SEC Adopts Changes Impacting Private Fund Advisers
The SEC’s recently-adopted changes to Form ADV and Rule 204-2 of the Investment Advisers Act of 1940, as amended (the so-called “books and records rule”), raise important considerations for many private fund advisers – particularly those that also advise separately managed accounts or that manage multiple funds through affiliated entities.
In particular, the amendments will: (1) call for the collection of more specific information about advisers’ separately managed accounts (“SMAs”), (2) permit so-called umbrella registration on a single Form ADV for affiliated advisers that participate in a single advisory business, and (3) impose several new disclosure and recordkeeping obligations on advisers.
The SMA-related amendments include the following additional disclosure items:
- Approximate percentage of SMA regulatory assets under management (“RAUM”) that are invested in 12 broad asset categories;
- For advisors with at least $500 million in RAUM attributable to SMAs, the amount of RAUM attributable to SMAs and the dollar amount of borrowings attributable to those assets; and
- Certain information about custodians that account for 10 percent or more of the adviser’s aggregate RAUM attributable to SMAs.
The umbrella registration-related amendments essentially modernize Form ADV to accommodate this form of registration and streamline the registration process consistent with the SEC’s position in the recent American Bar Association, Business Law Section, SEC Staff Letter (Jan. 18, 2012). Note that these amendments do not extend to exempt reporting advisers and that certain conditions must be met in order for registered advisers to utilize umbrella registration, including:
- The filing adviser and each relying adviser must advise only private funds and separately managed accounts in which the clients are “qualified clients”;
- The relying advisers must be subject to examination by the SEC; and
- The filing adviser and the relying advisers must operate under a single code of ethics and a single set of written compliance policies, and the procedures must be administered by a single CCO.
Separately, the amendments to Form ADV will call for new disclosures about advisers’ social media accounts, offices, and outsourced chief compliance officers (an area of recent focus by the SEC), among other things.
In conjunction with the amendments to Form ADV, the SEC also revised the books and records rule to require that advisers retain materials that demonstrate the calculation of performance or rates of return in any communications distributed to any person, as well as to maintain originals of all written communications received or copies of all written communications sent that relate to the performance or rate of return of managed accounts or securities recommendations. Note that emails constitute “written communications” for these purposes.
Although the amendments to Form ADV and the revisions to the books and records rule do not go into effect until October 1, 2017, private fund advisers should consider what steps they should be taking now in order to be in a position to comply with these new requirements before the time comes.
The final rules are available here.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.