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News June 26, 2017 Issue

SEC Staff Issue Form ADV FAQs as Compliance Deadline Approaches

Form ADV is changing – and advisers that do not take the time to learn how to answer the new questions may find themselves scrambling for answers as the October 1 effective date draws near. It may seem far off, but it’s only a little more than 90 days away. The SEC’s Division of Investment Management earlier this month issued answers to 23 frequently asked questions to help advisory firms prepare.

The Form ADV changes were made by the agency’s August 26, 2016 rule amendments (ACA Insight, 8/29/16) that sought to modernize the questions required to be answered on the form and its updates. The changes are also intended to make what advisory firms do more transparent to the SEC. Among other things, the amendments require advisers to provide aggregate reporting on separate accounts, and allow private fund advisers managing multiple entities as a single business to register and report on just one form.

"It is critical that advisers become familiar with the changes to Form ADV to ensure they are prepared for the October 1, 2017 effective date," said ACA Compliance Group senior principal consultant Jessica Huelbig. "Firms with December fiscal year ends may be thinking they don’t need to worry about the changes until the March 2018 annual deadline. However, any change made to Part 1 after October 1 will require that the new form be completed in its entirety. Firms should take the opportunity when things slow down a bit this summer to educate themselves on the ADV changes."

"A lot of chief compliance officers are probably looking at the adopted rule changes and trying to understand them," said Mayer Brown attorney Adam Kanter. "The SEC staff may be looking at the form themselves and recognizing where there may be questions."

With that in mind and with the compliance date approaching, following is a rundown of some of the answers to FAQs on the new Form ADV by the Division of Investment Management staff. (Advisers are encouraged to view the actual FAQs for these and additional topics themselves on the agency’s Form ADV FAQ page, and to review the blackline edit of the Form, which shows the changes that were made to Form ADV as a result of the rule amendments.)

Item 1.I – Social media platforms

Item 1 of Form ADV deals with "Identifying Information," and Section I of this item addresses whether an adviser has one or more websites or accounts of publicly available social media platforms, such as Twitter, Facebook or LinkedIn.

"If ‘yes,’ list all firm website addresses and the address for each of the firm’s accounts on publicly available social media platforms on Section 1.I of Schedule D," Item 1.I states. "If a website address serves as a portal through which to access other information you have published on the web, you may list the portal without listing addresses for all of the other information. You may need to list more than one portal address. Do not provide the addresses of websites or accounts on publicly available social media platforms where you do not control the content. Do not provide the individual electronic mail (e-mail) addresses of employees or the addresses of employee accounts on publicly available social media platforms."

This instruction has apparently caused some confusion among advisers, as the agency staff lists four FAQs just on this one topic. "Most of these questions are variations on the same theme, asking whether website and account addresses need to be reported in certain circumstances," said Kanter. "All good to have and to refer to when completing the form."

Here they are, as well as the answer from the staff or, when the answer is very long, a summary (questions are in bold, and answers from the agency staff, along with comments from ACA Insight or external sources are in non-bold):

  • Does an adviser have to report the address of an account or a publicly available social media platform where an unaffiliated third party distributor or solicitor controls the content? "No," the staff says. "An adviser should not provide the address of websites or accounts on publicly available social media platforms where the adviser does not control the content. . . .To the extent an account is used to promote the business of an adviser registered with the Commission and the adviser controls the content, the account should be reported." The answer also notes that Form ADV’s Schedule D, Section 1.I specifies that the only website addresses that need to be reported "are ones where the adviser ‘controls the content.’"
  • Information about my advisory firm is included on an account on a social media platform where a third party controls the content. The platform provides job listings and enables the public to rate and review companies. Should I include the address of that account for purposes of Item 1.I? "No," the answer to this FAQ said. "You should not provide the address of websites or accounts on social media platforms where the adviser does not control the content."
  • The parent company of an adviser created and maintains a social media account that references the business of the adviser. Should the adviser report the address of that account for purposes of Item 1.I? Here, the SEC staff hedged its answer a bit. "It depends," the staff said. "An adviser needs to provide only the addresses of websites or accounts on publicly available social media platforms where the adviser controls the content. Whether an adviser controls the content of such an account depends on the facts and circumstances." As an example, it noted that "the staff believes that if the adviser provides content for the account and is aware that its parent company uses the account to promote the adviser’s business, then the adviser may be in control of the content and therefore would have to report the account’s address. On the other hand, if such an account merely mentions the adviser as one of the parent company’s subsidiaries, but is not used to promote the adviser’s business, then the adviser may not be in control of the content and therefore could omit reporting the account’s address."
  • Should the adviser report the address of an employee’s account on a publicly available social media platform if the adviser controls the content of the account? Here the question centers around whether an employee’s account address should be listed. "No," the agency says. "This item is not intended to extend to the social media accounts of an adviser’s employees regardless of whether the adviser controls the content of such accounts."

Item 1.J. (2) – Chief compliance officer compensation

"This item really zeroes in on the external CCO model, where an adviser contracts with a compliance company for CCO help, and the CCO is paid not by the adviser, but by the compliance company" said Kanter.

"If your chief compliance officer is compensated or employed by any person other than you, a related person or an investment company registered under the Investment Company Act of 1940 that you advise for providing chief compliance officer services to you, provide the person’s name and IRS employer identification number (if any)," a new question added by the rule amendment states.

Nonetheless, the staff provided an answer to one FAQ here:

  • My firm’s chief compliance officer provides chief compliance officer services to my firm and two other firms. Those two other firms employ and compensate the chief compliance officer for the services provided to their respective firms and not for the services provided to my firm. What should my firm answer for Item 1.J. (2)? "Your firm should leave Item 1.J.(2) blank," the staff says. "Item 1.J. (2) requires information only where another person employs or compensates your chief compliance officer for providing chief compliance officer services to your firm. In this case, the two other firms are employing and compensating your chief compliance officer, but for the services provided to them – not the services provided to your firm.)"

Item 5.D – Information about clients

Item 5.D. requires advisers to list their clients, without revealing client names, by type (i.e., individuals, high net worth individuals, investment companies), as well as provide the number of clients they have in each group and the amount of regulatory assets under management in each group.

To this end, one of the staff’s instructions states that "if you have fewer than 5 clients in a particular category . . . you may check Item 5.D. (2) rather than respond to 5.D. (1)." Item 5.D. (1) requires the advisory firm to list the number of clients in each category, while Item 5.D. (2) is checked if an adviser has fewer than five clients.

This prompted questions from advisers, and the following answer from the agency staff:

  • My advisory firm does not have any high net worth individual clients to report . . . . Should I check column 5.D. (2) to report "fewer than 5 clients" for that category of client? "While the staff recognizes that the instructions to Item 5.D. state that ‘if you have fewer than 5 clients in a particular category . . . you may check Item 5.D.(2) rather than respond to Item 5.D.(1), if you do not have any clients for a particular category, the staff encourages you to report ‘0’ in column 5.D.(1), ‘Number of client(s),’" the staff said.

"This is one of those instances when the SEC tried to be helpful, but the result is that the instructions became ambiguous," said Kanter. "The FAQ clarifies the instructions."

More

Other topics addressed in the FAQs relate to Item 1.O – Amount of firm assets, Item 5.K – Separately managed account clients, Item 7.B – Private fund adviser identification, and Schedule R – Form ADV identification and related information.