Date Drawing Near for Compliance with SEC Amendments to Form ADV and Recordkeeping Rules

Beginning October 1, 2017, registered investment advisers are required to use revised form ADV, which requests certain information not sought on previous versions of the form. Advisers will also have to comply with amendments to Rule 204-2 under the Investment Advisers Act of 1940 (“Advisers Act”).  With the compliance date less than three months away, advisers should examine whether to modify their internal policies and procedures pertaining to Form ADV reporting and recordkeeping, and also should begin the process of collecting the new information and assuring that the information remains available for future Form ADV filings.

The amendments to Form ADV changed the requirements of Item 5 of Part 1A of Form ADV and Section 5 of Schedule D.  The amendments will obligate investment advisers to disclose the estimated percentage of regulatory assets under management (“RAUM”) held in separately managed accounts (“SMAs”) and to indicate those assets “that are invested in twelve broad asset categories.”  Investment advisers with $10 billion or more in RAUM connected to SMAs will be obligated to report both mid-year and end-of-year percentages for each category.  Investment advisers with fewer than $10 billion in RAUM connected to SMAs will only be obligated to report only end-of-year percentages.  The amendments to Form ADV will also require investment advisers to disclose the identity of custodians that make up 10 percent or more of an investment adviser’s total SMA RAUM.

The amendments to Form ADV will also obligate certain investment advisers to SMAs “to report information regarding the use of borrowing and derivatives” in SMAs on Schedule D.  Investment advisers who manage $500 million or more in SMA RAUM will be obligated to disclose the amount of SMA RAUM that they manage and the dollar amount of borrowings connected to those assets that correspond to three levels of gross notional exposure: less than 10%, 10-149%, and 150% or more.  Investment advisers with $10 billion or more will be obligated to report the same information, in addition to derivative exposures across six categories of derivatives.

Two amendments to Rule 204-2, also known as the Books and Records Rule, will also need to be complied with by October 1.  Prior to the amendments, Rule 204-2(a)(16) obligated SEC-registered investment advisers “to maintain records supporting performance claims in communications that are distributed to ten or more persons.”  The amendments will compel investment advisers to maintain these records in relation to communications made to any person.

The SEC also made modifications to Rule 204-2(a)(7).  Before the amendments, Rule 204-2(a)(7) obligated SEC-registered investment advisers to “maintain certain categories of written communications received and copies of written communications sent by such advisers.”  Beginning October 1, SEC-registered investment advisers will be required to “also 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.”

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