SEC Announces Reporting Changes for Advisors on SMAs, Performance

On Aug. 25, the Securities and Exchange Commission published Release No. IA-4509, adopting final amendments to Form ADV Part 1 and the rules promulgated under the Investment Advisers Act of 1940. The final amendments will become effective on Oct. 24, and investment advisors must be in compliance by Oct. 1, 2017.

Amendments to Form ADV Part 1

The release identifies several areas where advisors will need to provide additional information on their Form ADV.

It should also be assumed that the SEC will be using this new information to target advisors engaged in business practices it deems "high risk." Therefore it is of extreme importance that advisors provide accurate and complete information when responding to these new questions.

Separately managed accounts. The area of greatest concern for advisors will no doubt be the additional information relating to SMAs. The SEC defines SMAs as advisory accounts that are not pooled investment vehicles. This means that for purposes of completing Form ADV, any client account that is not a registered investment company, business development company or pooled investment vehicle must be treated as an SMA for reporting purposes.

The amendments will require advisors to categorize their regulatory assets under management (RAUM) from SMAs as a percentage of one of 12 asset categories. Advisors with less than $10 billion in RAUM attributable to SMAs will be required to report year-end percentages; advisors with more than $10 billion in RAUM from SMAs will have to report mid-year and year-end percentages.

Advisors with $500 million or more in RAUM attributable to SMAs will also be required to disclose the number of accounts, and average derivatives and borrowings information each year as part of their Form ADV annual amendment filing. Advisors with more than $10 billion in RAUM from SMAs will be required to disclose mid-year and year-end information on the number of accounts, average borrowings and average derivatives exposure across six categories of derivatives.

Social media usage. Advisors must disclose on Form ADV any social media accounts they control. Accounts utilized by employees that are not subject to the advisor's control need not be disclosed.

Chief compliance officer disclosure. Advisors must disclose whether its CCO is employed by any third party. Ostensibly, the SEC is concerned that CCOs may not be able to adequately perform their duties if they are required to perform similar functions for other firms. Firms that are utilizing an "outsourced" CCO may be subject to additional scrutiny.

Client information. Advisors must disclose the number and types of advisory clients they serve, the RAUM attributable to each category of client, the amount of RAUM attributable to non-U.S. persons, and the number of clients that do not have RAUM. Advisors with fewer than five clients in a particular category are not required to disclose the number of clients.

Custodial information. Advisors must disclose on Form ADV each qualified custodian where 10% or more of their RAUM attributable to SMAs are maintained and the amount of RAUM held at each disclosed custodian.

Wrap fee program participation. Advisors will be required to disclose the amount of their RAUM attributable to acting as a sponsor or manager for a wrap fee program.

Branch office information. Advisors must report information about their 25 largest offices. Specifically, advisors with branch offices must report the branch office's CRD branch number, the total number of employees working from that branch office who perform investment advisory functions and the business activities conducted from that location.

Advisers Act Rule 204-2

After Oct. 1, 2017, advisors will be required to retain performance documentation for all managed accounts or security recommendations to any single person. These amendments signify the SEC's increased concern regarding performance calculations and reporting.

— Read Why You 'May' Be Headed for SEC Enforcement on ThinkAdvisor.