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News March 26, 2012 Issue

SEC Updates Form ADV FAQs

When can you report for your special purpose entities (SPEs) on Form ADV, and when must they report to the SEC separately?

How do you treat short positions in the calculation of regulatory assets under management (RAUM)?

The SEC staff answered these and other questions in the recently updated "Frequently Asked Questions on Form ADV and IARD."

The staff offered responses for a variety of factual scenarios involving exempt reporting advisers (ERAs) with SPEs, outlining conditions under which an ERA may report information for one or more SPE.

For example:

Where the ERA has discretionary authority over a private fund’s assets, and the general partner, managing member or similar SPE oversees and may terminate the ERA’s management of the fund, the ERA may satisfy the SPE’s reporting obligation provided the SPE:

  • Engages in no activities other than such oversight that would cause it to be an investment adviser under Section 202(a)(11); and
  • Is an SPE only for private funds or other pooled investment vehicles advised by the ERA or its related persons.

And what about a situation where discretionary authority over fund assets is shared between the ERA and the SPE?

The staff okayed that as well, provided that:

  • The SPE acts as an SPE only for private funds or pooled investment vehicles advised by the ERA;
  • The SPE is controlled by the ERA;
  • The SPE’s investment advisory activities are subject to the Advisers Act;
  • All persons employed by or acting on behalf of the SPE are officers, directors, partners or employees of the ERA; and
  • All persons acting on behalf of the SPE are subject to the ERA’s control and therefore are "persons associated with" the ERA.

The FAQs direct ERAs to provide all the information the SPE would provide if it were required to file its own separate report on Form ADV.

The FAQs also update information on how advisers should respond to Item 7.B of Form ADV.

Most importantly, the staff provides guidance – as promised – on the treatment of short positions, derivatives, repurchase agreements, total return swaps, and other financial instruments for purposes of calculating regulatory assets under management (RAUM).

"If the private fund has a balance sheet, you may rely on the gross assets reflected on the balance sheet. Accordingly, you need not assess the value of these financial instruments in a manner different from that required under the applicable accounting standard," say the FAQs.

The response provides an example for clarification in calculating RAUM:

"For example, when determining whether to include short positions, the short position should be included when it is an asset on the balance sheet in accordance with the applicable accounting standard. Typically, a short sale will be recorded as a short sale liability (because the fund has an obligation to replace the security) together with an asset for the proceeds received or due from the counterparty (e.g., cash received or due from a broker).

In that case, the short sale liability would neither be included as an asset nor deducted from assets in the calculation of ‘gross asset value,’ although the proceeds received would be included in ‘gross asset value.’ However, if the fund takes a short position using a derivative, the derivative itself may have a positive fair value and be recorded as an asset. In this case, the short position would be included as an asset in the calculation of ‘gross asset value.’ (See the Rule Release IA-3221, footnote 83.)"

Also related to Item 7.B responses, the FAQs indicate that the staff views private funds in master-feeder arrangements and private fund-of-funds as different types of private fund structures for reporting purposes on Form ADV. The FAQs instruct that master funds should count beneficial owners in the private fund(s) in questions 13-16 of Schedule D when Section 7.B.(1) is filled out separately for the master fund and each feeder fund.

Among other information, the FAQs instruct advisers on how to obtain private fund identification numbers (PFIDs) for reporting purposes (through the IARD system), and how to look up a private fund’s PFID.

The FAQs warn that multiple advisers to a private fund must coordinate in obtaining the private fund’s single PFID, and that the IARD system does not store the PFID until it is used on a Form ADV filing.

"As a result, you cannot retrieve this number if it is lost before you make your filing," say the FAQs.