SEC Updates Form ADV FAQs to Offer Guidance on Complying With Recent Rule Changes

The Securities and Exchange Commission’s (SEC) Division of Investment Management recently modified its “Frequently Asked Questions on Form ADV and IARD,” adding several new topics and updating one existing item.

Released in June, the changes are intended to provide investment advisers with additional guidance regarding specific questions with respect to Form ADV, many of which relate to changes made following the 2016 rulemaking titled “Form ADV and Investment Advisers Act Rules” in August 2016, which are scheduled to go into effect on Oct. 1, 2017.

In addition to the previously existing items, the SEC staff added responses to the following items to the Frequently Asked Questions (FAQs):

• Form ADV: Item 1.I
• Form ADV: Item 1.J
• Form ADV: Item 5.D
• Form ADV: Item 5.K
• Form ADV: Item 7.B
• Form ADV: Schedule R

A summary of some of the more significant amendments to the FAQs are set forth below.

Item 5.K

Significantly, six of the newly added FAQs address Item 5.K of Form ADV, which was created in the 2016 rulemaking and established reporting requirements for separately managed accounts. For example, the SEC staff indicated in the FAQs that an adviser to private funds that reports information about parallel managed accounts to the private funds it manages in Question 11 of Form PF should treat such parallel managed accounts as separately managed accounts for purposes of answering Item 5.K and Schedule D, Section 5.K, of Form ADV.

This section also clarifies which types of transactions should be considered “borrowings” for purposes of reporting on Item 5.K.(2) and Schedule D, Section 5.K.(2). The staff indicated that traditional lending activities — such as client bank loans and margin accounts, other secured borrowings and unsecured borrowings, synthetic borrowings and transactions involving synthetic borrowings, transactions selling securities short, and transactions in which variation margin is owed but, as a result of not reaching a certain set threshold, has not been paid by the client — should all be considered a “borrowing transaction” for reporting purposes under these sections of Form ADV. However, the FAQs further state that advisers “should not report leverage embedded through the use of derivatives, securities lending or repurchase agreements as borrowings.”

Finally, a question under Item 5.K asks whether an adviser would be required to report a sub-custodian that has been appointed to provide some custodial services such as settling trades or trade execution by a custodian that holds 10% or more of the adviser’s separately managed account clients’ regulatory assets under management. For purposes of Item 5.K.(4) and Schedule D, Section 5.K.(3), the staff expressed the view that an adviser would be required to report the custodian only under such circumstances.

Schedule R

In an added FAQ relating to Schedule R, the SEC staff said it will withdraw its previous response to Question 4 of a 2012 letter to the American Bar Association’s Business Law Section, stating that the response has been superseded by the 2016 rulemaking, which adopted amendments to Form ADV, codifying umbrella registration for certain advisers to private funds. In this section, the SEC staff also confirmed that every nonresident general partner and managing agent of a relying adviser is required to file Form ADV-NR, even if the relying adviser itself is a resident in the United States. In addition, the SEC staff indicated that umbrella registration is not permitted for exempt reporting advisers, as it is available only for “filing advisers” and “relying advisers” to register with the SEC.

Additional Items

The SEC staff also added FAQs addressing a range of other sections of Form ADV. With respect to the use of social media, the staff advised that Item 1.I of Form ADV does not require an adviser to list the websites or accounts on publicly available social media platforms to the extent the adviser does not control the content, such as those belonging to an employee or third-party provider.

In connection with Item 1.J, an adviser is not required to disclose that its chief compliance officer provides services to another third-party adviser where such other third-party adviser does not compensate your chief compliance officer for the services provided to your firm. 

Finally, the FAQs state that an adviser is required to disclose under Item 7.B its auditor’s assigned number from the Public Company Accounting Oversight Board (PCAOB) and indicate whether the audited financial statements have been distributed, adding that an adviser may answer “yes” if it will distribute the audited financial statements as required to the private fund’s investors, but has not yet done so at the time of filing the Form ADV.

Item 1.O

In addition, the SEC staff updated the existing FAQ section relating to Form ADV: Item 1.O, which requires an adviser to indicate whether it had $1 billion or more in total assets shown on its balance sheet as of the last day of its most recent fiscal year-end. The SEC clarified that an adviser with more than $1 billion in regulatory assets under management may not be required to answer “yes” to this question, since “assets” refers to only the adviser’s total assets, not the assets managed on behalf of clients. Further, nonproprietary assets, such as client assets under management, should be excluded for purposes of responding to Item 1.O, regardless of whether they appear on an investment adviser’s balance sheet.