Understanding the Revisions Made to Form ADV Part 1 for Investment Advisers

December 21, 2011

Earlier this year, the U.S. Securities and Exchange Commission (“SEC”) adopted rule changes under the Investment Advisers Act of 1940 in order to implement Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  One of the more significant rule changes impacts all registered investment advisers as it centers on revisions to the Form ADV Part 1. Beginning January 1, 2012, all investment advisers registered with the SEC will have 90 days to complete and submit the revised Form ADV Part 1 confirming their eligibility to remain SEC registered.  Investment advsiers registered with the SEC with November, December, January and February fiscal year ends are reminded they must also file their official Form ADV Part 1 Annual Amendment within 90 days of their fiscal year end and will likely choose to file their SEC eligibility amendment and annual amendment in conjunction.

There are numerous changes that have been made to the Form ADV Part 1 and registered investment advisers need to devote sufficient time and resources to review, understand and properly respond to the new Form ADV Part 1 items.  

Item 1 – Identifying Information

An investment adviser must now disclose:

  • the name and contact information of the investment adviser’s Chief Compliance Officer;
  • if a person other than the Chief Compliance Officer is authorized to receive information and respond to questions about the Form ADV;
  • if the investment adviser is a public reporting company under Sections 12 or 15(d) of the Securities Exchange Act of 1934 and provide their SEC assigned CIK number (Central Index Key number that the SEC assigns to each public reporting company); and
  • if the investment adviser has $1 billion or more in assets on the last day of your most recent fiscal year and the investment adviser’s Legal Entity Identifier if applicable.

Item 2 – SEC Registration

An investment adviser is now required to disclose if they are eligible to register (or remain registered with the SEC.

The vast majority of SEC registered investment advisers will be required to indicate the following.

  • If a large investment adviser firm:

An investment adviser is considered to be a large firm if the investment adviser has regulatory assets under management of $100 million (in U.S. dollars) or more, or has regulatory assets under management of $90 million (in U.S. dollars) or more at the time of filing its most recent annual updating amendment and is registered with the SEC.

  • If a mid-sized investment adviser firm:

An investment adviser is considered to be a mid-sized investment adviser firm if it has regulatory assets under management of $25 million (in U.S. dollars) or more but less than $100 million (in U.S. dollars) and the investment adviser is either not required to be registered as an adviser in its home state or not subject to examination by the state securities regulator of its home state.

  • If no longer eligible to remain registered as an investment adviser with the SEC:

Such investment adviser firms ares required to switch to state registration.

An investment adviser must complete Item 2.B. if it is reporting to the SEC as an exempt reporting adviser and disclose if it:

(1) qualifies for the exemption from registration as an investment adviser solely to one or more venture capital funds; qualifies for the exemption from registration because it acts solely as an investment adviser to private funds and has assets under management in the United States of less than $150 million;

(2) qualifies for the exemption from registration because it acts solely as an investment adviser to private funds and has assets under management in the United States of less than $150 million;

(3) acts solely as an investment adviser to private funds but it isno longer eligible to check box 2.B.(2) because it have assets under management in the United States of $150 million or more.

Item 5 – Your Advisory Business

An investment adviser must now disclose:

  • The number of employees rather than just a range;
  • The number of “employees” that are registered representatives of a broker-dealer;
  • The number of “employees” that are investment adviser reps of your investment adviser firm;
  • The number of “employees” that are investment adviser reps of another investment adviser firm; and
  • The number of “employees” that are licensed insurance agents.

Other Item 5 Changes:

  • The definition of an individual client has been change to include trusts, estates, 401(k) plans, and IRAs (but not sole proprietorships).
  • The types of clients disclosed has been updated to include business development companies, other investment advisers and insurance companies.
  • An investment adviser is now required to not only list the percentage of clients by number, but also by the percentage of clients based upon its regulatory assets under management.
    • The definition of regulatory assets under management has also been amended to include securities portfolios for which they provide continuous and regular supervisory or management services, regardless of whether these assets are family or proprietary assets, assets managed without receiving compensation, or assets of foreign clients.
    • The types of investment advisory activities has also been amended to include management of pooled investment vehicles and “educational seminars/workshops”
    • An investment advisor must also indicate if the investment adviser provides investment advice with respect to only limited types of investments.

Item 6 – Other Business Activities

  • Listed other business activities now include futures commission merchant (broken out from commodity pool operated or trading advisor), trust company, registered municipal advisor, registered security-based swap dealer, major swap participant, accountant/accounting firm, and lawyer/law firm.
  • If another business activity uses a different name from the IA name, it must be furnished on Schedule D.
  • If you sell products or services other than investment advice to your clients, that business must be described on Schedule D.

Item 7 – Financial Industry Affiliations and Private Fund Reporting

  • The related persons list has been changed to remove investment company and add municipal advisor, swap dealer, major swap participant, futures commission merchant trust company, and sponsor of pooled investment vehicles.
  • Foreign affiliates (registered or unregistered) must be reported
  • Item 7 of the Form ADV Part 1A has been changed to request more detail on services provided by firms and related persons including custodians, private funds and seminar providers.

Item 8 – Participation or Interest in Client Transactions

  • An investment adviser must now disclose whether they receive of any compensation for client referrals.

Item 9 – Custody

  • An investment adviser is required to identify the number of custodians used in connection with those assets where the firm has custody and Schedule D of the Form ADV has been revised in order for firms to provide more detail about these arrangements.

Item 11 – Disclosure Information

An investment adviser will be required to indicate if any of the responses in Item 11 relate to any of their supervised persons.

Schedule D of Form ADV

Section 6 of the Schedule D has had significant changes that will require an investment adviser to provide details of their business activities

  • Section 6.A. must disclose the name of any other business (if different from your investment adviser’s name).
  • Section 6.B. must describe your investment adviser’s primary business (if not investment advisory) or other products and services.

Section 7 of the Schedule D has been added to require private fund managers and those investment advisers with related or affiliated entities that are private funds to provide responses to another 40 to 60 questions depending upon the investment adviser’s activities.

  • Under Section 7.A., an investment adviser must identify the type of each related person (same as Item 7.A.), describe the control relationship with each related person, and disclose the registration status of each related person.
  • Section 7.B(1) covers any private fund your firm advises.  An investment adviser must identify the name and exemption status of each private fund; describe the ownership, advisory services, and private offering of each private fund; and identify each fund’s auditors, prim broker, custodian, administrator and marketer(s).

Section 7.B(2) requires an investment adviser to disclose whether the investment adviser solicits clients to invest in each private fund.

Posted by Bryan Hill
Labels: Annual Amendment, Form ADV, SEC