Securities Regulation Daily SEC adopts enhanced disclosure rules for registered investment advisers
Thursday, August 25, 2016

SEC adopts enhanced disclosure rules for registered investment advisers

By Jacquelyn Lumb

The SEC has adopted amendments to the Investment Advisers Act to improve the quality of information that is provided to investors and to enhance the SEC’s ability to monitor and regulate the asset management industry (Release No. IA-4509, August 25, 2016). In a news release announcing the adoption of the rules, Chair Mary Jo White said the information will give investors and the SEC a better understanding of the risk profile of each adviser and the industry as a whole. Among the new requirements are additional calculations with respect to performance information that will help the examination staff evaluate claims by advisers which may reduce the likelihood of presenting misleading or fraudulent advertising. The amendments will become effective 60 days after publication in the Federal Register, but the compliance date is October 1, 2017 to provide time for FINRA to reprogram the investor adviser registration database, known as IARD.

The SEC proposed the revisions on May 20, 2015. The amendments to Part 1A of Form ADV will fill what the SEC saw as information gaps relating to separately managed accounts; permit private fund adviser entities operating a single advisory business to register using a single Form ADV, known as umbrella registration; and clarify certain items and instructions. The amendments to Rule 204-2, the books and records rule, will require advisers to document and maintain their performance calculations or rates of return that appear in any of their written communications. The final rules also remove certain transition provisions that were adopted with previous rulemaking initiatives but are no longer necessary.

The SEC received 50 comment letters in response to its proposal, most of which were generally favorable, and the majority of which addressed the reporting of separately managed accounts and umbrella registration. The final rules reflect a number of modifications in response to commenters’ concerns.

Modifications. Advisers will be required to report the approximate percentage of separately managed account regulatory assets under management that are invested in 12 broad asset categories, rather than 10 as originally proposed. The scope of information to be reported has been narrowed, as has the frequency of reporting, from the original proposal. Advisers will be able to use their own consistently applied methodologies to select asset classes. Advisers may not look through investments and funds to the underlying asset type because the SEC wants to see the extent to which separately managed account assets are invested in funds as well as other types of investments.

The final rule raises the minimum threshold from $150 million to $500 million for reporting the amount of separately managed account regulatory assets under management and the dollar amount of borrowings attributable to those assets that correspond to three levels of gross national exposures rather than four levels as proposed. The final rule also bases the reporting of borrowings and derivatives on regulatory assets under management in separately managed accounts, rather than net asset value as proposed. In addition, the final rule was revised to address concerns about confidentiality, including the disclosure of ranges of advisory clients rather than a specific number.

Umbrella registration. With respect to umbrella registration, the release notes that it is not mandatory, but it will simplify the registration requirements for private fund advisers that operate a single advisory business through multiple legal entities. The conditions under which umbrella registration is available are the same as those in the staff guidance that many advisers have relied upon since 2012. Umbrella registration does not extend to non-U.S. filing advisers or to exempt reporting advisers as some commenters had urged.

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