associated with management style

Check how assets currently reported internally and to clients in relation to these categories to assure assets will be reported on Form ADV as desired

Conduct due diligence on reporting by service providers

Confirm categorization within industry standards



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Borrowings and derivatives in SMA’s • Reporting of specific gross notional metrics as defined

o “Gross Notional Value” o “Gross Notional Exposure”

• Requirements for reporting

o Thresholds based on RAUM attributable to SMA’s o Not number of accounts or the size of individual SMA’s



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Gross notional value, defined • “The gross nominal or notional value of all transactions that have

been entered into but not yet settled as of the reporting date. For contracts with variable nominal or notional principal amounts, the basis for reporting is the nominal or notional principal amounts as of the reporting date. For options, use delta adjusted notional value.”

• Includes borrowings and the gross notional value of derivatives

Gross notional exposure of an account, defined

• “The percentage obtained by dividing (i) the sum of (a) the dollar amount of any borrowings and (b) the gross notional value of all derivatives, by (ii) the regulatory assets under management of the account.”



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Amount of RAUM attributable to SMA’s

Reporting Requirements

Information for all advisers with assets: At least $10 billion At least $500 million but less than $10 billion

Amount of SMA RAUM

Dollar amount of borrowings attributable to the assets corresponding to three levels of gross notional exposures o Less than 10% o 10% to 149% o 150% or more

Additional information for certain advisers with assets: At least $10 billion

Derivative exposures in six categories

o Interest rate derivative o Foreign exchange derivative o Credit derivative o Equity derivative o Commodity derivative o Other derivatives


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Commentators’ concerns that gross notional metrics calculations could be misleading as to their actual use in SMA’s.

Commission’s responses summarized:

o Calculations rely on measures common to all advisers:

Regulatory assets under management of an account Total amount of borrowings in an account The notional value of derivatives

o Comparable to the information collected on Form PF

o Gross notional metrics as calculated provides a sufficient measurement for regulatory purposes Provides information about the scale of accounts’ derivatives

activities Not desire specific risk metrics or more granular information on

derivative use

o Item 5.K.(2) provides the option of including a narrative description of the strategies and manner in which borrowings and derivatives are

used in the management of SMA’s



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Custodian Information • Identify any custodians that account for at least 10% of SMA RAUM

• Disclose amount of RAUM attributable to SMA’s held at custodian

• Report location of custodian


Goals and Purposes

Identify advisers using the same custodian

oIn the event, for example, a concern is raised about a particular custodian

oIdentify the appropriate contacts when a custodian is part of a large organization with multiple offices

Additional Comments About SMA Reporting

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Subadviser relationships

o Subadviser provides information only about the portion of the account that it subadvises

o Both advisers and subadvisers report on the same RAUM of their separate Form ADV’s

SMA’s held by a non-United States person and managed by an investment adviser whose principal office and place of business is outside the United States o Report information regarding SMA’s o For all clients, including clients who are non-United States persons

Securities lending or repurchase agreements disclosure not

required at this time


Public Disclosure of SMA Information

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Commentators’ concerns Disclosure of client-identifying information, and confidential or proprietary

information about investment strategy

Put advisers with a small number of SMA clients at a competitive disadvantage

Reference clients’ concerns about Form ADV reporting being linked or attributable to their SMA’s with small advisers

Commission’s response Section 210(a) requires public disclosure of Form ADV unless public disclosure

is neither necessary nor appropriate in the public interest or for the protection of investors

Assist the public in better understanding of SMA management

Directly improve the ability of clients and potential clients to make more informed decisions about the selection and retention of investment advisers

May also benefit the public by increasing competition among investment advisers for clients


Additional Information Form ADV Amendments

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Identifying information, advisory business, and affiliations

Amendments developed from staff’s experience in examining and monitoring investment advisers


Goals and Purposes

Designed to enhance Commission’s understanding and oversight of investment advisers

oEnhance staff's risk assessment and monitoring activities

Assist staff in its risk-based examination program

Social Media Information

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Disclose whether have accounts on social media platforms, such as Twitter, Facebook or LinkedIn

Disclose address of each social media page

Limited to accounts on social media platforms where the adviser controls the content

Limited to accounts on publicly available social media platforms

Not require information about the social media accounts of an adviser’s

employees

For accounts used to promote the business of an adviser, not internal accounts or social media platforms for employees

Not limit disclosure to social media platforms that promote the adviser’s

business in the United States or are targeted towards the adviser’s U.S. clients

Not disclose account if solely promotes the business of an affiliate or affiliates not registered with the Commission


Social Media Information (cont.)

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Goals and Purposes

Allow staff to prepare for examinations

oCompare information that advisers disseminate across different social media platforms

oIdentify and monitor new platforms

oCurrent and prospective clients may use this information to learn more about advisers and make more informed decisions regarding the selection of advisers

Office Information

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• Total number of offices at which conduct investment advisory business

• Further information about 25 largest offices in terms of number of employees

o Number of employees in each office

o Number of employees who perform advisory functions from

each office


Office Information (cont.)

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• Identify securities-related activities conducted from each office from the following list: o Broker-dealer o Bank o Insurance broker or agent o Commodity pool operator or commodity trading adviser o Registered municipal adviser o Accountant or accounting firm o Lawyer or law firm

• Describe any other investment-related business conducted from each office o Investment-related currently a defined term in the Glossary to Form

ADV

• Information only required to be updated in an annual updating

amendment, not more frequently


Office Information (cont.)

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Goals and Purposes

Learn more about an investment adviser’s business

oIdentify locations to conduct examinations

oBetter understanding of operations and the nature of activities conducted in its top 25 offices

oAssess risk with other offices and other activities

oAssess offices that conduct a combination of activities

Chief Compliance Officer Information

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• Disclose whether chief compliance officer is o Compensated or employed o By any person other than the adviser or a related person o For providing chief compliance officer services to the adviser

• Report the name and IRS Employer Identification Number of this other person

• If the other person is a registered investment company, not required to disclose the identity of the other person compensating or employing the chief compliance officer

• Not require information regarding third-party compliance auditors at this time


Chief Compliance Officer Information (cont.)

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Goals and Purposes

o“Our examination staff has observed a wide spectrum of both quality and effectiveness of outsourced chief compliance officers and firms.”

oIdentify all advisers relying on a particular service provider and address potential risks associated with that service provider

oImprove Commission’s ability to assess potential risks related to outsourced chief compliance officers and firms

Asset Size Reporting

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• Advisers with assets of $1 billion or more report assets within three ranges: o $1 billion to less than $10 billion o $10 billion to less than $50 billion o $50 billion or more

• More precise data for use by Commission in rulemaking arising from ongoing Dodd-Frank Act implementation

• Footnote reference: “See, e.g., section 165(i) of the Dodd-Frank Act (requires the Commission and other financial regulators to establish methodologies for the conduct of stress tests by financial companies with consolidated assets of over $10 billion)”.


Number of Clients and Related RAUM

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Disclose for each listed category of clients o Number of clients o Amount of RAUM attribute to the category o As of the date determine RAUM

Categories of clients same as current Form ADV, with exceptions o Added sovereign wealth funds and foreign official institutions o State or municipal government entities include government pension

plans

o Government pension plans not counted as pension and profit plans

Report number of clients provide advisory services without RAUM

o Examples Non-discretionary accounts One-time financial planning clients

New disclosure chart from redlined Form ADV on next page


Number of Clients and Related RAUM(cont.)

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Type of Client (1) Number of Client(s)

(2) Fewer than 5 Clients

(3) Amount of Regulatory Assets under Management

(a) Individuals (other than high net worth individuals)

(b) High net worth individuals

(c) Banking or thrift institutions

(d) Investment companies

(e) Business development companies

(f) Pooled investment vehicles (other than investment companies and business development companies)

(g) Pension and profit sharing plans (but not the plan participants or government pension plans )

(h) Charitable organizations

(i) State or municipal government entities (including government pension plans)

(j) Other investment advisers

(k) Insurance companies

(l) Sovereign wealth funds and foreign official institutions

(m) Corporations or other business not listed above

(n) Other: ________ Copyright RCA 2005-2016

Number of Clients and Related RAUM (cont.)

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Fewer than five clients indicate such instead of reporting actual

number of clients o Except for investment companies, business development companies

and other pooled investment vehicles

If client fits into more than one client category

o Select the category that most accurately represents the client o Avoid double counting

• Subadviser advises a registered investment company, business development company, or pooled investment vehicle o Report those sub-advised assets in such respective categories for the

entities, not as adviser to investment adviser


Number of Clients and Related RAUM(cont.)

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• Scale and concentration of assets by client type

More complete understanding of each adviser’s business

More Accurate Information

• Review data across investment advisers

• Assist in risk assessment and effectiveness of examinations

• Allow determination of RAUM attributable to SMA’s

Analyze Data

• More complete understanding of adviser’s business

• Enhanced ability to analyze data across investment advisers, including the scale and concentration of assets by client type

oInvestors Potentially Benefit

Parallel Managed Accounts

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• Report RAUM of parallel managed accounts

• Parallel managed accounts defined o Any managed account or other pool of assets, o Pursues substantially the same investment objective and strategy,

and o Invests side by side in substantially the same positions as the

identified investment company or business development company

• Interpret whether pursue “substantially the same investment

objective and strategy” o Use best judgment and make a good faith determination o Reference many private fund advisers already make this

determination when filling out Form PF


Parallel Managed Accounts (cont.)

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Goals and Purposes

oInformation permits Commission's staff to assess these accounts

oConsideration of conflicts of interest in managing parallel managed accounts along with registered investment companies or business development companies

oShow the extent of any shift in assets between parallel managed accounts and registered investment companies or business development companies

Misc. Additional Information Advisory Business

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Discretionary assets differ from RAUM o Check a box noting that election

o Purpose to determine if differences in reporting requires regulatory response

RAUM attributable to non-United States persons o Complement the current requirement that each adviser report the

percentage of its clients that are non-United States persons

o Purpose to have better indicator of relationships with non-U.S. clients, in reporting of RAUM, as opposed to percentage of clients

• Private fund reporting o Indicate whether fund qualifies for the exclusion from the definition of

investment company under Section 3(c)(1) of the Investment Company Act of 1940

o Report whether a fund limits sales to qualified clients, as defined, including any private fund that qualifies for the exclusion from the definition of “investment company” under Section 3(c)(7) of the Investment Company Act of 1940

o Purpose to give a better sense of the financial sophistication and nature of investors in private funds


Umbrella Registration

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• Codify staff guidance on umbrella registration for certain private fund advisers

• Sets forth conditions to assess availability of umbrella registration

• Filing adviser file and update as required a single Form ADV o Relates to, and includes all information concerning, the filing adviser

and each relying adviser o Must include this same information in any other reports or filings

• Schedule R by filing adviser o Filed for each relying adviser o Identifying information o Basis for SEC registration o Ownership information about each relying adviser

• Consolidates in one location information for each relying adviser

• Not expanding umbrella registration to exempt-reporting advisers


Umbrella Registration (cont.)

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Conditions for Umbrella Registration

1. Filing adviser and relying adviser advise only private funds and qualified clients in SMA’s who are otherwise eligible to invest in the private funds and whose accounts pursue investment objectives and strategies substantially similar or otherwise related to the private funds.

2. The filing adviser has its principal office and place of business in the United States and, the substantive provisions of the Advisers Act and the rules thereunder apply to all advisers’ dealings with each of its clients, regardless of whether any client is a United States person.

3. Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control and, are “persons associated with” the filing adviser as defined in Section 202(a)(17).

4. The advisory activities of each relying adviser is subject to the Advisers Act and the rules thereunder, and each relying adviser is subject to examination by the Commission.

5. Advisers operate under a single code of ethics adopted in accordance with Rule 204A-1 and a single set of written policies and procedures adopted and implemented in accordance with Rule 206(4)-(7) and administered by a single chief compliance officer in accordance with that Rule.


Performance Advertising Amendments

37

• Rule 204-2(a)(16) requires maintenance of materials to

demonstrate the calculation of performance or rate of return

• Amended to include performance distributed to any person o Removing condition that distribution be to 10 or more persons o Content of records to be maintained not amended

• Performance records maintained o Which form the basis for or demonstrate calculation of the

performance or rate of return of any or all managed accounts or securities recommendations

o In any notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication

• Maintain alternatively for performance of managed accounts

o All account statements if reflect all debits, credits, and other transactions in a for the period of the statement, and

o All worksheets necessary to demonstrate the calculation of the performance or rate of return of all managed accounts


Performance Advertising Amendments (cont.)

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• Rule 204-2(a)(7)(iv) added to require maintenance of written

communications relating to:

“(iv) The performance or rate of return of any or all managed accounts or securities recommendations.”

• Prior language in Rule 204-2(a)(7) not specify “performance”

• “Originals of all written communications received and copies of all written communications sent by such investment adviser relating to:

(i) any recommendation made or proposed to be made and any advice given or proposed to be given;

(ii) any receipt, disbursement or delivery of funds or securities; or (iii) the placing or execution of any order to purchase or sell any

security.”

• (iv) added as referenced



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Commentary Reference to recent enforcement action in Adopting Release

Amendments cover responses to Requests for Proposals and

individual communications with performance advertising

Previously such individual communications could have been deemed outside recordkeeping rule

Unwise not to have maintained such information as anti-fraud provisions apply



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Goals and Purposes

oVeracity of performance information regardless of whether personalized client communication or in an advertisement sent to 10 or more persons

oRecords useful in examining and evaluating advisers

oInvestors will benefit to the extent that the amendments reduce the incidence of misleading or fraudulent advertising and communications

Closing Thoughts


PRACTICEEDGE™ SERIES DELIVERED BY THE RCA, ITS ENDOWING ORGANIZATIONS AND AFFILIATE LAW SCHOOLS CONSTITUTE A PREVIEW OF A RESPECTIVE CLASS SESSION IN THE LAW & MASTERS CONCENTRATION OR MYUNIVERSITY™.

THE PRACTICEEDGE™ SERIES IS INTENDED FOR INFORMATIONAL PURPOSES. THE COMMENTS MADE BY EACH MEMBER OF THE SPEAKING FACULTY REPRESENT THEIR PERSONAL VIEW, AND NOT THE POSITION OF THE REGULATORY COMPLIANCE ASSOCIATION (RCA), ITS ENDOWING ORGANIZATIONS, AFFILIATE LAW SCHOOLS OR UNIVERSITIES, OR A SPEAKER’S FIRM OR ORGANIZATION.

ADDITIONALLY, THE VIEWS EXPRESSED AND MATERIALS PROVIDED DO NOT CONSTITUTE LEGAL OR PROFESSIONAL ADVICE, OR EVEN A MODEL OF THE SAME, APPLICABLE TO ANY SPECIFIC MATTER. LASTLY, THE RCA AND OUR ENDOWING FIRMS ASSUME NO LIABILITY FOR ANY ACTIONS OR COMMENTS OF THE SPEAKING FACULTY - SUCH INDIVIDUALS REMAIN SOLELY LIABLE FOR THE SAME.

Disclaimer

42

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MyUniversity™

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PracticEdge Elite™ Delivers:

• Enterprise Class, Private Labeled Intranet of Knowledge ™;

• Over 110 hours of CPE, 70 hours of CLE and 70 hours of Continuing Compliance Education (updated monthly);

• The most timely, relevant, and vetted Course Materials

• Dedicated Academic Team with 24/7 service and support.

Curriculum includes over 35 Courses:

• Spanning 12 Practice Areas: Asset Management Law, Regulation, Compliance, Exams, Investigations, Enforcement, Operational Process, Due Diligence, Risk Management, Governance, Fund Accounting and Taxation

• Detailed, comprehensive and unbiased coverage of over 4, 000 subjects

• Over 1,500 pages of Textbooks and Course Materials

• Practical and actionable guidance, including extensive case studies

For more information, please contact the RCA at 800.306.6133 or visit www.rcaonline.org

PracticEdge Elite™

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