The amendments to Form ADV, Part 1 that became effective October 1, 2017 are presenting some registered investment advisers with unforeseen problems as we move into “annual amendment season” in 2018. As we previously highlighted among those changes to Form ADV is the requirement for advisers to disclose estimated percentages of assets held within separately managed accounts in twelve categories of assets.
Advisers with more than $10 billion in regulatory assets under management are required to report the same data as of mid-year and year-end. Smaller firms must report the same data as of year-end only.
This has not proved a simple exercise for some firms. Many have assumed that the custodians of their clients’ assets would readily be able to categorize their clients’ holdings and provide them reports summarizing the data. The dominant custodians serving the small to middle-market RIAs do not, however, provide this service, at least not as part of the custodial service agreement. Most custodians do, however, offer RIAs with access to technology and reporting tools that could be employed to calculate the data. Additionally, reporting and aggregating programs that are available to RIAs outside of the custodial relationship can be used.
Assuming the RIA has the correct underlying data and the tools to assimilate it, there remain questions regarding classification of certain holdings into one or more of the asset classes identified on Form ADV. The SEC has recommended that firms document their decisions to classify assets into one class versus another. It is also important not to count the same asset in two or more different classes.
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