Form ADV Changes Are Around the Corner – Are You Ready?

Businessman is selecting Update.Last August the U.S. Securities and Exchange Commission (“SEC”) issued a final rule expanding the information required on Form ADV.  All investment advisers making Form ADV filings as of October 1, 2017 will need to include the applicable additional information.   The following is a guideline for the new information required on Form ADV Part 1:

Item 1 – Identifying Information

  • Item 1.B. – Check a box when registering more than one adviser under the same registration (umbrella registration).
  • Item 1.D. and 1.E. – Include all Central Index numbers (CIK) and Central Registration Depository numbers (CRD) applicable to the firm.
  • Item 1.F – Include the total number of offices in which the adviser conducts business as well as information about the adviser’s 25 (instead of five) largest offices as calculated by the number of personnel in each office.

Schedule D Question for Item 1.F:   Include the CRD number if the branch office is registered with FINRA via Form BR, the number of employees at location, other types of business  activities performed from location, and a description of other investment related activities.

  • Item 1.I – Include all of the adviser’s websites and any social media platforms on which the adviser has a presence.
  • Item1.D.(3). All of the firm’s CIK numbers, if any.

Schedule D Question for Item 1.I:  Include the addresses of all firm-controlled social media sites.

  • Item 1.J (2)– Disclose whether the adviser’s chief compliance officer is employed by someone other than the adviser or a related person.  If the Chief Compliance Officer is compensated or employed by any person other than the filing firm, a related person or an investment company registered under the Investment Company Act of 1940 that the filing firm advises for providing chief compliance officer services to the filing firm, provide the person’s name and IRS Employer Identification Number (if any): ____________________________________________________________.
  • Item 1.O. – Check a box indicating the amount of firm assets (based on a range) over $1 billion from the firm’s most recent balance sheet

Item 5 – Information About Your Advisory Business

Item 5 currently requires an adviser to provide approximate ranges for three data points concerning the adviser’s business – the number of advisory clients, the types of advisory clients, and regulatory assets under management attributable to client types.  The SEC is amending these items to require an adviser to report the number of clients and amount of regulatory assets under management (“RAUM”) attributable to each category of clients as of the date the adviser determines its RAUM.

  • Item 5.C. – Include the number of clients as of the date of the last fiscal year end
  • Item 5.D. – Include the number of clients for each client type listed with the corresponding RAUM. Include “sovereign wealth funds (a government owned investment fund) and foreign official institutions” as a client category.
  • Item 5.F – Include the amount of RAUM attributed to non-U.S. clients
  • Item 5.I. – Include the RAUM attributed to wrap program participation as a sponsor, portfolio manager, and as a sponsor and portfolio manager for the same wrap program
  • Item 5.J. – Indicate if the AUM reflected in Form ADV Part 2A is a calculated differently than the RAUM reported in Form ADV Part 1.
  • Item 5.k. – Advisers reporting that they have RAUM attributable to separately managed accounts in response to new Item 5.K.(1) of Part 1A will be required to complete new Section 5.K.(1) of Schedule D, and may be required to complete new Sections 5.K.(2) and 5.K.(3) of Schedule D regarding those accounts.
  • Section 5.K.(2) of Schedule D to Form ADV requires advisers to separately managed accounts to report information regarding the use of borrowings and derivatives in those accounts with modifications from the proposal in response to commenters
  • Advisers with at least $500 million but less than $10 billion in separately managed account RAUM will be required to report on Section 5.K.(2)(b) the amount of separately managed account RAUM, and the dollar amount of borrowings attributable to those assets that correspond to three levels of gross notional exposures.
  • Advisers must identify in Section 5.K. (3) of Schedule D each custodian that accounts for at least ten percent of separately managed account RAUM, and the amount of the adviser’s RAUM attributable to separately managed accounts held at the custodian.

 

Financial Industry Affiliations and Private Fund Reporting

Item 7 –  Schedule D Amendments:

  • Sections 7.A.4 for Financial Industry Affiliations, the “Related Person’s” CRD and/or CIK numbers, if any. and 7.B.(1).A.23.(e) of Schedule D requires an adviser to provide identifying numbers (i.e., Public Company Accounting Oversight Board (“PCAOB”)-assigned numbers).
  • Section 7.B.(1)A.15.(b) of Schedule D requires an adviser to a private fund that qualifies for the exclusion from the definition of investment company under section 3(c)(1) of the Investment Company Act of 1940 (a “3(c)(1) fund”) to report whether it limits sales of the fund to qualified clients, as defined in Rule 205-3 under the Advisers Act.

 

Participation or Interest in Client Transactions

  • Item 8.B.(2) – Indicate whether the adviser or any related person of the adviser recommends to advisory clients or acts as a purchaser representative for advisory clients with respect to the purchase of securities for which the adviser or any related person of the adviser serves as underwriter or general or managing partner.
  • Item 8.H.(1) Indicate if compensation is provided to persons other than employees for client referrals.
  • Item 8.H.(2) Indicate if an adviser or and related person provides, in addition to employees’ regular salaries, any employee compensation for obtaining clients for the firm.
  • Item 8.I. – Indicate if an adviser or any related person (including employees) receive compensation from any person (other than you or any related person) for client referrals.

 

Other Schedule D Amendments:

  • Section 9.C.3. of Schedule D.  Require an adviser to provide the PCAOB- assigned number of the adviser’s independent public accountant. The Section will also ask whether all of the reports prepared by the independent public accountant since the date of the last annual updating amendment have contained unqualified opinions.
  • Question 21 (Private Offerings) of Schedule D.   Indicate if the private fund has ever relied on an exemption from registration of its securities under Regulation D.
  • Question 25 (g) of Schedule D.   Include the legal entity identifier, if any, for a private fund custodian that is not a broker-dealer, or that is a broker-dealer but does not have an SEC registration number. (A legal entity identifier is a unique number that companies use to identify each other in the financial marketplace)

 

New Schedule R for Relying Advisers

Each Relying Adviser must complete the New Schedule R:

  • Section 1 – Identifying Information: Include required contact information and business operation information
  • Section 2 – SEC Registration: Indicate the independent reason for SEC eligibility
  • Section 3 – Form of Organization: Include required information on type of entity, month ending of fiscal year and location of organization
  • Section 4 – Controls Persons: List owners, executive officers and indirect owners

 

Other Notes:

Exempt reporting advisers submitting other than annual amendments should update corresponding sections of Schedules A, B, C and D. See, Amended Form ADV, General Instructions, Instruction 4.

Rule 204-2 (Books and Records) Amendments to Rule 204-2 will require advisers to maintain records related to the calculation and distribution of performance information. Rule 204-2(a)(16) is changed to remove the “ten or more persons” condition and replacing it with “any person.”  Rule 204-2(a)(7) is changed to require advisers to maintain originals of all written communications received and copies of written communications sent by an investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

 

How Oyster Can Help:

Oyster Consulting’s compliance support services include, among many others, Form ADV preparation, registration, risk assessments,  CCO support and outsourcing, annual reviews, and DOL Fiduciary Rule assessments and compliance support.

Oyster Solutions software is a highly-customizable platform designed to make your firm’s compliance program and risk assessment more efficient and effective. Oyster Solutions also helps you efficiently plan your work, assess risk, automate procedures and test your controls.  For more information about how Oyster Solutions can improve your compliance program, visit www.oystersolutions.com.

For more information on how Oyster Consulting can help, complete our contact form or call us directly at (804) 965-5400 and one of our Relationship Managers will be happy to help you.

 

 

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