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News March 9, 2015 Issue

Form ADV: Answers to the Most Common Questions

The end of March is fast approaching, and that means it’s time to get your Form ADV updates in. One key step in that process is making sure you understand all the questions so you can complete the forms accurately and completely.

Below are answers to some of the most common Form ADV questions (ACA Insight will provide more answers in next week’s issue). Review them to get the information you need – because completing Form ADV correctly may head off a future problem.

Part 1A, Item 1

Item 1.M – Are you registered with a foreign financial regulatory authority? This question is about the filing firm itself, not an affiliate," said ACA Compliance Group senior principal consultant Rhea Shelton. So, if an adviser is not registered with a foreign regulator but has a related person, such as a general partner entity, registered with one, "the answer is still ‘no,’’ he said.

  • Item 1.O – Did you have $1 billion or more in assets on the last day of your most recent fiscal year? Don’t fall into the trap of thinking this is about assets under management – it’s not. "It’s about the adviser’s own balance sheet," Shelton said.
  • Item 1.P – Provide your Legal Entity Identifier if you have one. If you can’t locate one, you can relax. An LEI is a single, universal standard identifier used by any organization or firm involved in financial transactions internationally for reporting purposes. "Most advisers do not have one," Shelton said, and if that is the case, just leave the answer blank.
  • Section 1.F – Other offices. These are offices in addition to the principal office and place of business disclosed elsewhere in Item 1. An adviser with more than five other office locations may list all of its offices – but it is only required to list the five largest, based on the number of employees.
  • Section 1.L – Location of books and records. You do not need to list locations that hold only duplicate books and records, Shelton said. However, if your original books and records are stored at multiple locations, such as at a document storage service provider like Iron Mountain, then each of those locations will need to be listed here. "For large advisers with hundreds of branch offices that may maintain certain books and records, if the list would be extremely long, then the SEC would not object if every office location was not listed," said Shelton.


Part 1A, Items 2, 3 and 4

Item 2.C – State securities authority notice filings and state reporting by exempt reporting advisers. Check the boxes next to only those states in which you are required to notice file, said ACA Compliance Group consultant Hanh Nguyen. State notice filing requirements vary from state to state. "In general, a notice filing is required in states where there is a primary or branch office," she said. "In addition, a notice filing is generally required once the number of clients exceeds five." Four states – Louisiana, New Hampshire, Nebraska and Texas – require a state notice filing if an adviser has just one natural person client in that state. Private fund managers typically need to remember that the fund is the client.

  • Item 3.C – Under the laws of what state or country are you organized? Don’t go by your firm’s main office location. Rather, refer to the governing documents of the registered investment adviser to determine in what state the adviser was organized. For example, an adviser may be located in New York, but incorporated in Delaware.
  • Item 4.A – Are you, at the time of this filing, succeeding to the business of a registered investment adviser? "Generally, this is answered ‘no,’ since only a few firms find themselves in this situation," said Nguyen. That said, be aware that if you are changing the legal structure of your investment advisory firm, that may, in certain states, be considered a succession filing, which would require the completion of this item.


Part 1A, Item 5

Item 5.C – To approximately how many clients did you provide investment advisory services during your most recently completed fiscal year? It is critical that private fund managers remember that the term "client" refers to the funds and not the funds’ investors. Wrap fee advisers need to remember that each wrap fee participant is considered a client and that the wrap fee platform itself is not. An adviser, at its own discretion, may count each account for the same individual/entity or household toward the
client count. "The method should be consistent with the way the adviser normally counts clients for their firm," Nguyen said.

  • Item 5.E – You are compensated for your investment advisory services by (check all that apply). The key thing to remember is that you must disclose all types of compensation the firm may receive, not just those for which there are specific boxes, said Nguyen. For fee types for which there are not specific boxes, such as deal fees or portfolio management fees, check the "other" box, she said. Private equity managers should ask themselves if they have disclosed the receipt of deal or portfolio company monitoring fees.
  • Item 5.F(1) – Do you provide continuous and regular supervisory or management services to securities portfolios? An advisory firm provides such services if it falls into either of two categories. The first category is that it has discretionary authority over and provides ongoing supervisory or management services with respect to the account. The second category is if it does not have discretionary authority over the account, but has the ongoing responsibility to select or make recommendations based on the needs of the client in regard to specific securities or other investments in the account to purchase or sell and, if the recommendation is accepted by the client, is responsible for arranging or effecting that purchase or sale.
  • Item 5.F(2) – If yes, what is the amount of your regulatory assets under management and total number of accounts? Remember that RAUM refers to the gross asset value, not the net, of proprietary assets, as well as assets managed without receiving compensation, assets of foreign clients, and uncalled capital commitments, as applicable. "Gross" value means you should not deduct any outstanding indebtedness or other accrued but unpaid liabilities. The value must be calculated within 90 days prior to the date of filing the annual amendment.


Here’s how you calculate RAUM:

First determine if the account is a securities portfolio. Keep in mind that a portfolio of assets is deemed a securities portfolio for the purpose of Form ADV only when at least 50 percent of its total value consists of securities. Assets that are not considered securities, such as art, should be excluded. If 50 percent or more of the assets are securities, the entire value of the portfolio is included. Similarly, if 50 percent is not securities, the entire account would not be considered a securities portfolio. Once you have determined whether the account is a securities portfolio, determine whether your firm provides continuous and regular supervisory services with respect to the account, then determine the total value of the account. Example: A client’s $10 million portfolio consists of $6 million in stocks and bonds, $1 million in cash and cash equivalents, and $3 million in non-securities such as collectibles and real estate. Since 70 percent of the account is comprised of securities, the account is considered a securities portfolio. The account is managed on a discretionary basis and is provided ongoing supervisory and management services, thereby meeting the definition for supervisory or management services. The entire value of the account ($10 million) is therefore included in the calculation of the adviser’s RAUM.

  • Item 5.H – If you provide financial planning services, to how many clients did you provide these services during your last fiscal year? If the adviser does not provide financial planning services and has not marked Item 5.G(1), then this question should be left blank, rather than marking "0," Nguyen said.


Part 1A, Item 6

Item 6.A – You are actively engaged in a business as a (check all that apply).

There are 14 disclosure categories in this item. Advisers should choose those that apply. If there is a separate legal entity established to engage in business with one of those categories, that would more appropriately be disclosed in Item 7. It should be noted, Nguyen said, that if an adviser’s other business activity does not fall under one of the categories listed in Item 6, then it does not need to be disclosed in Item 6. "However, consider whether the other business activity may present certain conflicts of interest that may require additional disclosures in Part 2A," she said.

Part 1A, Item 7

Item 7.A – You have a related person that is a (check all that apply). A related person is defined as all of the adviser’s advisory affiliates and any person that is under common control with the adviser. For each related person that may fall under one of the 16 categories listed in item 7, a separate Section 7.A will need to be completed.

  • Section 7.A – Financial industry affiliations. Advisers are generally required to complete this section for their related persons, but an adviser may omit certain related persons. These would be related persons with whom the adviser a) has no business dealings in relation to the advisory services provided to clients, b) does not conduct shared operations, c) does not refer clients or business to and vice versa, d) does not share supervised persons or premises, and e) has no reason to believe that the relationship with the related person creates a conflict of interest with clients.
  • Section 7.B(1)(10) – What type of fund is the private fund? Form ADV has "very specific definitions of private funds," Nguyen said, and private fund advisers need to be aware of how Form ADV defines hedge funds, liquidity funds, private equity funds and others, particularly since those definitions may not match market definitions. "Advisers should always refer back to the definition in order to accurately categorize their private funds," she said.
  • Section 7.B(1)(11) – Current gross asset value of the private fund. The methodology used to calculate a private fund’s current gross asset value should be similar to that used to calculate RAUM. It should include uncalled capital commitments and not deduct any outstanding indebtedness or other accrued unpaid liabilities.
  • Section 7.B(1)(19) – Are your clients solicited to invest in the private fund? "It can’t be emphasized enough: the client is the private fund," said Nguyen. If a separately managed account client or another private fund is invested in the reporting private fund, then the answer should be "yes," she said. However, this does not apply to master-feeder structures where the feeder funds are invested in the master.
  • Section 7.B(1)(22) – If yes, provide the private fund’s Form D file number (if any). If after reasonable efforts to locate the Form D file number you cannot find your identification number, then the adviser should enter all nines for the number (e.g., 021-9999999999).
  • Section 7.B(1)(23)(h) – Does the report prepared by the auditing firm contain an unqualified opinion? "For advisers whose private funds undergo an annual audit to meet Custody Rule requirements, this should be answered ‘report not yet received,’ if the opinion has not been issued by the date of the annual updating amendment," Nguyen said. "Advisers must remember to update this promptly once the report is received."
  • Sections 7.B(1)(25) – Does the private fund use any custodians (including prime brokers listed above) to hold some or all of its assets? Advisers should remember to list all prime brokers and financial institutions that have custody of assets, including cash.