The Securities and Exchange Commission (the “SEC”) recently adopted amendments to Form ADV, the investment adviser registration and reporting form, and several rules under the Investment Advisers Act of 1940 (the “Advisers Act”) in order to enhance the reporting and disclosure of information by an investment adviser registered or required to be registered with the SEC (each, an “Adviser”)¹ and improve the quality of information that an Adviser provides to clients and the SEC.²The following is a summary of certain of these amendments.

An Adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after October 1, 2017, will be required to use the revised form. As discussed below, amendments to Rule 204-2 of the Advisers Act (the “Books and Records Rule”) will apply to communications circulated or distributed after October 1, 2017.

Amendments to Form ADV

Information Regarding Separately Managed Accounts

Amendments to Form ADV will require an Adviser to provide additional information regarding its separately managed account (“SMA”)³ business, including:

• The approximate percentage of its SMA regulatory assets under management (“RAUM”) that are invested in 12 broad asset categories;⁴
• Any custodians that account for at least ten percent of its SMA RAUM and the amount of SMA RAUM held at the custodian; and
• With respect to an Adviser with SMA RAUM of at least $500 million, information on the use of derivatives and borrowings in SMAs.⁵

Additional Identifying Information and Information Regarding Advisory Business

An Adviser will also be required to report additional identifying information and information regarding its advisory business, including:

• Publicly available social media webpages where the Adviser controls the content on the webpage;⁶
• Information on its largest 25 offices in terms of number of employees;
• Whether the Chief Compliance Officer is compensated or employed by any person other than the Adviser, a related person of the Adviser, or an investment company registered under the Investment Company Act of 1940 (the “Investment Company Act”) that is advised by the Adviser, for providing chief compliance officer services to the Adviser;⁷
• The number of clients and amount of RAUM attributable to each type of client (e.g., high net worth individuals, investment companies, pooled investment vehicles, etc.);⁸
• The number of clients for whom it provides advisory services but does not have RAUM, such as nondiscretionary accounts;
• The approximate amount of RAUM attributable to clients that are non-U.S. persons;⁹
• The RAUM of all “parallel managed accounts” related to a registered investment company, or series thereof, or business development company that it advises;¹⁰
• The RAUM attributable to acting as a sponsor to or portfolio manager for a wrap fee program;
• Additional information about its financial industry affiliations and private fund reporting;¹¹ and
• With respect to an Adviser to private funds that qualify for the exclusion from the definition of investment company under Section 3(c)(1) of the Investment Company Act, whether the Adviser limits sales of the fund to “qualified clients,” as defined in Rule 205-3 of the Advisers Act.¹²

Umbrella Registration

Amendments to Form ADV will facilitate an “umbrella registration”¹³ on a single Form ADV for multiple private fund adviser entities operating a single advisory business under certain conditions.¹⁴New Schedule R of Form ADV will require reporting of certain information about each relying adviser in an umbrella registration. Amended Section 7.B.(1) of Schedule D will require an Adviser filing an umbrella registration to identify the filing adviser and/or relying advisers that sponsor or manage the private funds reported on Form ADV.¹⁵ Umbrella registration will not be available to a non-U.S. filing adviser.¹⁶

The SEC also adopted several clarifying, technical and other amendments to Form ADV.¹⁷

Compliance Date

An Adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after October 1, 2017, will be required to use the revised form.

Amendments to Advisers Act Rules

Amendments to the Books and Records Rule of the Advisers Act will require an Adviser to maintain:

• Materials that demonstrate the calculation of the performance or rate of return in any communication that the Adviser circulates or distributes, directly or indirectly, “to any person” (rather than “to 10 or more persons” as the rule currently requires);¹⁸ and
• Originals of all written communications received and copies of written communications sent by an Adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations in addition to the categories of written communications currently required.¹⁹

The SEC also adopted other technical amendments to certain Advisers Act rules.²⁰

Compliance Date

The amendments to the Books and Records Rule will apply to communications circulated or distributed after October 1, 2017.²¹

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¹ As noted herein, only certain of the amendments to Form ADV will apply to an investment adviser that qualifies for an exemption from SEC registration under Section 203(l) or Rule 203(m)-1 of the Advisers Act (each, an “Exempt Reporting Adviser”).

² Full text of the final rule adopted on August 25, 2016, is available here: https://www.sec.gov/rules/final/2016/ia-4509.pdf (the “Final Rule Release”).

³ A client other than an investment company, business development company or other pooled investment vehicle is considered an SMA for this purpose.

⁴ The 12 asset categories are: Exchange-Traded Equity Securities; Non Exchange-Traded Equity Securities; U.S. Government/Agency Bonds; U.S. State and Local Bonds; Sovereign Bonds; Investment Grade Corporate Bonds; Non-Investment Grade Bonds; Derivatives; Securities Issued by Registered Investment Companies or Business Development Companies; Securities Issued by Pooled Investment Vehicles (other than Registered Investment Companies or Business Development Companies); Cash and Cash Equivalents; and Other. An Adviser may use its own methodologies and the conventions of its service providers in determining how to categorize assets but should not double count assets. An Adviser with at least $10 billion in SMA RAUM will report, on an annual basis, both mid-year and end of year asset category percentages, while an Adviser with less than $10 billion in SMA RAUM will report only end of year percentages.

⁵ An Adviser may, but is not required to, provide information on the use of derivatives and borrowings with respect to any SMA with RAUM of less than $10 million.

⁶ Reportable social media webpages include, but are not limited to, Twitter, Facebook and LinkedIn.

⁷ An Exempt Reporting Adviser is also required to report information on its social media accounts, largest 25 offices and compensation of its Chief Compliance Officer, if any.

⁸ An Adviser with less than five clients in a particular client category (other than investment companies, business development companies and other pooled investment vehicles) is not required to disclose the number of clients in that category.

⁹ This information is required in addition to the current requirement to report the percentage of the Adviser’s clients that are non-U.S. persons.

¹⁰ A “parallel managed account” is defined as any managed account or other pool of assets advised by the Adviser that pursues substantially the same investment objective and strategy and invests side by side in substantially the same positions as an investment company, or series thereof, or business development company advised by the Adviser.

¹¹ An Adviser will be required to report CIK number(s), if any, of its financial industry affiliations in Section 7.A. of Schedule D of Form ADV Part 1A and the Public Company Accounting Oversight Board-assigned number of a private fund’s auditing firm in Section 7.B.(1) of Schedule D of Part 1A of Form ADV. An Exempt Reporting Adviser is also required to report this information.

¹² An Exempt Reporting Adviser is also required to report this information.

¹³ Amended General Instructions to Form ADV defines an umbrella registration as “a single registration by a filing adviser and one or more relying advisers who advise only private funds and certain separately managed account clients that are qualified clients and collectively conduct a single advisory business.”

¹⁴ Amended General Instructions to Form ADV provides five conditions for an Adviser to assess whether umbrella registration is available. Those conditions are consistent with the guidance previously provided by the SEC staff in the American Bar Association, Business Law Section, SEC Staff Letter (Jan. 18, 2012). Additionally, the SEC considers the following factors as indicia of a single advisory business for purposes of umbrella registration: commonality of advisory services and clients; a consistent application of the Advisers Act and the rules thereunder to all advisers in the business; and a unified compliance program. Umbrella registration is not available for an Exempt Reporting Adviser. See the discussion in Section II.A.3. of the Final Rule Release.

¹⁵ See Question 3(b) of Section 7.B.(1) of Schedule D of Form ADV Part 1A.

¹⁶ Amended General Instructions to Form ADV provide that umbrella registration is available if the filing adviser has its principal office and place of business in the United States.

¹⁷ See the discussion in Section II.A.4. of the Final Rule Release.

¹⁸ 17 C.F.R. § 275.204-2(a)(16)

¹⁹ 17 C.F.R. § 275.204-2(a)(7). Rule 204-2(a)(7) currently requires an Adviser to maintain written communications relating to (i) any recommendation made or proposed to be made and any advice given or proposed to be given, (ii) any receipt, disbursement or delivery of funds or securities; or (iii) the placing or execution of any order to purchase or sell any security.

²⁰ See the discussion of “Technical Amendments to Advisers Act Rules” in Section II.B.2. of the Final Rule Release.

²¹ Amended Rule 204-2(a)(16) will apply to communications circulated or distributed by an Adviser after October 1, 2017, that include performance information, including information on performance that predates that date.

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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.