Form ADV and Investment Advisers Act Rules

Federal RegisterSep 1, 2016

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-4509; File No. S7-09-15]

RIN 3235-AL75

Form ADV and Investment Advisers Act Rules

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (the “Commission” or “SEC”) is adopting amendments to Form ADV that are designed to provide additional information regarding advisers, including information about their separately managed account business, incorporate a method for private fund adviser entities operating a single advisory business to register using a single Form ADV, and make clarifying, technical and other amendments to certain Form ADV items and instructions. The Commission also is adopting amendments to the Advisers Act books and records rule and technical amendments to several Advisers Act rules to remove transition provisions that are no longer necessary.

DATES:

Effective October 31, 2016.

Compliance Date:

See Section III of this final rule.

FOR FURTHER INFORMATION CONTACT:

Bridget D. Farrell, Senior Counsel, Jennifer Songer, Senior Counsel, Betselot Zeleke, Attorney-Adviser, or Sara Cortes, Assistant Director at (202) 551-6787 or

IArules@sec.gov

, Investment Adviser Regulation Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION:

The Commission is adopting amendments to rules 202(a)(11)(G)-1 [17 CFR 275.202(a)(11)(G)-1], 203-1 [17 CFR 275.203-1], 204-1 [17 CFR 275.204-1], 204-2 [17 CFR 275.204-2], and 204-3 [17 CFR 275.204-3] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] (“Advisers Act” or “Act”),

and amendments to Form ADV [17 CFR 279.1] under the Advisers Act. The Commission is also rescinding rule 203A-5 [17 CFR 275.203A-5] under the Advisers Act.

15 U.S.C. 80b. Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 80b of the United States Code, at which the Advisers Act is codified, and when we refer to rules under the Advisers Act, or any paragraph of these rules, we are referring to title 17, part 275 of the Code of Federal Regulations [17 CFR part 275], in which these rules are published.

Table of Contents

I. Background

II. Discussion

A. Amendments to Form ADV

1. Information Regarding Separately Managed Accounts

a. Amendments to Item 5 of Part 1A and Section 5 of Schedule D

b. Section 5.K.(1) of Schedule D

c. Section 5.K.(2) of Schedule D

d. Section 5.K.(3) of Schedule D

e. Public Disclosure of Separately Managed Account Information

f. Additional Comments About Reporting of Separately Managed Accounts

2. Additional Information Regarding Investment Advisers

a. Additional Identifying Information

b. Additional Information About Advisory Business

c. Additional Information About Financial Industry Affiliations and Private Fund Reporting

3. Umbrella Registration

4. Clarifying, Technical and Other Amendments to Form ADV

a. Amendments to Item 2

b. Amendments to Item 4

c. Amendments to Item 7

d. Amendments to Item 8

e. Amendments to Section 9.C. of Schedule D

f. Amendments to Disclosure Reporting Pages

g. Amendments to Instructions and Glossary

B. Amendments to Investment Advisers Act Rules

1. Amendments to Books and Records Rule

2. Technical Amendments to Advisers Act Rules

a. Rule 203A-5

b. Rule 202(a)(11)(G)-1(e)

c. Rule 203-1(e)

d. Rule 203-1(b), Rule 204-1(c) and Rule 204-3(g)

III. Effective and Compliance Dates

A. Effective Date

B. Compliance Dates

IV. Economic Analysis

A. Introduction

B. Amendments to Form ADV

1. Economic Baseline and Affected Market Participants

2. Analysis of the Amendments to Form ADV and Alternatives

a. Information Regarding Separately Managed Accounts

b. Additional Information Regarding Investment Advisers

c. Costs Applicable to Reporting Information Regarding Separately Managed Accounts and Additional Information on Form ADV

d. Umbrella Registration

e. Clarifying, Technical and Other Amendments to Form ADV

f. Exempt Reporting Advisers

C. Amendments to Investment Advisers Act Rules

1. Economic Baseline and Affected Market Participants

2. Analysis of the Effects of the Amendments to the Advisers Act Books and Records Rule

V. Paperwork Reduction Act Analysis

A. Form ADV

1. Changes in Average Burden Estimates

a. Estimated Change in Burden Related to Part 1A Amendments (Not Including Private Fund Reporting)

i. Amendments Related to Reporting of Separately Managed Account Information

ii. Other Additional Information Regarding Investment Advisers

iii. Clarifying, Technical and Other Amendments

b. Estimated Changes in Burden Related to Private Fund Reporting Requirements

c. Estimated Changes in Burden Related to Exempt Reporting Adviser Reporting Requirements

2. Annual Burden Estimates

a. Estimated Annual Burden Applicable to All Registered Investment Advisers

i. Estimated Initial Hour Burden (Not Including Burden Applicable to Private Funds) for First Year Adviser To Complete Form ADV (Part 1 and Part 2)

ii. Estimated Initial Burden Applicable to Registered Advisers to Private Funds

iii. Estimated Annual Hour Burden Associated With Amendments, New Brochure Supplements, and Delivery Obligations

iv. Estimated Annual Cost Burden

b. Estimated Annual Burden Applicable to Exempt Reporting Advisers

i. Estimated Initial Hour Burden

ii. Estimated Annual Burden Associated With Amendments and Final Filings

3. Total Revised Burden

B. Rule 204-2

VI. Final Regulatory Flexibility Analysis

A. Need for and Objectives of the Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rule and Rule Amendments

D. Projected Reporting Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VII. Statutory Authority

Appendix A: Form ADV: General Instructions

Appendix B: Form ADV: Instructions for Part 1A

Appendix C: Form ADV: Glossary of Terms

Appendix D: Form ADV, Part 1A

I. Background

Form ADV is used by investment advisers to register with the Commission and with the states.

The information collected on Form ADV serves a vital role in our regulatory program and our ability to protect

investors. On May 20, 2015,

we proposed amendments to Part 1A of Form ADV in three areas: Revisions to fill certain data gaps and to provide additional information about investment advisers, including their separately managed account business; amendments to incorporate a method for private fund adviser entities operating a single advisory business to register with us using a single Form ADV; and clarifying, technical and other amendments to existing items and instructions.

Information on Form ADV is available to the public through the Investment Adviser Public Disclosure System (“IAPD”), which allows the public to access the most recent Form ADV filing made by an investment adviser and is available at

http://www.adviserinfo.sec.gov.

See Amendments to Form ADV and Investment Advisers Act Rules,

Investment Advisers Act Release No. 4091 (May 20, 2015) [80 FR 33718 (June 12, 2015)] (“Proposing Release”).

In general, this Release discusses the Commission's rule and form amendments that will affect advisers registered with the Commission. We understand that the state securities authorities intend to consider similar changes that affect advisers registered with the states, who are also required to complete Part 1B of Form ADV as part of their state registrations.

Several of the amendments to Form ADV relate to separately managed accounts. These amendments will require advisers to provide certain aggregate information about separately managed accounts that they advise. Other amendments to Form ADV that we are adopting are designed to improve the depth and quality of information that we collect on investment advisers, facilitate our risk monitoring initiatives and assist our staff in its risk-based examination program. Moreover, because Form ADV is available to the public on our Web site, these amendments also are intended to provide advisory clients and the public additional information regarding registered investment advisers.

We are also adopting amendments to Part 1A that will provide a more efficient method for the registration on one Form ADV of multiple private fund adviser entities operating a single advisory business (“umbrella registration”). The staff has provided guidance to private fund advisers regarding umbrella registration,

and the amendments to incorporate umbrella registration into Form ADV will make the availability of umbrella registration more widely known to advisers. Uniform filing requirements for umbrella registration in Form ADV will provide more consistent data about, and create a clearer picture of, groups of private fund advisers that operate as a single business.

See

American Bar Association, Business Law Section, SEC Staff Letter (Jan. 18, 2012),

available at http://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm

(“2012 ABA Letter”).

The last set of amendments to Part 1A of Form ADV includes clarifying, technical and other amendments that are based on our staff's experience with the form and responding to inquiries from advisers and their service providers. These amendments should make it easier for advisers to understand and complete the form.

Separate from Form ADV, we are adopting amendments to several Advisers Act rules. First, we are adopting amendments to the books and records rule, rule 204-2, to require advisers to make and keep supporting documentation that demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person. Advisers also will be required to maintain originals of all written communications received and copies of written communications sent by them related to the performance or rate of return of any or all managed accounts or securities recommendations. As discussed in the Proposing Release, we believe that these amendments will better protect investors from fraudulent performance claims.

Finally, we are adopting several technical amendments to rules under the Advisers Act to remove transition provisions that were adopted in conjunction with previous rulemaking initiatives, but that are no longer necessary.

See

Proposing Release,

supra

footnote 3 at Section I.

We received 50 comment letters on our proposals, most of which were from investment advisers, trade or professional organizations, law firms and consultants.

Commenters generally supported the goals of the proposal. The majority of comments focused on reporting of separately managed accounts and umbrella registration. Several commenters supported collection of information on separately managed account clients, but many raised concerns about the public availability of the information and reporting on derivatives and borrowings. A diverse group of commenters supported umbrella registration. Commenters also generally supported the amendments to certain Advisers Act rules. We are adopting the proposed amendments with several modifications to address commenters' concerns. We discuss these modifications and concerns below.

Comment letters submitted in File No. S7-09-15 are available on the Commission's Web site at

http://www.sec.gov/comments/s7-09-15/s70915.shtml.

We also considered those comments submitted in File No. S7-08-15 (

Investment Company Reporting Modernization,

Investment Company Act Release No. 9776 (May 20, 2015) [80 FR 33589 (June 12, 2015)]) that addressed the amendments adopted in this Release. Those comments are available on the Commission's Web site at

http://www.sec.gov/comments/s7-08-15/s70815.shtml.

We also note that in December 2014, the Financial Stability Oversight Council (“FSOC”) issued a notice requesting comment on aspects of the asset management industry, which includes, among other entities, registered investment advisers. Although this rulemaking is independent of FSOC, the notice included requests for comment on additional data or information that would be helpful to regulators and market participants. In response to the notice, several commenters discussed issues concerning data that are relevant to this rulemaking, including data regarding separately managed accounts that was cited and considered as part of the Proposing Release.

II. Discussion

A. Amendments to Form ADV

1. Information Regarding Separately Managed Accounts

Several of the amendments to Form ADV that we are adopting are designed to collect more specific information about advisers' separately managed accounts. For purposes of reporting on Form ADV, we consider advisory accounts other than those that are pooled investment vehicles (

i.e.,

registered investment companies, business development companies and pooled investment vehicles that are not registered (including, but not limited to, private funds)) to be separately managed accounts. As we discussed in the Proposing Release, we currently collect detailed information about pooled investment vehicles that advisers manage, but little specific information about separately managed accounts.

We believe that collecting additional information about separately managed accounts will enhance our staff's ability to effectively carry out our risk-based examination program and other risk assessment and monitoring activities. We discuss below the specific separate account reporting requirements. Commenters stated that they generally understood our interest in collecting additional data on separately managed accounts,

but many raised concerns

regarding separately managed account reporting as proposed, and we discuss those concerns below.

See

Proposing Release,

supra

footnote 3 at Section II.A.1.

See, e.g.,

Comment Letter of Blackrock, Inc. (Aug. 11, 2015) (“BlackRock Letter”); Comment Letter of Dechert LLP (Aug. 11, 2015) (“Dechert Letter”); Comment Letter of Investment Adviser Association (Aug. 11, 2015) (“IAA Letter”); Comment Letter of Investment Company Institute (Aug. 11, 2015) (“ICI Letter”); Comment Letter of Invesco Advisers, Inc. (Aug. 11, 2015) (“Invesco Letter”); Comment Letter of LPL Financial LLC (Aug. 11, 2015) (“LPL Letter”); Comment Letter of Managed Funds Association (Aug. 11, 2015) (“MFA Letter”); Comment Letter of Money Management Institute (Aug. 11, 2015) (“MMI Letter”); Comment Letter of Morningstar, Inc. (Aug. 12, 2015) (“Morningstar Letter”); Comment Letter of North American Securities Administrators Association, Inc. (Aug. 11, 2015) (“NASAA Letter”); Comment Letter of National Regulatory Services (Aug. 11, 2015) (“NRS Letter”); Comment Letter of

OppenheimerFunds, Inc. (Aug. 10, 2015) (“Oppenheimer Letter”); Comment Letter of Charles Schwab & Co., Inc. (Aug. 11, 2015) (“Schwab & Co. Letter”); Comment Letter of Securities Industry and Financial Markets Association, Asset Management Group and Asset Managers Forum (Aug. 11, 2015) (“SIFMA Letter”); Comment Letter of the Systemic Risk Council (Aug. 7, 2015) (“SRC Letter”); Comment Letter of T. Rowe Price Associates, Inc. (Aug. 11, 2015) (“T. Rowe Price Letter”). However, certain commenters expressed their disapproval of the collection this data.

See

Comment Letter of The Alternative Investment Management Association Limited (Aug. 6, 2015) (“AIMA Letter”) (stating that this data should not be collected unless kept confidential).

a. Amendments to Item 5 of Part 1A and Section 5 of Schedule D

Item 5 of Part 1A and Section 5 of Schedule D currently require advisers to provide information about their advisory business including percentages of types of clients and assets managed for those clients. We had proposed to collect information specifically about separately managed accounts, including types of assets held, and the use of derivatives and borrowings in the accounts.

We are adopting the amendments to Item 5 of Part 1A and Section 5 of Schedule D largely as proposed, with some modifications in response to comments we received, as discussed below. We are amending Item 5 of Part 1A and Section 5 of Schedule D to require advisers to provide information on an aggregate level regarding separately managed accounts that they manage.

Advisers will be required to report information about the types of assets held and the use of derivatives and borrowings in separately managed accounts. Advisers that report that they have regulatory assets under management attributable to separately managed accounts in response to new Item 5.K.(1) of Part 1A will be required to complete new Section 5.K.(1) of Schedule D, and may be required to complete new Sections 5.K.(2) and 5.K.(3) of Schedule D regarding those accounts.

See

Proposing Release,

supra

footnote 3 at Section II.A.1.

See infra

Section II.A.2.b. for a discussion of other amendments to Item 5 of Part 1A.

b. Section 5.K.(1) of Schedule D

In Section 5.K.(1) of Schedule D advisers will be required to report the approximate percentage of separately managed account regulatory assets under management that are invested in twelve broad asset categories, modified from the ten that were proposed in response to comments received and discussed below. As proposed, advisers with at least $10 billion in regulatory assets under management attributable to separately managed accounts will report, on an annual basis, both mid-year and end of year

percentages while advisers with less than $10 billion in regulatory assets under management attributable to separately managed accounts will report only end of year percentages. As we stated in the Proposing Release, we believe this information will allow us to better monitor this segment of the investment advisory industry and identify advisers that specialize in particular asset classes.

We are adopting the amendments to Section 5.K.(1) of Schedule D largely as proposed, with some minor modifications in response to comments we received, as discussed below.

As stated in Amended Form ADV, Part 1A, Schedule D, Section 5.K.(1), end of year refers to the date used by the adviser to calculate its regulatory assets under management, and mid-year is the date six months before the end of year date.

See

Proposing Release,

supra

footnote 3 at Section II.A.1.

While some commenters generally supported the collection of this information,

others suggested requiring a minimum regulatory assets under management or number of account threshold for reporting on this section to minimize burdens on small and mid-sized advisers.

We recognize that this reporting will impose some burden on all advisers, including smaller advisers, but we believe that gathering this information for all registered advisers is important for us to gain a full understanding of assets held in separately managed accounts managed by investment advisers of different sizes. This section requires advisers, on an annual basis, to report aggregate separate account investments across twelve categories of investments. We believe that requiring all advisers to separately managed accounts to report this information will enable us to gain a more fulsome picture of assets held in separately managed accounts. We have also tailored and limited the scope of information to be reported and the frequency of such reporting.

See

Schwab & Co. Letter (“We support the SEC's efforts to collect additional data seeking to minimize as much as possible the burden on regulated entities and the investors they service while helping the SEC to enhance their ability to conduct risk-based examinations of advisers.”); BlackRock Letter (“We believe this information will help the Commission identify which managers specialize in SMAs that invest in certain asset classes.”).

Comment Letter of Advisor Solutions Group, Inc. (Aug. 11, 2015) (“ASG Letter”); AIMA Letter (suggesting that advisers with a small number of separately managed account clients or a small amount of separately managed account assets under management be exempt from reporting on separately managed accounts).

With respect to the categories of investments listed in Section 5.K.(1), we proposed to require advisers to report the approximate percentage of separately managed account regulatory assets under management invested in ten broad asset categories.

Several commenters sought clarification on how to classify assets in certain categories

Another commenter suggested new categories, such as “private real estate” and “structured products.”

In response to that commenter's suggestion

we have included a new category for “Cash and Cash Equivalents.”

We also believe that additional delineation of equity securities would be helpful for our staff and the public, and accordingly, we have added a “Non-Exchange-Traded Equity Securities” category in addition to the “Exchange-Traded Equity Securities” category, to clarify where to report equities that are not listed on a regulated securities exchange. This information will assist our examination staff in monitoring risks associated with advisers managing separately managed account assets in securities that are not exchange traded.

Proposing Release,

supra

footnote 3 at Section II.A.1.

LPL Letter; MMI Letter.

See also

Dechert Letter (stating that advisers may not maintain systems that permit them to efficiently categorize assets based on asset types in the proposed amendments); IAA Letter.

BlackRock Letter. BlackRock also suggested removing “derivatives” as a category, because derivatives information for some advisers will be collected in Section 5.K.(2). We have not removed “derivatives” as a category, because are collecting different information in Section 5.K.(2) than in Section 5.K.(1).

BlackRock Letter; MMI Letter.

Amended Form ADV, Part 1A, Schedule D, Section 5.K.(1)(a)-(b). The text proceeding Section 5.K.(1) gives examples of cash and cash equivalents, including bank deposits, certificates of deposit, bankers' acceptances, and similar bank instruments. We also added an instruction to the text preceding Section 5.K.(1)(a) stating that advisers should round to the nearest percent when reporting this information.

Some commenters also sought clarification about how to report assets that may be classified into multiple categories.

Commenters also suggested that advisers be permitted to use reasonable and documented systems and methodologies for determining

appropriate asset categories.

We acknowledge that some assets may be classified into more than one category or require advisers to apply discretion about which category applies to a particular asset, and agree that advisers should be permitted to use reasonable methodologies in selecting a category in which to report such an asset, but should not double count assets. Accordingly, in response to these comments, we are adding an instruction to Item 5.K.1 that advisers may use their own internal methodologies and the conventions of their service providers in determining how to categorize assets, so long as their methodologies are consistently applied and consistent with information the advisers report internally and to current and prospective clients, but should not double count assets. We believe that providing this flexibility, which we modeled after an instruction in Form PF, acknowledges that advisers may categorize the same or similar assets differently based on different methodologies.

Comment Letter of Anonymous (Aug. 11, 2015) (“Anonymous Letter”) (“derivatives” category may overlap with others); Comment Letter of JAG Capital Management LLC (June 24, 2015) (“JAG Letter”) (convertible bonds, TIPS and ETFs); MMI Letter (convertible bonds, fixed income securities, preferred securities); Comment Letter of Professional Compliance Assistance, Inc. (Aug. 11, 2015) (“PCA Letter”) (balanced mutual funds).

See also

IAA Letter (U.S. government agency, corporate bonds, other).

Dechert Letter; IAA Letter.

Some commenters expressed concerns about the proposed reporting of “Corporate Bonds—Investment Grade” and “Corporate Bonds—Non-Investment Grade,” based on the proposed definitions of such terms, as they believed that this would require advisers to make subjective decisions about how to classify assets and could result in inconsistent reporting. These commenters requested that the Commission eliminate the reporting requirement, or either provide a more objective definition or permit an adviser to follow and rely on the classifications made by another investment adviser.

Another commenter noted the reference to “liquidity” in the definition and requested that the Commission seek a consistent approach to liquidity-related concepts across reporting regimes.

LPL Letter; MMI Letter.

IAA Letter.

In response to these comments, we are removing the proposed definitions of these terms from Form ADV. Given the instruction we have added permitting advisers to use their own consistently applied methodologies to select asset categories, we believe that the definitions are no longer necessary. We recognize that an adviser might reasonably categorize the same or similar assets differently from another adviser. Even with such differences, we believe that this categorization will provide useful information, particularly given the Commission's intended purpose for requiring such reporting, which is to better understand how assets in separately managed accounts are invested across that industry, rather than to impose a standard of creditworthiness for such assets.

Other commenters suggested we provide instructions as to whether advisers need to look through investments in funds or ETFs, for example, and report the underlying asset type.

With respect to looking through an account's investments in funds, advisers should not do so and we have clarified this in the form.

Advisers should not look through investments in funds because we want to understand the extent to which separately managed account assets are invested in funds as well as other types of investments.

ASG Letter; MMI Letter; NRS Letter; Schwab & Co. Letter.

We have added the following sentence to the text preceding Schedule D, Section 5.K.(1)(a): “Investments in derivatives, registered investment companies, business development companies, and pooled investment vehicles should be reported in those categories. Do not report those investments based on related or underlying portfolio assets.”

c. Section 5.K.(2) of Schedule D

We are also adopting amendments to add Section 5.K.(2) of Schedule D to Form ADV to require advisers to separately managed accounts to report information regarding the use of borrowings and derivatives in those accounts with modifications from the proposal in response to commenters. These amendments are designed to provide data to assist our staff in identifying and monitoring the use of borrowings and derivatives exposures in separately managed accounts as part of the staff's risk assessment and monitoring programs. Some commenters supported our proposal for the collection of that data.

However, as discussed below, several other commenters expressed concern about the proposed reporting thresholds, the public disclosure of certain information,

the use of gross notional metrics and the burden associated with reporting this information. The specific gross notional metrics used in Section 5.K.(2) are “gross notional value” and “gross notional exposure,” as proposed. The calculation of gross notional exposure includes borrowings and the gross notional value of derivatives. The definition of “gross notional value” specifies how derivatives are measured when determining an account's gross notional exposure.

NASAA Letter; SRC Letter.

We discuss public disclosure of separately managed account information in Section II.A.1.e.

Gross notional exposure of an account is “the percentage obtained by dividing (i) the sum of (a) the dollar amount of any borrowings and (b) the gross notional value of all derivatives, by (ii) the regulatory assets under management of the account.” Amended Form ADV, Part 1A, Schedule D, Item 5.K.(2). Gross notional value is defined in the Glossary to Form ADV as “The gross nominal or notional value of all transactions that have been entered into but not yet settled as of the reporting date. For contracts with variable nominal or notional principal amounts, the basis for reporting is the nominal or notional principal amounts as of the reporting date. For options, use delta adjusted notional value.”

One commenter suggested requiring reporting on derivatives only if there is a minimum gross notional amount of derivatives.

Another commenter suggested as an alternative requiring derivatives reporting only if the adviser uses leverage as part of its investment strategy.

We disagree with these approaches as they would give us information only about a segment of the separately managed account industry that uses derivatives or borrowings, and because the line between advisers that use derivatives and borrowings strategically and those that do not can be fluid and difficult to define. While we are adopting Section 5.K.(2) largely as proposed, we have modified it in certain places in response to commenters' concerns, as discussed below.

Anonymous Letter.

JAG Letter.

As proposed, advisers with at least $150 million but less than $10 billion in regulatory assets under management attributable to separately managed accounts would have been required to annually report in Section 5.K.(2)(b) the number of accounts and average borrowings that corresponded to ranges of net asset values and gross notional exposures, as of the date the adviser used to calculate its regulatory assets under management for purposes of the adviser's annual updating amendment. Advisers with at least $10 billion in regulatory assets under management attributable to separately managed accounts would have been required to annually report in Section 5.K.(2)(a) the number of accounts, average borrowings, and average derivatives exposures across six categories of derivatives, based on the same ranges of net asset values and gross notional exposures in Section 5.K.(2)(b), as of the date used by the adviser to calculate its regulatory assets under management for purposes of its annual updating amendment, and six months before that date.

We received a diversity of views about whether the proposed reporting thresholds of at least $150 million in regulatory assets under management attributable to separately managed

accounts, and at least $10 billion in regulatory assets under management attributable to separately managed accounts for additional reporting, were appropriate, and if not, what these thresholds should be.

Certain commenters suggested thresholds based on number of accounts or the size of individual separately managed accounts. However, we believe establishing thresholds based on regulatory assets under management attributable to separately managed accounts better provides us with comparability across advisers and appropriately advances our regulatory goal of gaining a more complete understanding of advisers' separately managed account business as compared to the alternatives suggested by commenters. Several commenters recommended that we increase the $150 million threshold to $500 million on the basis that such a change would allow the Commission to collect 95% of the data that it would using the $150 million threshold, while relieving approximately 3,000 advisers from having to report derivatives and borrowings information.

On balance, and based on our staff's experience with small advisers, we agree with commenters that this is a sensible accommodation that would allow us to meet our regulatory objectives while alleviating reporting burdens on smaller advisers. As a result, we have raised the minimum reporting threshold to $500 million. Advisers with at least $500 million but less than $10 billion in separately managed account regulatory assets under management will be required to report on Section 5.K.(2)(b) the amount of separately managed account regulatory assets under management and the dollar amount (rather than the proposed average amount) of borrowings attributable to those assets that correspond to three levels of gross notional exposures rather than four levels as proposed. Advisers with at least $10 billion in separately managed account regulatory assets under management will be required to report on Section 5.K.(2)(a) the information required in Section 5.K.(2)(b) as well as the derivative exposures across the same six derivatives categories that were proposed. Also as proposed, advisers may limit their reporting for both (a) and (b) to individual accounts of at least $10 million.

ASG agreed with the $150 million threshold. Oppenheimer agreed with the thresholds, but also suggested a threshold based on number of accounts, below which the adviser would not be required to respond to Section 5.K.(2), and permitting advisers to round number of accounts to the nearest five in a particular range. IAA recommended increasing the $150 million threshold to $500 million but supported the $10 billion threshold. SIFMA also agreed with the thresholds, but suggested changing the account-level reporting thresholds to minimize confidentiality concerns and permitting advisers to round to the nearest 5 accounts in a particular range. AIMA noted that the proposed thresholds at the adviser level and at the individual separately managed account level are low for advisers with institutional clients and recommended not requiring advisers with less than $150 million in separately managed account assets to report any separately managed account information, including in Sections 5.K.(1) and 5.K.(3). Anonymous suggested that the reporting threshold should be based on a minimum gross notional amount in relation to the adviser's total regulatory assets under management. BlackRock suggested that reporting thresholds should not be tied to aggregate adviser separately managed account regulatory assets under management, but rather only to individual separately managed account regulatory assets under management.

IAA Letter; Comment Letter of the New York State Bar Association, Business Law Section, Securities Regulation Committee, Private Investment Funds Subcommittee (Aug. 12, 2015) (“NYSBA Committee Letter”); PCA Letter; Schwab & Co. Letter. IAA estimated that if the minimum threshold were $150 million, the Commission would collect data on approximately $37.8 trillion in separately managed account assets under management from 7,257 advisers. However, it estimated that if the threshold were raised to $500 million, the Commission would collect data on approximately $36.8 trillion in separately managed account assets under management from approximately 3,700 advisers. A recent analysis of Form ADV by Commission staff filings shows that over 2,800 advisers will be relieved from the filing requirement and we will receive information on 98% of the assets for which we would have received reporting under the proposed $150 million threshold. IARD system data as of May 16, 2016.

Some commenters suggested making the exclusion of individual accounts under $10 million optional because excluding those accounts might, in some cases, be more costly to firms.

See

Dechert Letter; IAA Letter; NYSBA Committee Letter. We have revised the text in Section 5.K.(2) to read, “You may, but are not required to, complete the table with respect to any separately managed account with regulatory assets under management of less than $10,000,000.”

Another change we are making to Section 5.K.(2) in response to commenters is to base the reporting of borrowings and derivatives on regulatory assets under management in separately managed accounts, rather than net asset value as proposed. One commenter noted that advisers do not currently characterize their individual client accounts according to net asset values.

We agree, and accordingly advisers will be required to report both the amount of regulatory assets under management and borrowings in their separately managed accounts that correspond to ranges of gross notional exposure of those accounts. Regulatory assets under management is already used throughout Form ADV, and should be available to advisers for purposes of Section 5.K.(2). Similarly, the reporting of borrowings in Section 5.K.(2) has been revised to require information about the total dollar amount of borrowings that correspond to different ranges of gross notional exposure, and not the weighted average amount (which is based on a percentage of net asset value).

We believe these changes will reduce burdens for advisers completing this section, while providing our staff with additional information regarding borrowings and derivatives exposures in separately managed accounts.

IAA Letter.

One commenter suggested that reporting of borrowing is duplicative of reporting of margin by broker-dealer custodians to FINRA. JAG Letter. While we recognize that broker-dealers report this information, we note that parties other than broker-dealers may serve as custodians to separately managed accounts.

Commenters presented a range of concerns and suggestions about the use of gross notional metrics in reporting on Section 5.K.(2). Some commenters supported the use of gross notional metrics for assessing the use of derivatives and borrowings in separately managed accounts,

while others raised issues concerning the utility of gross notional metrics.

Several commenters stated that gross notional metrics are not accurate measures of leverage or risk and argued that they provide little value without context, and they could be misleading or misunderstood.

Some commenters suggested reporting derivatives and borrowings in Form ADV similar to how leverage is reported in Form PF or in the AIFMD framework.

For example, one

commenter suggested reporting long and short dollar amounts, similar to Form PF.

We acknowledge these commenters' concerns and recognize that gross notional metrics may not always reflect the way in which derivatives are used in a separately managed account and are not a risk measure.

We also recognize that there are other measures or additional data points that could be used to evaluate the use of derivatives in a separately managed account, which may depend on various considerations, such as investment strategy, types of investments, and the specific risks that are being considered. The calculations of gross notional exposure and gross notional value that we proposed and are adopting today rely on measures common to all advisers: regulatory assets under management of an account; total amount of borrowings in an account; and the notional value of derivatives. As we noted in the Proposing Release, gross notional metrics are commonly used metrics and are comparable to the information collected on Form PF regarding private funds. On balance, therefore, we continue to believe that, for most types of derivatives the gross notional metrics generally provide a measure that is sufficient for this regulatory purpose, which is to collect information about the scale of an account's derivatives activities, rather than to collect specific risk metrics or more granular information regarding the ways in which derivatives are used in a separate account. Section 5.K.(2) also provides advisers the option of including a narrative description of the strategies and/or manner in which borrowings and derivatives are used in the management of separately managed accounts. To the extent that advisers are concerned that disclosure of gross notional metrics would be misleading, they could provide in the space provided in Section 5.K.(2) an additional narrative description regarding their use of derivatives in these accounts.

Comment Letter of CFA Institute (Aug. 10, 2015) (“CFA Letter”) (observing that notional exposure metrics are valuable in conducting investment and operational analyses, but provide less value for risk management); NASAA Letter (stating that the proposal contemplates collecting commonly used metrics on the use of derivatives and borrowings, consistent with Form PF); and SRC Letter (suggesting that the collection of data relating to gross notional exposure, borrowings and gross notional value of derivatives would provide the Commission with “invaluable insight into the use of derivatives and borrowings by advisers in separately managed accounts.”).

See, e.g.

NYSBA Committee Letter (stating that publicly reporting gross notional exposures without also reflecting actual exposure on the form would be misleading and potentially alarming to investors) and MFA Letter (asserting that gross notional disclosures provide an inaccurate representation of economic or market exposures and would not provide meaningful information, and thus should not be required).

BlackRock Letter; Dechert Letter; IAA Letter; Invesco Letter.

Dechert Letter (suggesting allowing additional data points, such as the ones required in Form PF, to better provide the Commission a more comprehensive understanding of the extent to which derivatives are used in separately managed accounts and the relevant risks associated with them); Blackrock Letter (providing an appendix containing a comprehensive framework for calculating leverage, similar to AIFMD's commitment leverage approach, under which derivatives used for hedging positions and

offsetting long and short positions do not create leverage).

AIMA Letter.

For example, different derivatives transactions having the same notional amount but different underlying reference assets—for example, an interest rate swap and a credit default swap having the same notional amount—may expose a separately managed account to very different potential investment risks and potential payment obligations.

Many commenters requested that the term “derivatives” be defined as part of this rulemaking.

Several of these commenters suggested the Commission adopt a definition that provides flexibility to adapt to changing financial markets and instruments, such as the characteristic-based definition of derivatives in FASB ASC 815.

Another commenter, however, suggested that we should not define derivatives, similar to Form PF.

We believe that Form ADV, which collects aggregate portfolio information, is similar to Form PF. Thus, consistent with adviser reporting on Form PF and the proposal, we have decided not to define the term at this time. Several commenters requested clarification on whether interest rate derivatives should be presented in terms of 10-year bond equivalents, consistent with Form PF.

We have added a sentence to the definition of “interest rate derivative” in the Glossary that interest rate derivative information should be presented in terms of 10-year bond equivalents. Regarding the term “equity derivative,” one commenter requested confirmation that the term “listed” as used in Form ADV has the same meaning as in Form PF. We confirm that the term “listed equity derivatives” refers to exposures to derivatives for which the underlying asset is listed equities.

ASG Letter; Oppenheimer Letter; PCA Letter; SIFMA Letter; T. Rowe Price Letter.

Oppenheimer Letter; SIFMA Letter; T. Rowe Price Letter.

IAA Letter.

AIMA Letter; IAA Letter; MFA Letter.

We note that current staff guidance regarding this term in Form PF takes a similar approach.

See

Form PF, Frequently Asked Questions, Question 26.1.

Finally, we are also revising the proposal in ways that should both alleviate concerns about confidentiality, which we discuss more fully below, and simplify reporting of separately managed account information. First, we reduced the number of categories of gross notional exposure that we proposed in the charts. As proposed, Section 5.K.(2) included four categories of gross notional exposure by which accounts and borrowings were reported. This has been reduced to three categories of gross notional exposure: less than 10%, 10—149% and 150% or more. In addition to reducing the number of categories from four to three, we changed the highest threshold from 200% or more to 150% or more. After consideration of comments received regarding the potential burdens of providing this information, we believe that the use of three categories instead of four and changing the highest threshold from 200% or more to 150% or more will reduce the reporting burden on advisers while providing us with sufficient information regarding the use of derivatives and borrowings by investment advisers in separately managed accounts. In addition, we believe that these modifications provide less granular information than proposed, thereby mitigating some concerns commenters raised regarding confidentiality. We also modified Section 5.K.(2) to remove reporting of the number of separately managed accounts. As proposed, Section 5.K.(2) would have required advisers to report the number of accounts that corresponded to the accounts' net asset value and gross notional exposure. Section 5.K.(2)(a) and (b) now require reporting of regulatory assets under management based on ranges of gross notional exposure of accounts.

Amended Form ADV, Part 1A, Schedule D, Section 5.K.(2).

d. Section 5.K.(3) of Schedule D

As proposed, we are amending Form ADV to require advisers to identify any custodians that account for at least ten percent of separately managed account regulatory assets under management, and the amount of the adviser's regulatory assets under management attributable to separately managed accounts held at the custodian.

This information will allow our examination staff to identify advisers whose clients use the same custodian in the event, for example, a concern is raised about a particular custodian. As we discussed in the Proposing Release, similar disclosures are required for custodians to pooled investment vehicles

and registered investment companies.

Amended Form ADV, Part 1A, Schedule D, Section 5.K.(3). We added “aggregate” before “separately managed account regulatory assets under management” to the text preceding the section for clarity.

Amended Form ADV, Part 1A, Schedule D, Section 7.B.(1), Question 25.

Form N-1A, Item 19(h)(3).

We received several comments on this aspect of the proposal. For example, a commenter suggested that we obtain this information from other parties, including custodians.

However, we do not directly regulate all separately managed account custodians and we believe this information is available to advisers because advisers interact with custodians when placing trades on behalf of separately managed account clients. Some commenters agreed with the ten percent of regulatory assets under management threshold for reporting custodians of the adviser's separately managed account client

assets.

Other commenters recommended that the Commission modify the threshold, and raised concerns about this reporting for smaller advisers.

We agree with the commenters who believe that the ten percent threshold is appropriate. We recognize that this reporting will impose some burdens on all advisers, including smaller advisers. However, we are adopting the ten percent threshold as proposed because we continue to believe it, rather than a higher threshold, most appropriately advances our regulatory goal of identifying and obtaining a more complete picture regarding the custodians serving a significant proportion of an adviser's separately managed account clients. Moreover, we believe we have appropriately tailored and limited the scope of information to be reported since this requirement at most will require advisers to identify ten custodians.

BlackRock Letter.

See also

Comment Letter of Financial Engines Advisors, LLC (Aug. 11, 2015) (“Financial Engines Letter”) (suggesting identification of recordkeeper, rather than custodian, where advised assets are associated with a 401(k) plan).

Anonymous Letter; CFA Letter; PCA Letter.

AIMA Letter (suggested a twenty percent threshold); BlackRock Letter; IAA Letter; MMI Letter; NRS Letter (suggested a minimum separately managed account regulatory assets under management threshold in lieu of or in addition to the ten percent threshold).

In addition, some commenters recommended deleting or clarifying the requirement to identify the location of the custodian's office.

These commenters reasoned that because of the electronic nature of custodian records, and the current advisers' practice of not maintaining this physical location information as a matter of course, disclosure of the identity of the custodian, rather than the location of the office, would be of primary benefit to the Commission. This information is consistent with similar questions we ask about custodians in Schedule D, Section 7.B.(1), Question 25 of Form ADV. Location information allows us to identify the appropriate contacts when a custodian is part of a large organization with multiple offices.

Therefore, we are adopting these requirements as proposed.

ASG Letter; IAA Letter; MMI Letter; Oppenheimer Letter; PCA Letter; SIFMA Letter.

One commenter also sought clarification about reporting custodians who have multiple legal entities. IAA Letter. Advisers do not have to determine affiliations of related custodians for purposes of this item, but rather should report the particular legal entity that is custodian for the adviser's separately managed account assets.

e. Public Disclosure of Separately Managed Account Information

While commenters understood our reasons for collecting information on separately managed accounts, many expressed concerns that the new reporting would lead to disclosure of client-identifying information or confidential or proprietary information about investment strategy.

Commenters also expressed concern that public disclosure of separately managed account information could put advisers with a small number of separately managed account clients at a competitive disadvantage if clients were concerned about the reporting on Form ADV being linked or attributable to their separately managed accounts.

We address these concerns below.

Comment Letter of the American Bar Association, Section of Business Law, Federal Regulation of Securities Committee (Sept. 3, 2015) (“ABA Committee Letter”); AIMA Letter; Anonymous Letter; ASG Letter; BlackRock Letter; Dechert Letter; IAA Letter; Invesco Letter; MFA Letter; NYSBA Committee Letter; Oppenheimer Letter; Comment Letter of Schulte Roth & Zabel LLP (Aug. 11, 2015) (“Schulte Letter”); Comment Letter of Shearman & Sterling LLP (Aug. 11, 2015) (“Shearman Letter”); SIFMA Letter; Comment Letter of Securities Industry and Financial Markets Association Asset Management Group and Asset Managers Forum (Jan. 13, 2016) (“SIFMA II Letter”).

See also

Comment Letter of Private Equity Growth Capital Council (Aug. 11, 2015) (“PEGCC Letter”).

ABA Committee Letter; AIMA Letter; Anonymous Letter; BlackRock Letter; Dechert Letter; IAA Letter; MFA Letter; NYSBA Committee Letter; Oppenheimer Letter; Schulte Letter; Shearman Letter; SIFMA Letter; SIFMA II Letter.

Section 210(a) of the Advisers Act requires information in Form ADV to be publicly disclosed, unless we find that public disclosure is neither necessary nor appropriate in the public interest or for the protection of investors.

As discussed in the Proposing Release, we believe these amendments will enhance our staff's risk assessment and monitoring activities, which also serve to benefit investors.

We also believe that aggregate information about separately managed accounts may assist the public in better understanding advisers' management of separately managed account clients.

This information may directly improve the ability of clients and potential clients of investment advisers to make more informed decisions about the selection and retention of investment advisers, which, in turn, may also benefit the public by increasing competition among investment advisers for clients. For these reasons, we continue to believe that public disclosure of information about separately managed accounts on Form ADV is appropriate in the public interest as well as for the protection of investors. We have, however, made several modifications to our proposal, discussed below, in response to commenters.

Advisers Act section 210(a). Certain commenters suggested that this information be filed in a nonpublic manner, similar to Form PF.

See

ABA Committee Letter; PEGCC Letter. We note that Form PF is filed on a confidential basis under Advisers Act section 204(b), which prohibits the Commission from disclosing Form PF information unless those disclosures are made to Congress, other Federal agencies, or courts under certain conditions. Advisers Act section 204(b)(8).

Proposing Release,

supra

footnote 3 at Section II.A.1.

C.f.,

NASAA Letter (“These amendments would provide additional necessary information to the SEC and state regulators, as well as members of the public, far outweighing any regulatory burden the proposal creates.”).

Some commenters also expressed broader concerns that public disclosure of separately managed account holdings or borrowings and derivatives information would reveal proprietary investment strategies.

We do not believe that public disclosure of aggregate information in Schedule D, Sections 5.K.(1) or (2) would lead to the revelation of proprietary investment strategies. This information would be reported for one or two data points per year,

depending on the amount of regulatory assets under management attributable to separately managed accounts, ninety days after the end of the adviser's fiscal year,

and only on an aggregate basis for all the separately managed account clients that an adviser manages. Given the limited number of data points that advisers to separately managed accounts must report on, the fact that the information is reported both in aggregate and in broad categories across an adviser's separately managed accounts, and the time lag between those data points and any public reporting, we disagree that this reporting could compromise trading

strategies. In addition, as discussed above, we reduced the number of categories of gross notional exposures in Section 5.K.(2), which means advisers will be required to report less granular information.

See, e.g.,

ABA Committee Letter (“While individual types of securities would not be disclosed, the percentage of the portfolio in ten different asset categories would be subject to unprecedented public scrutiny, as would be detailed breakdowns of derivatives exposures and borrowings.”); BlackRock Letter; Dechert Letter; MFA Letter.

Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(1) and (2). Although two commenters recommended against larger advisers providing both mid-year and end of year separately managed account information, we believe this information is important to understanding advisers to the largest separately managed accounts. LPL Letter; NRS Letter.

Advisers are required to update the derivatives and borrowings information annually, when filing their annual updating amendment to Form ADV, which is consistent with the requirement for updating other information in Item 5 of Form ADV. Advisers with at least $10 billion in separately managed account regulatory assets under management would be required to report both mid-year and end of year information as part of their annual filing. Many commenters supported the annual reporting and recommended against more frequent reporting. Anonymous Letter; ASG Letter; CFA Letter; Comment Letter of Capital Research and Management Company (Aug. 11, 2015) (“Capital Research Letter”); MMI Letter; Morningstar Letter; NRS Letter; PCA Letter; Shearman Letter. Form ADV is required to be amended at least annually, within 90 days of the end of the adviser's fiscal year.

See

rule 204-1.

Supra

Section II.A.1.c.

We are mindful of commenters' concerns regarding disclosure of client-specific information and related competition concerns.

Accordingly, we revised Item 5.D., which lists the number of advisory clients in categories, to include a “fewer than 5 clients” column.

We also have modified Section 5.K.(2) to remove reporting of the number of accounts. As proposed, Section 5.K.(2) would have required reporting of the number of accounts that correspond to the accounts' net asset value and gross notional exposure. As adopted, Section 5.K.(2)(a) and (b) will require reporting solely by ranges of gross notional exposure of accounts.

We believe that these changes mitigate the risk of any client-specific information being disclosed in Item 5.D. and Sections 5.K.(1) and (2).

See, e.g.,

ABA Committee Letter; AIMA Letter; BlackRock Letter (“For a particular adviser, there may be only one or two accounts in a particular category, potentially making this client identifiable and its RAUM with an adviser public information.”); Dechert Letter; IAA Letter; MFA Letter (“[A] fund manager may need to report data of a single SMA client, which is not suitable for public disclosure.”); NYSBA Committee Letter (“In addition, if an adviser has a small number of accounts, the disclosure of any of the information would be particularly problematic as others may be in a position to determine the identity of the clients in any such account.”); Oppenheimer Letter; SIFMA Letter.

Several commenters suggested limiting reporting for five or fewer clients, or rounding to the nearest five clients. IAA Letter; NYSBA Committee Letter; Oppenheimer Letter; SIFMA Letter. Other commenters suggested that advisers with a small number of separately managed account clients be excluded from reporting on separately managed accounts.

See, e.g.,

AIMA Letter; SIFMA Letter. However, a small number of accounts could still include a large amount of assets or significant use of borrowings and derivatives. For that reason, reporting will be required on these accounts. We believe that the modifications in Item 5.D. and Schedule D, Section 5.K.(2) will address confidentiality concerns related to those accounts.

Amended Form ADV, Part 1A, Schedule D, Section 5.K.(2).

f. Additional Comments About Reporting of Separately Managed Accounts

Additional comments regarding separately managed account reporting in Schedule D included comments about the definition of separately managed account, the treatment of subadvisers, and the reporting requirements when both the registered investment adviser and the separately managed account owner are not United States persons.

First, several commenters sought clarification of the definition of the term “separately managed account” as used in Form ADV.

We do not believe that a formal definition of this term is required because we have included instructions in the text preceding Sections 5.K.(1) and (2) to clarify that any regulatory assets under management reported in Item 5.D.(3)(d) (investment companies), (e) (business development companies), and (f) (other pooled investment vehicles) should not be reported in Schedule D, Sections 5.K.(1) or (2). Thus, regulatory assets under management reported for those types of clients in Item 5.D.(3) should not be considered separately managed account assets and should not be reported in Sections 5.K.(1) or (2).

See, e.g.,

IAA Letter (noting the term has not been defined in the Advisers Act); Financial Engines Letter (seeking the exclusion of assets within defined contribution plans from separately managed accounts); MMI Letter (seeking clarification for sponsors, overlay managers, portfolio managers and model providers). Commenters also sought clarification of the treatment of pooled investment vehicles that are not private funds.

See

PEGCC Letter.

See also

IAA Letter. Pooled investment vehicles include, but are not limited to, private funds.

Second, several commenters requested clarification about how to treat subadviser relationships in reporting separately managed account information, including suggestions that only advisers with discretionary authority report information in these sections.

In response to these concerns, we are clarifying the instructions in the text preceding Section 5.K.(1)(a) to expressly state, as they already do for Section 5.K.(2), that a subadviser to a separately managed account should provide information only about the portion of the account that it subadvises.

We recognize that these instructions may require both advisers and subadvisers to report on the same regulatory assets under management (

i.e.,

the assets that they both manage in an account) in Sections 5.K.(1) and (2) of their separate Form ADVs, which is consistent with the current reporting structure of regulatory assets under management in Form ADV.

Comment Letter of JG Advisory Services LLC (Jul. 22, 2015) (“JGAS Letter”); LPL Letter; MMI Letter; NYSBA Committee Letter; SIFMA Letter.

See also

Dechert Letter; IAA Letter.

Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(1) and (2).

Further, in response to suggestions that only advisers with discretionary authority should be required to report information in Sections 5.K.(1) and (2), we note that these sections both require responses based on the regulatory assets under management an adviser reports in Item 5.F. Per the instructions to Item 5.F., advisers are already required to consider the role of discretionary authority when calculating regulatory assets under management. Those instructions require that the calculation include only assets over which advisers provide continuous and regular supervisory or management service.

The instructions further state that an adviser “provide[s] continuous and regular supervisory or management services with respect to an account” if: (a) The adviser has discretionary authority over and provides ongoing supervisory or management services with respect to the account; or (b) the adviser does not have discretionary authority over the account, but has ongoing responsibility to select or make recommendations, based upon the needs of the client, as to specific securities or other investments the account may purchase or sell and, if such recommendations are accepted by the client, the adviser is responsible for arranging or effecting the purchase or sale.

Thus, if an adviser does not provide continuous and regular supervisory or management services with respect to an account, those account's assets should not be reported as regulatory assets under management in Item 5.F, and would not be reported in Sections 5.K.(1) and (2).

See

Form ADV, Instructions to Part 1A, Item 5.F.

Id.

A final suggestion from commenters was to exclude from the reporting requirements any separately managed account held by a non-United States person and managed by an investment adviser whose principal office and place of business is outside the United States.

As proposed, and consistent with the reporting of regulatory assets under management generally, we are requiring each adviser whose principal office and place of business is outside the United States to report information regarding separately managed accounts for all of their clients, including clients who are not United States persons.

We believe that the consistent reporting of information in Item 5 will be valuable in our and the public's understanding of the new separately managed account items as they are a subset of the regulatory assets under management

already being reported by registered investment advisers.

AIMA Letter; PEGCC Letter; Shearman Letter. “United States person” is defined in the Glossary to Form ADV.

The Form ADV Instructions to Part 1A, Item 5 that specify how regulatory assets under management must be calculated provides that accounts of clients who are not United States persons are accounts that must be included in the adviser's securities portfolios.

Commenters suggested that we not require reporting of accounts beneficially owned by those who are not United States persons and managed by advisers whose principal offices and places of business are outside the United States. These commenters noted Item 7.B. of Form ADV and Form PF generally allow advisers whose principal offices and places of business are outside the United States to exclude reporting on funds that are not United States persons, are not offered in the United States, and are not beneficially owned by any United States persons.

As noted above, there is not a similar exclusion in Item 5 regarding funds that are not United States persons advised by any advisers, and advisers must include those clients in response to Item 5, including their regulatory assets under management and client types. An exception like the one suggested by commenters would hamper the utility of the data collection in Item 5, which collects aggregate, census-type information regarding the adviser's total business. We are collecting this information to better inform Commission staff and the public about this segment of the investment adviser industry.

AIMA Letter; PEGCC Letter; Shearman Letter.

See infra

Section II.A.3 for a discussion of the application of the Advisers Act to non-U.S. advisers.

In the Proposing Release, we requested comment on whether to require advisers to report on securities lending and repurchase agreements in separately managed accounts.

While some commenters supported collection of this information,

others noted that advisers may not be aware of or directly involved in securities lending activity in separately managed accounts,

and several commenters objected to the disclosure.

In response to the comments we received, we are not requiring disclosure regarding securities lending or repurchase agreements at this time.

Proposing Release,

supra

footnote 3 at Section II.A.1.

CFA Letter; SRC Letter.

JAG Letter; NRS Letter; Comment Letter of The Risk Management Association, Committee on Securities Lending (Aug. 10, 2015) (“RMA Committee Letter”); Comment Letter of State Street Corporation (Aug. 11, 2015) (“State Street Letter”).

MFA Letter: PCA Letter.

See also

ASG Letter.

2. Additional Information Regarding Investment Advisers

In addition to the amendments outlined above regarding separately managed accounts, we are adopting, largely as proposed, several new questions and amending existing questions on Form ADV regarding identifying information, an adviser's advisory business, and affiliations. As discussed in the Proposing Release, these items were developed through our staff's experience in examining and monitoring investment advisers, and are designed to enhance our understanding and oversight of investment advisers and to assist our staff in its risk-based examination program.

a. Additional Identifying Information

We are adopting several amendments to Item 1 of Part 1A of Form ADV as proposed to improve certain identifying information that we obtain about advisers. Item 1 currently requires an adviser to provide a Central Index Key number (“CIK Number”) in Item 1.N. only if the adviser is a public reporting company under Sections 12 or 15(d) of the Securities Exchange Act of 1934.

We are removing this question from Item 1.N. and adding a question to Item 1.D. that requires an adviser to provide all of its CIK Numbers if it has one or more such numbers assigned,

regardless of public reporting company status.

As we explained in the Proposing Release, requiring registrants to provide all of their assigned CIK Numbers, if any, will improve our staff's ability to use and coordinate Form ADV information with information from other sources.

The commenter who weighed in on the reporting of CIK Numbers did not object to this amendment, which we are adopting as proposed.

Form ADV, Part 1A, Item 1.N.

The SEC assigns CIK Numbers in EDGAR not only to identify entities as public reporting companies, but also when an entity is registered with the SEC in certain other capacities, such as a transfer agent.

Amended Form ADV, Part 1A, Item 1.D.(3).

Proposing Release,

supra

footnote 3 at Section II.A.2.

Item 1.I. of Part 1A of Form ADV currently asks whether an adviser has one or more Web sites, and Section 1.I. of Schedule D requests the addresses of each Web site. We are amending Item 1.I. largely as proposed to also ask whether the adviser has one or more accounts on social media platforms, such as Twitter, Facebook or LinkedIn, and requesting the address of each of the adviser's social media pages in addition to the address of each of the adviser's Web sites in Section 1.I. of Schedule D.

As discussed in the Proposing Release, our staff may use this information to help prepare for examinations of investment advisers and compare information that advisers disseminate across different social media platforms, as well as to identify and monitor new platforms. Current and prospective clients may use this information to learn more about advisers and make more informed decisions regarding the selection of advisers.

Amended Form ADV, Part 1A, Item 1.I. and Section 1.I. of Schedule D.

Proposing Release,

supra

footnote 3 at Section II.A.2.

Several commenters were generally supportive of our proposed approach to social media reporting,

but some commenters were concerned that it would be too burdensome for advisers and not useful to investors.

Several commenters requested clarification on the types of social media platforms that trigger the reporting requirement,

and some commenters recommended that we limit required reporting to accounts on social media platforms where the adviser controls the content.

These commenters pointed out that there may be social media platforms that reference an adviser over which the adviser has no control and of which the adviser may not even be aware.

We agree, and we have revised Item 1.I. of Part 1A and Section 1.I. of Schedule D to note that the required reporting is limited to accounts on social media platforms where the adviser controls the content.

Commenters generally agreed with the proposal's approach of not requiring information about the social media accounts of an adviser's employees.

CFA Letter; IAA Letter; LPL Letter; Morningstar Letter; NASAA Letter.

See also

BlackRock Letter (understood our rationale for requesting this information).

Comment Letter of TMorgan Advisers, LLC (June 28, 2015) (“Morgan Letter”); NRS Letter; NYSBA Committee Letter; Oppenheimer Letter.

ASG Letter; IAA Letter; MMI Letter; SIFMA Letter.

ASG Letter; MMI Letter; SIFMA Letter.

MMI Letter.

See also

ASG Letter.

An adviser may control its social media content, notwithstanding the fact that a social media platform has a policy to edit or remove content (such as offensive content) across the platform.

ASG Letter; MFA Letter; MMI Letter; Morgan Letter; Morningstar Letter; NRS Letter; NYSBA Committee Letter.

A commenter requested that we limit required reporting to accounts on public-facing social media platforms used to promote the adviser's business.

We did not intend to require reporting on information posted on an adviser's internal social media platform or information not intended to promote the adviser's business to potential clients (

e.g.,

information posted on a job board intended to attract job applicants). We have revised the text preceding Item 1.I. of Part 1A and Section 1.I. of

Schedule D to clarify that the required reporting is limited to accounts on publicly available social media platforms.

IAA Letter.

Another commenter requested that we limit required reporting to accounts on social media platforms that promote the adviser's business in the United States or are targeted towards the adviser's U.S. clients.

The commenter pointed out that there are circumstances in which an adviser might have additional accounts on social media platforms that are not used to promote the adviser's business in the United States or are targeted towards the adviser's non-U.S. clients and that reporting on such accounts would provide little value to the Commission and could be confusing to clients or potential clients seeking information about an adviser.

We believe that, to the extent an account on a social media platform is used to promote the business of an adviser registered with the Commission, the account should be disclosed in order to better inform our staff about the adviser's use of social media. However, if an account on a social media platform is used solely to promote the business of an affiliate or affiliates that are not advisers registered with the Commission, the account does not need to be disclosed on Form ADV.

SIFMA Letter.

Id.

The commenter also mentioned that a large advisory complex that includes multiple affiliated advisers may maintain an account on a social media platform on behalf of a parent company or another affiliate that is not designed to promote the reporting adviser's services and/or is targeted towards non-U.S. clients, perhaps in a language other than English.

A few commenters were concerned that the burden on advisers of updating social media information on Form ADV promptly if the information becomes inaccurate in any way would be great, given the frequency of changes in social media platforms and accounts.

We believe that, by limiting the social media information required on Form ADV to an adviser's accounts on publicly available social media platforms where the adviser controls the content, the burden associated with reporting and updating that information should be limited. Because the social media environment is rapidly evolving, we think it will be useful to the Commission and investors to have current information on an adviser's use of social media on Form ADV. Additionally, this approach to updating social media reporting is consistent with our current approach to updating the other information required in Item 1 of Part 1A, including information on advisers' Web sites.

BlackRock Letter; Oppenheimer Letter; SIFMA Letter.

Several commenters questioned the utility for investors of social media reporting in Part 1A of Form ADV.

Commenters stated that investors who are interested in an adviser's social media presence will most likely look to the adviser's Web site or conduct an internet search to find the adviser's accounts on various social media platforms.

100

We recognize that this is most likely the case. However, we believe that having current information on an adviser's social media presence collected in one place on Form ADV may be helpful to investors. Two commenters stated that investors generally do not read Part 1A of Form ADV and recommended that we consider including social media reporting in Part 2A of Form ADV instead.

101

We recognize that investors may not look to Form ADV for information on an adviser's social media presence, but if they do, they will likely look to Item 1.I. of Part 1A and Section 1.I. of Schedule D because those are where we currently collect identifying information about an adviser, including information on an adviser's Web site or Web sites. In addition, a primary purpose of this item is to provide the Commission and our staff with information that may be used in our examination program and for other regulatory purposes. Accordingly, we believe it will be useful to the Commission to have information on an adviser's use of social media on Form ADV, and this placement in the form is an efficient and readily identifiable location for such information that appropriately serves our regulatory purposes.

Comment Letter of the Association for Corporate Growth (Aug. 11, 2015) (“ACG Letter”); ASG Letter; JAG Letter; Morningstar Letter; PCA Letter.

100

ASG Letter; JAG Letter; Morningstar Letter; Oppenheimer Letter; PCA Letter.

101

Morningstar Letter; PCA Letter.

See also

Comment Letter of Jeff J. Diercks (May 22, 2015) (“Diercks Letter”).

We are amending Item 1.F. of Part 1A of Form ADV and Section 1.F. of Schedule D largely as proposed to expand the information provided about an adviser's offices other than its principal office and place of business. We currently require an adviser to provide contact and other information about its principal office and place of business, and, if an adviser conducts advisory activities from more than one location, about its largest five offices in terms of number of employees.

102

In order to help Commission examination staff learn more about an investment adviser's business and identify locations to conduct examinations, we are now requiring that advisers provide us with the total number of offices at which they conduct investment advisory business and provide information in Schedule D about their 25 largest offices in terms of number of employees.

103

As discussed in the Proposing Release, we chose 25 offices as the number to be reported because it will provide a complete listing of offices for the vast majority of investment advisers, and provide valuable information about the main business locations for the few advisers that have a very large number of offices.

104

102

Form ADV, Part 1A, Item 1.F. and Section 1.F. of Schedule D.

103

Amended Form ADV, Part 1A, Item 1.F. and Section 1.F. of Schedule D.

104

See

Proposing Release,

supra

footnote 3 at Section II.A.2. IAPD Investment Adviser Registered Representative State Data as of May 2, 2016 shows that a majority of SEC-registered advisers (approximately 98%) have 25 or fewer offices, but that many of the remaining two percent have many multiples of 25 offices.

In addition to providing contact information for the 25 largest offices in terms of number of employees, we are amending Section 1.F. of Schedule D as proposed to require advisers to report each office's CRD branch number (if applicable) and the number of employees who perform advisory functions from each office, identify from a list of securities-related activities the business activities conducted from each office, and describe any other investment-related business conducted from each office. This information will help our staff assess risk, because it provides a better understanding of an investment adviser's operations and the nature of activities conducted in its top 25 offices. This information also will assist our staff in assessing offices that conduct a combination of activities.

Two commenters provided general support for our proposed enhanced reporting of adviser offices.

105

However, several commenters expressed concern that our approach would impose a significant burden on advisers with little or no benefit to either the Commission or investors.

106

Another commenter noted the substantial burden on advisers required to report additional offices, but acknowledged that burden would ease after the initial reporting period.

107

We recognize that the burden on some large advisers might be significant, especially in the initial reporting cycle when they are required to report their additional offices for the

first time. However, we believe that the burden will decrease after the initial filing because in subsequent filings, advisers will only be reporting changes to their previously reported additional office information. Two commenters requested clarification on how often the additional office information should be updated.

108

One commenter felt that annual updating of office locations would not be unduly burdensome but more frequent than annual updates would be burdensome.

109

We agree and are requiring that Section 1.F. of Schedule D be updated as part of an adviser's annual updating amendment and not more frequently.

110

105

LPL Letter; NASAA Letter.

106

ACG Letter; CFA Letter; Morningstar Letter; NRS Letter; NYSBA Committee Letter.

107

Morningstar Letter.

108

ASG Letter; Morningstar Letter.

109

ASG Letter.

110

Amended Form ADV, General Instruction 4.

One commenter expressed concern about our proposal's impact on smaller advisers and suggested that, as an alternative, we require advisers to (a) continue to provide information about their five largest additional offices, (b) report their total number of additional offices, and (c) report additional information only for their additional offices that meet a certain threshold of regulatory assets under management or that engage in certain enumerated practices of interest to the Commission.

111

We currently require advisers to track their additional offices based upon number of employees.

112

We understand that many advisers do not currently track their additional offices based upon the amount of regulatory assets under management attributable to each office and we believe that requiring them to do so would place an additional burden on advisers. For this reason, we are not changing our approach to additional office reporting.

111

NRS Letter.

112

Form ADV, Part 1A, Item 1.F. and Section 1.F. of Schedule D.

One commenter requested that we simplify the reporting of information about additional offices for firms that are dually registered as investment advisers with the Commission and as broker-dealers with FINRA by allowing them to cross-reference to information submitted on their Uniform Branch Office Registration Form filed with FINRA.

113

We agree and we are updating the IAPD system so that by entering a branch's CRD number, the address, phone number, and facsimile number of all additional offices will automatically populate on Section 1.F. of Schedule D.

113

MMI Letter.

Item 1.J. of Form ADV currently requires each adviser to provide the name and contact information for the adviser's chief compliance officer. We proposed amending Item 1.J. to require an adviser to report whether its chief compliance officer is compensated or employed by any person other than the adviser (or a related person of the adviser) for providing chief compliance officer services to the adviser, and if so, to report the name and IRS Employer Identification Number (if any) of that other person. We are adopting the amendments to Item 1.J. largely as proposed, but in addition to related persons of the adviser, as discussed below, advisers will not be required to disclose the identity of the other person compensating or employing the chief compliance officer if that other person is an investment company registered under the Investment Company Act of 1940 advised by the adviser.

114

Amended Form ADV, Part 1A, Item 1.J.

As discussed in the Proposing Release, our examination staff has observed a wide spectrum of both quality and effectiveness of outsourced chief compliance officers and firms.

115

Identifying information for these third-party service providers, like others on Form ADV,

116

will allow us to identify all advisers relying on a particular service provider and could be used to improve our ability to assess potential risks.

115

Proposing Release,

supra

footnote 3 at Section II.A.2.

116

For example, advisers provide the names and addresses of independent public accountants that perform audits or surprise examinations and that prepare internal control reports on Form ADV, Part 1A, Schedule D, Section 9.C.

Two commenters expressed general support for our proposal to identify if chief compliance officers are compensated or employed by other parties for providing chief compliance officer services,

117

and others expressed concern that the requirement would be unduly burdensome on advisers or that the information would be of little or no use to the Commission or investors.

118

We are not persuaded that this requirement would be unduly burdensome because the adviser should have or be able to easily obtain the necessary information, and we continue to believe that this information will be valuable for the reasons discussed above.

117

CFA Letter; NASAA Letter.

118

ACG Letter; Comment Letter of L.A. Schnase (Jul. 2, 2015) (“Schnase Letter”) (would be duplicative of already reported information, raises privacy concerns with the chief compliance officer's other clients, would become inaccurate or out-of-date quickly, and would miss the situation of firms hiring comprehensive external compliance support with an in-house chief compliance officer in name only).

See also

NRS Letter (adviser may not have access to this information).

One commenter felt that our inquiry should focus not on the chief compliance officer's other employment and/or compensation, but rather on the details of the compliance program and resources committed to address compliance risk (

e.g.,

the chief compliance officer's education and professional designations, the number of other compliance employees, the estimated total hours spent on compliance, and the other duties of the chief compliance officer).

119

We agree with the commenter's suggestion that evaluating the overall effectiveness of an adviser's compliance program relies heavily on the facts and circumstances specific to that adviser.

120

However, we are adopting the amendments to Item 1.J. largely as proposed, because we believe that they meet our regulatory objective of identifying all advisers relying on particular service providers and may improve our ability to assess potential risks related to outsourced chief compliance officers and firms.

119

Morgan Letter.

120

Id.

One commenter expressed concern that identifying outsourced chief compliance officers would invite additional scrutiny about an adviser's judgment in hiring externally versus internally.

121

While we understand the commenter's concerns, we continue to believe that identifying information for these third-party service providers, like others on Form ADV, will allow us to identify all advisers relying on a particular service provider and to address potential risks associated with that service provider.

121

Shearman Letter.

Two commenters agreed with our proposal to specifically exclude situations where the chief compliance officer is paid or employed by a related person of the adviser.

122

Two other commenters recommended that we specify that a related person includes a registered investment company advised by the adviser.

123

These commenters noted that in many instances an individual may serve as the chief compliance officer of both an adviser and a registered investment company advised by the adviser and receive compensation from both the adviser and the registered investment company.

124

These commenters stated that requiring advisers to disclose these arrangements does not further our objective of assessing the use of third party service

providers.

125

We agree and we have updated Item 1.J.(2) to exclude chief compliance officers compensated or employed by an investment company registered under the Investment Company Act of 1940 advised by the adviser.

122

MMI Letter; Morningstar Letter.

123

Dechert Letter; IAA Letter.

124

Id.

125

Id.

In the Proposing Release, we asked whether we should require information about an adviser's use of third-party compliance auditors. Two commenters supported such disclosure,

126

but several commenters felt the disclosure would either not be useful or lead to incorrect inferences about the decision to use, or not use, external compliance support.

127

Several commenters expressed concern that, due to the diversity of services provided by third-party compliance auditors, requiring an adviser to state whether or not it uses them would not be useful to the Commission from a risk monitoring perspective.

128

Commenters also expressed concern that requiring an adviser to report on its use of third-party compliance auditors could lead to incorrect inferences about the adviser's compliance program. For example, advisers hiring third-party compliance auditors might be viewed as signaling a compliance issue, whereas advisers not hiring them might be viewed as not sufficiently focused on compliance.

129

Two commenters expressed concern about confidentiality issues implicated by third-party compliance auditor reporting.

130

We are not requiring advisers to report information on Form ADV regarding third-party compliance auditors at this time.

126

Comment Letter of Brown & Associates LLC (Aug. 10, 2015) (“Brown Letter”); NASAA Letter.

127

ASG Letter; IAA Letter; MFA Letter; MMI Letter; NRS Letter; NYSBA Committee Letter; PEGCC Letter.

128

IAA Letter; MFA Letter; NRS Letter; PEGCC Letter.

See also

ASG Letter (requested that we more clearly define “auditor”); JGAS Letter; MMI Letter.

129

IAA Letter; NYSBA Committee Letter; PEGCC Letter.

130

Anonymous Letter; MMI Letter (these relationships are often confidential, such as where law firms are involved).

We are amending Item 1.O. as proposed to require advisers with assets of $1 billion or more to report their assets within three ranges: (1) $1 billion to less than $10 billion; (2) $10 billion to less than $50 billion; and (3) $50 billion or more.

131

We added Item 1.O. in 2011 in connection with the Dodd-Frank Act's

132

requirements concerning certain incentive-based compensation arrangements.

133

Advisers are currently required to check a box to indicate if they have assets of $1 billion or more. Requiring advisers to report their assets within one of the three specified ranges will provide more precise data for use in Commission rulemaking arising from ongoing Dodd-Frank Act implementation.

134

131

Amended Form ADV, Part 1A, Item 1.O.

132

Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

133

See Rules Implementing Amendments to the Investment Advisers Act of 1940,

Investment Advisers Act Release No. 3221 (June 22, 2011) [76 FR 42950 (Jul. 19, 2011)] (“Implementing Release”) at Section II.C.6; section 956 of the Dodd-Frank Act. We are also moving the instruction for how to report “assets” for the purpose of Item 1.O. from the Instructions for Part 1A to Form ADV to Item 1.O. in order to emphasize this instruction.

134

See, e.g.,

section 165(i) of the Dodd-Frank Act (requires the Commission and other financial regulators to establish methodologies for the conduct of stress tests by financial companies with consolidated assets of over $10 billion);

Incentive-based Compensation Arrangements,

Exchange Act Release No. 34-77776 (May 6, 2016) (identifies three categories of covered institutions based on average total consolidated assets, ranging from $1 billion to $250 billion) (re-proposal of Exchange Act Release No. 34-64140);

Incentive-Based Compensation Arrangements,

Exchange Act Release No. 34-64140 (Mar. 29, 2011) [76 FR 21170 (Apr. 14, 2011)].

Two commenters expressed general support for our proposal to require advisers to report their own assets within specified ranges.

135

Two commenters did not believe that the information would be useful.

136

However, we continue to believe that requiring advisers to report their assets as described above will provide more accurate data for use in Commission rulemaking arising from ongoing Dodd-Frank Act implementation. Another commenter felt our proposal raised privacy issues for investors in an adviser where the adviser is privately held.

137

While we are sensitive to privacy concerns, we believe that we have narrowly tailored our proposal to address these concerns. We are only requiring that advisers with significant assets (at least $1 billion) report them and even then only within one of the three specified ranges. One commenter asked for clarification on the timing of the calculation of assets.

138

The item, as proposed and adopted today, specifies that an adviser should use the total assets shown on the adviser's balance sheet for the most recent fiscal year end.

139

We did not receive comments on the specific asset ranges.

135

CFA Letter; PCA Letter.

136

NRS Letter; NYSBA Committee Letter.

137

Anonymous Letter.

138

PEGCC Letter.

139

Amended Form ADV, Part 1A, Item 1.O.

b. Additional Information About Advisory Business

In addition to the amendments to Item 5 regarding separately managed accounts discussed above, we are adopting a number of other amendments to Item 5. Item 5 currently requires an adviser to provide approximate ranges for three data points concerning the adviser's business—the number of advisory clients, the types of advisory clients, and regulatory assets under management attributable to client types.

140

As proposed, we are amending these items to require an adviser to report the number of clients

141

and amount of regulatory assets under management attributable to each category of clients as of the date the adviser determines its regulatory assets under management.

142

As we discussed in the Proposing Release, replacing ranges with more precise information will provide more accurate information about investment advisers and will significantly enhance our ability to analyze data across investment advisers because providing actual numbers of clients and regulatory assets under management will allow us to see the scale and concentration of assets by client type.

143

It will also allow us to determine the regulatory assets under management attributable to separately managed accounts. We believe that the information needed for providing the number of clients and amount of regulatory assets under management by client type should be readily available to advisers because advisers are producing this data to answer the current iterations of these questions on Form ADV and advisers typically base their advisory fees on client assets under management.

140

Form ADV, Part 1A, Item 5.C.(1), Item 5.D.(1)-(2).

141

Amended Form ADV, Part 1A, Item 5.D.(1)-(2). Advisers with fewer than five clients in a particular category (other than investment companies, business development companies and other pooled investment vehicles) may check Item 5.D.(2) indicating that fact rather than report the actual number of clients in the particular category in Item 5.D.(1).

142

Amended Form ADV, Part 1A, Item 5.D.(3). The categories of clients are the same as those in Item 5.D. of the current Form ADV, except that we are adding “sovereign wealth funds and foreign official institutions” as a client category, and specifying that state or municipal government entities include government pension plans, and that government pension plans should not be counted as pension and profit sharing plans.

143

Proposing Release,

supra

footnote 3 at Section II.A.2.

We also are adding to Item 5 as proposed a requirement for advisers to report the number of clients for whom they provided advisory services but do not have regulatory assets under management in order to obtain a more complete understanding of each

adviser's advisory business.

144

As we explained in the Proposing Release, this information will assist in our risk assessment process and increase the effectiveness of our examinations.

145

144

Amended Form ADV, Part 1A, Item 5.C.(1). An example of a situation where an adviser provides investment advice but does not have regulatory assets under management is a nondiscretionary account or a one-time financial plan, depending on the facts and circumstances.

145

Proposing Release,

supra

footnote 3 at Section II.A.2.

Some commenters were generally supportive of our proposal to replace ranges with more precise information.

146

Several commenters stated that advisers would need to update computer systems to obtain this data, and raised concerns about the increased burden that our proposal would place on advisers.

147

One commenter felt that removing an adviser's ability to rely on estimates of the amount of regulatory assets under management would increase the time required to prepare Item 5.D.

148

We are not convinced that the burden placed on advisers by the requirement to report precise information will be significant. We continue to believe that the required information should be readily available to advisers because advisers are producing this data to answer the current iterations of these questions on Form ADV and advisers typically base their advisory fees on client assets under management.

146

NRS Letter; PCA Letter; CFA Letter (generally supportive but questions the usefulness of actual numbers rather than ranges); NASAA Letter (supports reporting the number of clients for whom an adviser provides advisory services but does not have regulatory assets under management).

147

ASG Letter; MMI Letter.

See

LPL Letter.

148

ASG Letter.

Some commenters suggested that our proposal to replace ranges with more precise information would heighten the risk of inaccurate reporting on Form ADV.

149

Commenters suggested that instead of requiring more precise information, we require advisers to report only an approximate number of clients and regulatory assets under management so as not to penalize advisers for “minor or inadvertent inaccuracies”

150

and one commenter suggested using narrower ranges.

151

Our goal in collecting more precise information is not to penalize advisers for minor inaccuracies but to enhance our ability to analyze data across investment advisers and allow us to see the scale and concentration of assets by client type. We collect numerical data throughout Form ADV, and we believe that advisers have access to the information required to accurately complete Item 5.

149

ASG Letter; LPL Letter; MMI Letter.

150

LPL Letter.

See also

IAA Letter.

151

MMI Letter.

One commenter expressed skepticism that the amendments would provide new, meaningful information to investors.

152

However, we believe that investors potentially will benefit from having a more complete understanding of an investment adviser's business. In addition, we believe that investors will indirectly benefit from our enhanced ability to analyze data across investment advisers, including the scale and concentration of assets by client type.

152

ACG Letter.

One commenter expressed concern that the reporting of precise numbers might reveal confidential client relationships or the amount of regulatory assets under management attributable to specific clients.

153

We are sensitive to these privacy concerns, and, as noted above, we are revising Form ADV, Part 1A, Item 5.D. to allow advisers with fewer than five clients in a particular category (other than investment companies, business development companies and other pooled investment vehicles) to check Item 5.D.(2) indicating that fact rather than report the actual number of clients in the particular category in Item 5.D.(1).

154

153

Anonymous Letter.

154

Amended Form ADV, Part 1A, Item 5.D.(1)-(2).

Several commenters requested clarification in situations where a client fits into more than one client category.

155

Specifically, two commenters requested that the Commission clarify whether an adviser that has contracts with other advisers to sub-advise registered investment companies, business development companies or pooled investment vehicles should categorize those clients as either (1) “other investment advisers” because other investment advisers hold the contracts, or as (2) “investment companies,” “business development companies,” or “pooled investment vehicles,” as applicable, because those entities hold the regulatory assets under management.

156

We are updating the instructions to Item 5.D. to state that, to the extent that the adviser advises a registered investment company, business development company, or pooled investment vehicle, the adviser should report those sub-advised assets in categories (d), (e), or (f) as applicable.

157

We also are amending the instructions in the text preceding Item 5.D., in response to a comment that we received,

158

to state that if a client fits into more than one category, then the adviser should select the category that most accurately represents the client in order to avoid double counting clients and assets.

159

155

Anonymous Letter; ASG Letter; IAA Letter; SIFMA Letter.

156

ASG Letter; IAA Letter.

157

Amended Form ADV, Part 1A, Item 5.D.

158

SIFMA Letter.

159

Amended Form ADV, Part 1A, Item 5.D.

Some commenters requested more specific definitions for the categories of clients.

160

However, most of the categories have not changed from current Form ADV and, based upon our experience with Form ADV, we believe that they are sufficiently clear. At the suggestion of two commenters,

161

we are moving the category labeled “Corporations or other businesses not listed above” down in the table so that it appears just above the category labeled “Other.”

162

160

IAA Letter (Commission should clarify whether a “sovereign wealth fund and foreign official institution” includes the account of any government or quasi-government entity). Morningstar Letter (Commission should add definitions for categories, including “other,” and provide a list of common custodian account types and how they map to the client categories).

161

IAA Letter; SIFMA Letter.

162

Amended Form ADV, Part 1A, Item 5.D.

We are adopting, largely as proposed, several targeted additions to Item 5 and Section 5 of Schedule D to inform our risk-based exam program and other risk monitoring initiatives. An adviser that elects to report client assets in Part 2A of Form ADV differently from the regulatory assets under management it reports in Part 1A of Form ADV is now required to check a box noting that election.

163

As discussed in the Proposing Release, this information will allow our examination staff to review across advisers the extent to which advisers report assets under management in Part 2A that differ from the regulatory assets under management reported in Part 1A of Form ADV.

164

Having this information will allow our staff to better understand the situations

in which the calculations differ, and assist us in analyzing whether those differences require a regulatory response.

163

Amended Form ADV, Part 1A, Item 5.J.(2). Form ADV, Part 2A, Item 4.E. requires an investment adviser to disclose the amount of client assets it manages on a discretionary basis and on a non-discretionary basis. The method used by an adviser to compute the amount of client assets it manages can be different from the method used to compute regulatory assets under management required for Item 5.F. in Part 1A. As discussed in the proposing release for Part 2, the regulatory assets under management calculation for Part 1A is designed for a particular purpose (

i.e.,

for making a bright line determination about whether an adviser should register with the Commission or with the states) and permitting a different calculation for Part 2 disclosure may be appropriate to enable advisers to make disclosure that is more indicative to clients about the nature of their business.

See Amendments to Form ADV,

Investment Advisers Act Release No. 2711 (Mar. 3, 2008) [73 FR 13958 (Mar. 14, 2008)].

164

Proposing Release,

supra

footnote 3 at Section II.A.2.

One commenter asserted that this information would not be meaningful to investors.

165

Another commenter noted that advisers may report additional assets in Part 2A of Form ADV, rather than calculate regulatory assets under management differently than they do in Part 1A of Form ADV.

166

We continue to believe that Item 5.J.(2) will provide the staff with helpful information regarding these calculations.

165

ACG Letter.

166

PCA Letter (stating that when advisers report different client assets in Part 2A than regulatory assets under management in Part 1A of Form ADV, it is frequently due to additional assets being included in the Part 2A calculation, such as non-discretionary assets that are under “advisement,” rather than a different method of calculating assets under management).

In addition, largely as proposed, we are adding a question asking the approximate amount of an adviser's total regulatory assets under management that is attributable to clients that are non-United States persons

167

to complement the current requirement that each adviser report the percentage of its clients that are non-United States persons, which, based on our experience, is not always a reliable indicator of an adviser's relationships with non-U.S. clients.

168

As noted in the Proposing Release, our examination staff can use this information to better understand the extent of investment advice provided to non-U.S. clients which will assist in our risk assessment process.

169

In our proposal, we used the term “non-U.S. client” and commenters sought clarification of the definition of “non-U.S. client.”

170

In response, the amendments that we are adopting today use the term “non-United States person” in Item 5.F.(3). The Glossary to Form ADV provides that “United States person” has the same meaning as in rule 203(m)-1 under the Advisers Act, which includes any natural person that is resident in the United States.

167

Amended Form ADV, Part 1A, Item 5.F.(3).

168

Form ADV, Part 1A, Item 5.C.(2). For example, an adviser may report a significant percentage of clients that are non-United States persons, but the regulatory assets under management attributable to those clients is a small percentage of the adviser's regulatory assets under management.

169

Proposing Release,

supra

footnote 3 at Section II.A.2.

170

Oppenheimer Letter; SIFMA Letter.

Section 5.G.(3) of Schedule D currently requires advisers to report the SEC File Number for registered investment companies and business development companies that they advise. Largely as proposed, we are adding to Section 5.G.(3) a requirement that advisers report the regulatory assets under management of all parallel managed accounts related to a registered investment company (or series thereof) or business development company that they advise.

171

As described in the Proposing Release, this information will permit our staff to assess the accounts and consider how an adviser manages conflicts of interest between parallel managed accounts and registered investment companies or business development companies advised by the adviser.

172

This information also will show the extent of any shift in assets between parallel managed accounts and registered investment companies or business development companies.

171

Amended Form ADV, Part 1A, Section 5.G.(3) of Schedule D. The Glossary to Amended Form ADV includes “parallel managed account,” which is defined as: “With respect to any registered investment company or series thereof or business development company, a parallel managed account is any managed account or other pool of assets that you advise and that pursues substantially the same investment objective and strategy and invests side by side in substantially the same positions as the identified investment company or series thereof or business development company that you advise.”

172

Proposing Release,

supra

footnote 3 at Section II.A.2.

Some commenters questioned the usefulness of collecting information on parallel managed accounts

173

or thought that disclosures about parallel managed accounts would not produce meaningful results or could be misleading.

174

We recognize that there may be different reasons for assets to shift between parallel managed accounts and registered investment companies or business development companies, but that does not make the additional information less useful to the staff in considering how advisers manage conflicts of interest and assessing the extent of any shift in assets for risk monitoring purposes.

173

BlackRock Letter (suggesting that asking during examinations for an adviser's policies related to fair treatment of all accounts, and testing of compliance with those policies, would better achieve the objective); IAA Letter; Comment Letter of Small Business Investor Alliance (Aug. 11, 2015) (“SBIA Letter”) (opining that the proposal adds unnecessary reporting for advisers of business development companies and is duplicative of Form N-2). We believe the information to be collected in Section 5.G.(3) is different from the information collected on Form N-2 regarding closed-end funds and business development companies because the information collected on Form N-2 regarding management of other accounts focuses on individual portfolio managers, while the information collected on Form ADV is reported at the adviser level.

174

Anonymous Letter (stating there are many reasons assets could shift between parallel managed accounts and registered investment companies or business development companies); BlackRock Letter.

Some commenters noted that registered investment companies often have multiple series, each with its own portfolio manager, investment strategy, and holdings; and that the concept of a parallel managed account could only be applied in the registered investment company context on a series-by-series basis.

175

In response, we have updated Section 5.G.(3) to clarify that parallel managed accounts related to a registered investment company (or a series thereof) should be reported.

175

IAA Letter; Oppenheimer Letter; SIFMA Letter.

One commenter felt that advisers would have difficulty interpreting the requirement that a parallel managed account pursue “substantially the same investment objective and strategy” as the relevant investment company or business development company.

176

Advisers should use their best judgment and make a good faith determination as to whether the investment objectives and strategies in question are “substantially the same.” We note that many private fund advisers already make this determination when filling out Form PF.

177

176

PCA Letter.

177

The definition of “parallel managed account,”

supra

footnote 171, is consistent with the Form PF definition of “parallel managed account.” Form PF, Glossary of Terms.

One commenter asked for confirmation that the value of derivatives held in a parallel managed account should be calculated using the market value of the derivatives rather than the gross notional value, if that is how the value of the account is reported to the account holder.

178

We agree that market value should be used in such a case.

179

178

IAA Letter.

179

This approach is consistent with the staff's view on how the value of a parallel managed account should be calculated on Form PF.

See

Form PF, Frequently Asked Questions. The staff's response to Question 11 on reporting value states that “When calculating the value of a parallel managed account for purposes of either determining whether it is a dependent parallel managed account that is aggregated with the reporting fund or reporting its value in Question 11, you should use the market value of the derivatives held in the parallel managed account, instead of the gross notional value, if that is how the value of the account is reported to the account holder.”

Finally, we are amending Item 5, largely as proposed, to obtain additional information concerning wrap fee programs.

180

Item 5.I. of Part 1A currently requires an adviser to indicate whether it serves as a sponsor of or portfolio manager for a wrap fee

program. We are amending Item 5.I. to ask whether the adviser participates in a wrap fee program, and if so, the total amount of regulatory assets under management attributable to acting as a sponsor to or portfolio manager for a wrap fee program.

181

One commenter noted that many advisers act as both the sponsor of and a portfolio manager for the same wrap fee program and that this could cause those advisers to double count their regulatory assets under management attributable to wrap fee programs in Item 5.I.

182

We agree and have added a question to Item 5.I. that asks for the total amount of regulatory assets under management attributable to the adviser acting as both sponsor to and portfolio manager for the same wrap fee program. To prevent advisers from double-counting assets, we added an instruction that assets reported in this new category should not be reported elsewhere in Item 5.I.(2).

180

The Glossary to Form ADV defines a wrap fee program as “[a]ny advisory program under which a specified fee or fees not based directly upon transactions in a

client's

account is charged for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and the execution of

client

transactions.” We are not amending this definition.

181

Amended Form ADV, Part 1A, Item 5.I.

182

MMI Letter.

Section 5.I.(2) of Schedule D currently requires an adviser to list the name and sponsor of each wrap fee program for which the adviser serves as portfolio manager. We are amending Section 5.I.(2), as proposed, to add questions that require an adviser to provide any SEC File Number and CRD Number for sponsors to those wrap fee programs.

183

As discussed in the Proposing Release, this information will help us better understand a particular adviser's business and assist in our risk assessment and examination process by making it easier for our staff to identify the extent to which the firm acts as sponsor or portfolio manager of wrap fee programs and collect information across investment advisers involved in a particular wrap fee program.

184

183

Amended Form ADV, Part 1A, Section 5.I.(2) of Schedule D.

184

Proposing Release,

supra

footnote 3 at Section II.A.2.

One commenter was generally supportive of our proposed reporting on wrap fee programs, but questioned its usefulness to investors and market participants.

185

As discussed above, our enhanced wrap fee reporting is designed to assist our staff in its risk assessment and examination process. Three commenters requested further clarification regarding the existing definition of a wrap fee program.

186

We are not changing or clarifying the existing definition of a “wrap fee program” that is included in Form ADV because, based on our experience with the Form, we believe it has been sufficiently clear.

185

CFA Letter.

186

ASG Letter (asking whether an adviser will be deemed to participate in a wrap fee program if the adviser negotiates an asset-based fee with a broker and pays that fee rather than having the client pay that fee); PCA Letter (asking whether an adviser will be deemed to “participate” in a wrap fee program as a result of placing client funds (or recommending that clients place non-discretionary funds) in one or more programs sponsored by unaffiliated third parties, but in which the adviser does not serve as the sponsor or a portfolio manager).

See also

NRS Letter (suggesting that we require wrap fee program sponsors to report the combined regulatory assets under management for themselves and any independent portfolio managers in their program).

c. Additional Information About Financial Industry Affiliations and Private Fund Reporting

Part 1A, Section 7.A. of Schedule D requires information on an adviser's financial industry affiliations and Section 7.B.(1) of Schedule D requires information on private funds managed by the adviser. We are adopting as proposed amendments to Sections 7.A. and 7.B.(1) of Schedule D that require an adviser to provide identifying numbers (

i.e.

, Public Company Accounting Oversight Board (“PCAOB”)-assigned numbers

187

and CIK Numbers

188

) in response to two questions to allow us to better compare information across data sets and understand the relationships of advisers to other financial service providers.

187

Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question 23(e).

188

Amended Form ADV, Part 1A, Section 7.A of Schedule D, Question 4(b).

Two commenters were concerned that, by requiring an adviser to report the PCAOB-assigned number of its auditing firm (if applicable), we are suggesting that using a PCAOB-registered auditing firm is required by the Commission.

189

This is not our intent. An auditing firm performing a surprise examination is not required to be registered with the PCAOB unless the adviser or its related person is serving as qualified custodian.

190

189

Shearman Letter.

See

Comment Letter of American Institute of Certified Public Accountants, Financial Reporting Executive Committee (Aug. 17, 2015) (“AICPA Letter”).

190

Rules 206(4)-2(a)(4) and 206(4)-2(a)(6)(i).

In addition, we are adding a question to Section 7.B.(1) of Schedule D to require an adviser to a private fund that qualifies for the exclusion from the definition of investment company under section 3(c)(1) of the Investment Company Act of 1940 (a “3(c)(1) fund”) to report whether it limits sales of the fund to qualified clients, as defined in rule 205-3 under the Advisers Act.

191

As proposed, the question would have required an adviser to report, for every private fund that it advises (including any private fund that qualifies for the exclusion from the definition of “investment company” under section 3(c)(7) of the Investment Company Act of 1940 (“3(c)(7) fund”), the approximate percentage of the private fund beneficially owned (in the aggregate) by qualified clients.

192

One commenter supported the rationale for our proposal;

193

however other commenters questioned the value of the question and were concerned about situations where the qualified client status of an investor is not known, or does not need to be determined.

194

We continue to believe that this information will give us a better sense of the financial sophistication and nature of investors in private funds, but in response to comments, we are making two changes from our proposal.

191

Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question 15(b). Current Question 15 will become Question 15(a).

192

Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question 15(b).

193

CFA Letter.

194

ACG Letter; Anonymous Letter; SBIA Letter.

First, we are limiting the question to 3(c)(1) funds because each investor in a 3(c)(7) fund is required to meet the higher “qualified purchaser” standard.

195

Second, we are revising the question to require a simple yes or no response as to whether the adviser limits sales of a fund to qualified clients instead of requiring advisers to report the percentage of ownership of the fund by qualified clients. Commenters noted that many advisers that are not registered with the Commission (

e.g.

, exempt reporting advisers

196

) are not required to determine whether the fund's investors are qualified clients.

197

These advisers may simply respond “No” to the revised question. Other commenters asked us to clarify whether advisers must re-certify the qualified client status of their investors annually.

198

As long as an investor met

the definition of a “qualified client” when it entered into the advisory contract with the adviser, then the investor is considered a “qualified client” even if it no longer meets the dollar amount thresholds of the rule. This is consistent with our existing approach to the definition of qualified client.

199

195

“Qualified purchaser” is defined in Section 2(a)(51) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(51)).

196

An exempt reporting adviser is an investment adviser that qualifies for the exemption from registration under section 203(l) of the Advisers Act because it is an adviser solely to one or more venture capital funds, or under rule 203(m)-1 under the Advisers Act because it is an adviser solely to private funds and has assets under management in the United States of less than $150 million.

See

Form ADV, Glossary.

197

ACG Letter; SBIA Letter.

See also

Anonymous Letter. Section 205(a) of the Advisers Act only applies to advisers who are registered or required to be registered with the Commission and generally restricts advisers from entering into, extending, renewing, or performing any advisory contract that provides for performance-based compensation. Rule 205-3 permits advisers to charge performance-based compensation to “qualified clients,” as defined in the rule. Advisers who are registered or required to be registered with the Commission are otherwise prohibited from charging performance-based compensation.

198

JGAS Letter; SBIA Letter.

See also

PCA Letter.

199

See Investment Adviser Performance Compensation,

Investment Advisers Act Release No. 3372 (Feb. 15, 2012) [77 FR 10358 (Feb. 22, 2012)].

3. Umbrella Registration

We are adopting, as proposed, amendments to Form ADV that codify umbrella registration for certain advisers to private funds. We are adopting the amendments today because we believe that umbrella registration should be made available to those private fund advisers that are registered with us and operate a single advisory business through multiple legal entities. Umbrella registration is not mandatory, but we believe it will simplify the registration process for these advisers, and provide additional and more consistent data about, and create a clearer picture of, groups of private fund advisers that operate a single advisory business through multiple legal entities. The amendments also will allow for greater comparability across private fund advisers.

As we discussed in the Proposing Release, the Dodd-Frank Act repealed the private adviser exemption that used to be in section 203(b)(3) of the Advisers Act.

200

As a result, many previously unregistered advisers to private funds,

201

including hedge funds and private equity funds, were required to register under the Advisers Act. Today, about 4,469 registered investment advisers provide advice on approximately $10.5 trillion in assets to approximately 30,896 private funds clients.

202

200

Section 403 of the Dodd-Frank Act. Section 203(b)(3) of the Advisers Act (the “private adviser exemption”) previously exempted any investment adviser from registration if the investment adviser (i) had fewer than 15 clients in the preceding 12 months, (ii) did not hold itself out to the public as an investment adviser and (iii) did not act as an investment adviser to a registered investment company or a company that elected to be a business development company.

201

Section 202(a)(29) of the Advisers Act defines the term “private fund” as “an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that Act.”

202

Based on IARD system data as of May 16, 2016.

For a variety of tax, legal and regulatory reasons, advisers to private funds may be organized as a group of related advisers that are separate legal entities but effectively operate as—and appear to investors and regulators to be—a single advisory business. Although these separate legal entities effectively operate as a single advisory business,

203

Form ADV was designed to accommodate the registration request of an adviser structured as a single legal entity. As a result, private fund advisers that operated as a single advisory business but were organized as separate legal entities may have had to file multiple registration forms, even though the registration effectively was for the same advisory business. Multiple Form ADVs for a single advisory business may distort the data we collect on Form ADV and use in our regulatory program, be less efficient and more costly for advisers, and may be confusing to the public researching an adviser on our Web site.

203

We treat as a single adviser two or more affiliated advisers that are separate legal entities but are operationally integrated, which could result in a requirement for one or both advisers to register.

See Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers

, Investment Advisers Act Release No. 3222 (June 22, 2011) [76 FR 39646 (Jul. 6, 2011)] (“Exemptions Release”).

See also In the Matter of TL Ventures Inc.

, Investment Advisers Act Release No. 3859 (June 20, 2014) (settled action).

Our staff provided guidance to private fund advisers before the compliance date of the Dodd-Frank Act private fund adviser registration requirements designed to address concerns raised by advisers.

204

The guidance provided conditions under which the staff believed one adviser (the “filing adviser”) could file a single Form ADV on behalf of itself and other advisers that were controlled by or under common control with the filing adviser (each, a “relying adviser”), provided that they conducted a single advisory business (collectively an “umbrella registration”).

204

See

2012 ABA Letter,

supra

footnote 5. The Division of Investment Management previously provided no-action relief to enable a special purpose vehicle (“SPV”) that acts as a private fund's general partner or managing member to essentially rely upon its parent adviser's registration with the Commission rather than separately register.

See

American Bar Association Subcommittee on Private Investment Entities, SEC Staff Letter (Dec. 8, 2005),

available at http://www.sec.gov/divisions/investment/noaction/aba120805.htm

(“2005 ABA Letter”) at Question G1.

We believe that most advisers that can rely on umbrella registration are doing so, with approximately 743 filing advisers and approximately 2,587 relying advisers filing umbrella registrations.

205

However, the method outlined in the staff guidance for filing an umbrella registration was limited by the fact that the form was designed for a single legal entity. This created confusion for filers and the public. It also complicated our staff's data collection and analysis on umbrella registrants.

206

Today's amendments are designed to ameliorate these issues.

205

Based on IARD system data as of May 16, 2016.

206

Under the guidance provided by the staff, for example, umbrella registration was appropriate where a relying adviser was not prohibited from registering with the Commission by section 203A of the Advisers Act.

See

2012 ABA Letter,

supra

footnote 5. However, a relying adviser did not have a way to answer Item 2 regarding the basis on which it was eligible for SEC registration. In addition, relying advisers often had to list owners and executive officers in a confusing manner in Schedules A and B which were not designed to accommodate multiple advisers and did not always provide the Commission staff with useful information on the owners of each relying adviser. Also, the filing adviser disclosed its reliance on the 2012 ABA Letter in the Miscellaneous Section of Schedule D.

We are adopting, as proposed, amendments to Form ADV's General Instructions that establish conditions for an adviser to assess whether umbrella registration is available. The conditions we are adopting today are the same as the conditions set forth in the staff's guidance that many investment advisers have relied on since 2012 (except that the staff's guidance also included disclosure conditions for Form ADV, the substance of which is covered elsewhere in this Release).

207

The conditions are as follows:

207

See

2012 ABA Letter,

supra

footnote 5 at Question 4.

1. The filing adviser and each relying adviser advise only private funds and clients in separately managed accounts that are qualified clients (as defined in rule 205-3 under the Advisers Act) and are otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds;

2. The filing adviser has its principal office and place of business in the United States and, therefore, all of the substantive provisions of the Advisers Act and the rules thereunder apply to the filing adviser's and each relying adviser's dealings with each of its clients, regardless of whether any client or the filing adviser or relying adviser providing the advice is a United States person;

208

The Glossary to Form ADV provides that “United States person” has the same meaning as in rule 203(m)-1 under the Advisers Act, which includes any natural person that is resident in the United States.

3. Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser's supervision and control and, therefore, each relying adviser, its employees and

the persons acting on its behalf are “persons associated with” the filing adviser (as defined in section 202(a)(17) of the Advisers Act);

4. The advisory activities of each relying adviser are subject to the Advisers Act and the rules thereunder, and each relying adviser is subject to examination by the Commission; and

5. The filing adviser and each relying adviser operate under a single code of ethics adopted in accordance with rule 204A-1 under the Advisers Act and a single set of written policies and procedures adopted and implemented in accordance with rule 206(4)-(7) under the Advisers Act and administered by a single chief compliance officer in accordance with that rule.

209

The code of ethics and written policies and procedures must be administered as if the filing adviser and each relying adviser are part of a single entity, although they may take into account, for example, that a relying adviser operating in a different jurisdiction may have obligations that differ from the filing adviser or another relying adviser.

The conditions are designed to limit eligibility for umbrella registration to groups of private fund advisers that operate as a single advisory business. For purposes of umbrella registration, we consider the following factors as indicia of a single advisory business: Commonality of advisory services and clients; a consistent application of the Advisers Act and the rules thereunder to all advisers in the business; and a unified compliance program. The conditions that we are adopting today are designed to demonstrate these factors. Condition 1 limits eligibility for umbrella registration to private fund advisers with a commonality of advisory services and clients. Conditions 2 and 4 are designed to provide assurance that our staff has access to and can readily examine the filing and relying advisers and that the Advisers Act and the rules thereunder fully apply to all advisers under the umbrella registration and clients of those advisers. Conditions 3 and 5 are designed to provide assurance that the filing and relying advisers are subject to a unified compliance program. Based on our experience, we believe that the conditions, when taken together, are a strong indication of the existence of a single private fund advisory business operating through the use of multiple legal entities.

In addition, we are amending the General Instructions as proposed to provide advisers using umbrella registration directions on completing Form ADV for the filing adviser and each relying adviser, including details for filing umbrella registration requests and the timing of filings and amendments in connection with an umbrella registration.

210

To satisfy the requirements of Form ADV while using umbrella registration, the filing adviser is required to file, and update as required, a single Form ADV (Parts 1 and 2) that relates to, and includes all information concerning, the filing adviser and each relying adviser, and must include this same information in any other reports or filings it must make under the Advisers Act or the rules thereunder (

e.g.

, Form PF). The revisions to the form's Instructions and Form ADV further specify those questions that should be answered solely with respect to the filing adviser and those that require the filing adviser to answer on behalf of itself and its relying adviser(s).

211

Additionally, we are amending the Glossary as proposed to add the following three terms: (i) “filing adviser;”

212

(ii) “relying adviser;”

213

and (iii) “umbrella registration.”

214

210

See

Form ADV, General Instruction 5.

211

See, e.g.

, statements added to Form ADV, Instructions and Part 1A, Items 1, 2, 3, 7, 10 and 11.

212

“Filing Adviser” means: “An investment adviser eligible to register with the SEC that files (and amends) a single

umbrella registration

on behalf of itself and each of its

relying advisers.

” See Form ADV, Glossary.

213

“Relying Adviser” means: “An investment adviser eligible to register with the SEC that relies on a

filing adviser

to file (and amend) a single

umbrella registration

on its behalf.”

See

Form ADV, Glossary.

214

“Umbrella Registration” means: “A single registration by a

filing adviser

and one or more

relying advisers

who collectively conduct a single advisory business and that meet the conditions set forth in General Instruction 5.”

See

Form ADV, Glossary.

We also are adopting as proposed a new schedule to Part 1A—Schedule R—that must be filed for each relying adviser.

215

Schedule R requires identifying information, basis for SEC registration, and ownership information about each relying adviser, some of which was already filed by an adviser relying on the staff guidance.

216

This new schedule consolidates in one location information for each relying adviser and addresses the problem the staff faced in its guidance that resulted in information regarding relying advisers being submitted in response to a number of different items on the Form, in ways not consistent across advisers, due to the fact that Form ADV was not designed to accommodate umbrella registration.

217

We believe that certain information that we are requiring (such as mailing address and basis for registration) is the same for nearly all relying advisers, and the filing adviser can check a box indicating that the mailing address of the relying advisers is the same as that of the filing adviser. Finally, we are adding, as proposed, a new question to Schedule D that requires advisers to identify the filing advisers and relying advisers that manage or sponsor private funds reported on Form ADV.

218

This information will allow us to identify the specific adviser managing the private fund reported on Form ADV if it is part of an umbrella registration. We believe that this information will help us better understand the management of private funds, will provide information to contact relying advisers, and will help us better understand the relationship between relying advisers and filing advisers.

215

Advisers that choose to file an umbrella registration are directed by Item 1.B. to complete a new Schedule R for each relying adviser. Form ADV, Part 1A, Item 1.B.(2).

216

Schedule R requires the following information for each relying adviser: Identifying information (Section 1); basis for SEC registration (Section 2); form of organization (Section 3) and control persons (Section 4). For basis for SEC registration (Section 2), we did not include categories that would make the relying adviser ineligible for umbrella registration, such as serving as an adviser to a registered investment company.

217

Under the staff's guidance in the 2012 ABA Letter, an adviser reported in its Form ADV (Miscellaneous Section of Schedule D) that it and its relying advisers were together filing a single Form ADV in reliance on the position expressed in the letter and identified each relying adviser by completing a separate Section 1.B., Schedule D, of Form ADV for each relying adviser and identified it as such by including the notation “(relying adviser).”

See

2012 ABA Letter,

supra

footnote 5 at Question 4.

218

Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question 3(b).

We received multiple comment letters regarding our proposal to codify umbrella registration, the vast majority of which expressed support for umbrella registration.

219

Several commenters also agreed that umbrella registration should not be mandatory.

220

However, several commenters urged the Commission to expand the eligibility for umbrella registration to additional advisers including non-U.S. filing advisers, exempt reporting advisers, advisers to other types of clients, and advisers not independently eligible to register with the Commission.

221

219

See, e.g.,

ABA Committee Letter; ACG Letter; AIMA Letter; ASG Letter; BlackRock Letter; CFA Letter; Dechert Letter; MFA Letter; NASAA Letter; NRS Letter; NYSBA Committee Letter; PCA Letter; PEGCC Letter; SBIA Letter; Schulte Letter; Shearman Letter; SIFMA Letter.

220

ABA Committee Letter; ASG Letter; BlackRock Letter; Dechert Letter.

221

One commenter suggested that advisers that can, but do not elect to, file an umbrella registration be required to note that on Form ADV. CFA Letter.

Many commenters encouraged us to permit umbrella registration for non-

U.S. filing advisers.

222

However, as we previously have expressed, we remain concerned that, absent Condition 2 (which requires that the filing adviser have its principal place of business in the United States), a group of related advisers based inside and outside of the United States could designate a non-U.S. adviser as a filing adviser, and could assert, based on the theory of operating a single advisory business, that the Advisers Act's substantive provisions generally would not apply to the U.S.-based relying advisers' dealings with their non-U.S. clients.

223

Many commenters acknowledged this concern.

224

Some commenters suggested that we address the concern by requiring that advisers indicate on their umbrella registration that they will follow applicable law.

225

We believe that Condition 2 eliminates the difficult determinations of the Advisers Act's application to these advisory relationships. The amendments we are adopting today do not change the Commission's statements with respect to the cross-border application of the Advisers Act.

226

222

ABA Committee Letter; AIMA Letter; Dechert Letter; NYSBA Committee Letter; Schulte Letter.

See also

Shearman Letter.

223

2012 ABA Letter,

supra

footnote 5 at n.9;

See

Exemptions Release,

supra

footnote 203 at Section II.D.

224

ABA Committee Letter; AIMA Letter; NYSBA Committee Letter; Schulte Letter; Shearman Letter.

225

AIMA Letter; NYSBA Committee Letter.

See also

Dechert Letter; ABA Committee Letter (suggesting that we state on Form ADV that the Advisers Act applies with respect to all U.S. clients of every registered investment adviser, and with respect to all of the activities of registered investment advisers that have their principal place of business in the United States).

226

Certain commenters discussed our cross-border application of the Advisers Act. ABA Committee Letter; Dechert Letter; Schulte Letter. Most of the substantive provisions of the Advisers Act are not applied to the non-U.S. clients of a non-U.S. adviser registered with the Commission but non-U.S. advisers registered with the Commission must comply with the Advisers Act and the Commission's rules thereunder with respect to any U.S. clients (and any prospective U.S. clients) they may have.

See

Proposing Release,

supra

footnote 3 at n.57 and Exemptions Release,

supra

footnote 203 at Section II.D.

Two commenters suggested permitting umbrella registration for an organization where all of the advisers have their principal office and place of business outside of the United States.

227

However, umbrella registration is intended to apply only where our staff has access to and can readily examine the filing and relying advisers and where the Advisers Act and the rules thereunder fully apply to all advisers (and clients) under the umbrella registration.

228

This would not be the case for a group of non-U.S. advisers.

227

Schulte Letter; Shearman Letter.

228

Proposing Release,

supra

footnote 3 at Section II.A.3.

Several commenters

229

argued that we should expand the concept of umbrella registration by registered advisers to include “umbrella reporting” by exempt reporting advisers. Many of these commenters stated, and we acknowledge, that allowing exempt reporting advisers that operate a single advisory business through multiple legal entities to file an “umbrella report” would provide many of the same benefits as umbrella registration.

230

However, we are not expanding the concept of umbrella registration to include “umbrella reporting” by exempt reporting advisers at this time. Some of the conditions required for umbrella registration reflect certain requirements that apply only to registered advisers.

231

Different conditions might be more appropriate for ensuring that a group of exempt reporting advisers is operating a single advisory business and therefore should be able to take advantage of “umbrella reporting.”

229

ABA Committee Letter; ACG Letter; AIMA Letter; ASG Letter; MFA Letter; NYSBA Committee Letter; SBIA Letter; Schulte Letter; Shearman Letter.

230

ABA Committee Letter; AIMA Letter; MFA Letter; SBIA Letter; Schulte Letter.

See also

ACG Letter.

231

Specifically, exempt reporting advisers are not subject to the requirement for compliance policies and procedures pursuant to rule 206(4)-7 under the Advisers Act or for a code of ethics pursuant to rule 204A-1 under the Advisers Act.

See

ACG Letter.

Certain commenters questioned the status of a set of Frequently Asked Questions

232

that permits certain exempt reporting advisers to file a single Form ADV on behalf of multiple special purpose entities.

233

The views of the staff as expressed in these Frequently Asked Questions are not withdrawn as a result of today's amendments to Form ADV.

232

Frequently Asked Questions on Form ADV and IARD,

Reporting to the SEC as an Exempt Reporting Adviser

(Mar. 2012),

available at https://www.sec.gov/divisions/investment/iard/iardfaq.shtml#exemptreportingadviser.

233

ABA Committee Letter; AIMA Letter; NYSBA Committee Letter.

Two commenters disagreed with Condition 5's requirement that the filing adviser and each relying adviser operate under a single code of ethics adopted in accordance with rule 204A-1 under the Advisers Act and a single set of written policies and procedures adopted and implemented in accordance with rule 206(4)-(7) under the Advisers Act and administered by a single chief compliance officer in accordance with that rule.

234

One commenter argued that Condition 5 was too restrictive and suggested that we allow groups of related advisers with “substantially similar” codes of ethics and sets of policies and procedures administered by several chief compliance officers operating under a “common compliance regime” to file an umbrella registration.

235

Based on our experience with private fund advisers that operate a single private fund advisory business through multiple legal entities, we believe that they commonly have a unified compliance program which is characterized by a single code of ethics and a single set of compliance policies and procedures administered by a single chief compliance officer. Because we believe that the existence of a unified compliance program that meets the requirements of Condition 5 is a meaningful indicia of a single private fund advisory business, we are not modifying Condition 5 at this time.

234

Capital Research Letter.

See

ACG Letter (stating that Condition 5 would have the practical effect of excluding exempt reporting advisers from eligibility for umbrella registration because exempt reporting advisers are not required by Advisers Act rule 204A-1 to adopt a code of ethics, nor are they required by Advisers Act rule 206(4)-7 to adopt compliance policies and procedures).

235

Capital Research Letter.

Several commenters disagreed with limiting umbrella registration eligibility to advisers operating a single private fund advisory business as described in Condition 1.

236

Some commenters urged the Commission to make umbrella registration available where the advisers operate a single advisory business for types of clients other than those described in Condition 1, including registered investment companies and business development companies.

237

Another commenter disagreed with limiting eligibility to a single advisory business of any kind and suggested that umbrella registration apply to all related persons of a filing adviser.

238

However, as we stated in the Proposing Release, we do not believe umbrella registration is appropriate for advisers that are related but that operate separate advisory businesses as it would compromise data quality and complicate analyses that rely on data from Form ADV.

239

We believe that by adopting umbrella registration as proposed, we are best able to accommodate the unique needs of

private fund advisers that operate a single advisory business through multiple legal entities without compromising the data quality or analyses that rely on data from Form ADV.

236

ASG Letter; BlackRock Letter; Capital Research Letter; Dechert Letter; Comment Letter of Tannenbaum Helpern Syracuse & Hirschtritt LLP (Aug. 5, 2016) (“Tannenbaum Letter”) (disagreed with “substantially similar or otherwise related” language, because advisers may operate a single business with different investment strategies).

237

ASG Letter; Dechert Letter.

See also

BlackRock Letter.

238

Capital Research Letter.

239

Proposing Release,

supra

footnote 3 at Section II.A.3.

Several commenters took issue with the proposal's requirement to determine asset-based eligibility for umbrella registration on an entity-by-entity, rather than consolidated, basis.

240

These commenters suggested that the goals of providing a clearer picture of groups of related advisers that operate as a single business and establishing a more efficient method for registration for separate legal entities that collectively conduct a single advisory business would be better served by allowing the group to determine asset-based eligibility for umbrella registration on a consolidated basis.

241

Umbrella registration was intended to consolidate the multiple registration forms that may otherwise have been required by a single advisory business. It was not intended to alter or modify the eligibility for registration with the Commission.

242

240

Dechert Letter; Morgan Letter; NRS Letter; NYSBA Committee Letter.

See

MFA Letter (arguing that a registered private fund adviser that serves as a filing adviser should be able to add a relying adviser that is an exempt reporting adviser to its umbrella registration).

241

Id.

242

See

Proposing Release,

supra

footnote 3 at Section II.A.3. To the extent there is concern about the eligibility of SEC registration for newly-formed relying advisers, rule 203A-2(c) provides an exemption for advisers that expect to be eligible for Commission registration within 120 days.

Some commenters disagreed with the requirement contained in Condition 1 that separately managed accounts be owned by qualified clients.

243

One commenter stated that the qualified client requirement for separately managed accounts is not related to the single business requirement.

244

Condition 1 also requires that the qualified clients be otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser and that their accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds. Condition 1, including the qualified client requirement, is intended to ensure the commonality of clients that we believe is an important indicia of a single private fund advisory business. For example, if a group of advisers advised private funds as well as separately managed accounts held by non-qualified clients or separately managed accounts that pursue investment objectives or strategies that differ from the private funds they advise, we do not believe they would be operating a single private fund advisory business. The offering of separately managed accounts to clients other than qualified clients (such as retail clients) or separately managed accounts that pursue investment objectives or strategies that differ from the private funds they advise indicate that the group of advisers is engaged in lines of business that differ from a single private fund advisory business that we intend to cover with umbrella registration. Accordingly, at this time, we continue to believe that a group of advisers' ability to comply with Condition 1, including the qualified client requirement for separately managed accounts, is a meaningful indicia of a single private fund advisory business, and we are therefore adopting Condition 1 as proposed.

243

Morgan Letter; NYSBA Committee Letter; Tannenbaum Letter.

See also

PCA Letter.

244

NYSBA Committee Letter.

We also received several comments on the new amendments to Form ADV to accommodate umbrella registration. Two commenters generally supported the benefits of new Schedule R, which requires separate reporting of indirect and direct ownership for relying advisers (similar to current Schedules A and B of Form ADV).

245

One commenter was concerned that relying advisers, which may act as special purpose general partners or similar entities and may be owned by employees sharing in the performance-based compensation paid by the fund, would in effect be forced to share the details of employee compensation on a public filing.

246

The ownership information required of relying advisers is consistent with the ownership information required of filing advisers. We believe this information will more accurately reflect the full nature and scope of the single advisory business conducted by the group of related advisers and will be more informative for advisory clients and private fund investors as well as the Commission.

247

245

ASG Letter; PEGCC Letter.

246

Shearman Letter.

247

See

Proposing Release,

supra

footnote 3 at Section II.A.3.

4. Clarifying, Technical and Other Amendments to Form ADV

We are adopting, largely as proposed, several amendments to Form ADV that are designed to clarify the form and its instructions. As noted in the Proposing Release, we believe these amendments to Form ADV will make the filing process clearer and more efficient for advisers and increase the reliability and the consistency of information provided by investment advisers. More reliable and consistent information will improve our staff's ability to interpret, understand, and place in context the information provided by advisers, allow our staff to make comparisons across investment advisers and improve the risk assessment and examination program. Many of these amendments are derived from questions frequently received by our staff. Except where noted, we did not receive comments on these amendments.

a. Amendments to Item 2

Item 2.A. of Part 1A of Form ADV requires an adviser to select the basis upon which it is eligible to register with the Commission, and Item 2.A.(9) includes as a basis that the adviser is eligible for registration because it is a “newly formed adviser” relying on rule 203A-2(c) because it expects to be eligible for SEC registration within 120 days.

248

Section 2.A.(9) of Schedule D is entitled “Newly Formed Adviser” and requests the adviser to make certain representations. As noted in the Proposing Release, our staff has received questions about whether the exemption from the prohibition on Commission registration contained in rule 203A-2(c) under the Advisers Act applies only to entities that have been “newly formed,”

i.e.

, newly created as corporate or other legal entities. It does not only apply to newly created entities and therefore, as proposed, we are deleting the phrase “newly formed adviser” from Item 2.A.(9) and Section 2.A.(9) of Schedule D. Section 2.A.(9) will be renamed “Investment Adviser Expecting to be Eligible for Commission Registration within 120 Days.”

249

248

Form ADV, Part 1A, Item 2.A.(9) and Section 2.A.(9) of Schedule D.

249

Amended Form ADV, Part 1A, Item 2.A.(9);

see

rule 203A-2(c) under the Advisers Act.

b. Amendments to Item 4

Item 4 of Part 1A of Form ADV addresses successions of investment advisers, and the Instructions to Item 4 provide that a new organization has been created under certain circumstances, including if the adviser has changed its structure or legal status (

e.g.

, form of organization or state of incorporation). As noted in the Proposing Release, our staff frequently receives questions from investment advisers regarding this item and, as proposed, we are adding to Item 4 and Section 4 of Schedule D text that is currently contained in the Instructions to Item 4 that succeeding to the business of a registered investment adviser includes, for example, a change of

structure or legal status (

e.g.

, form of organization or state of incorporation).

250

Amended Form ADV, Part 1A, Item 4.A. and Section 4 of Schedule D.

c. Amendments to Item 7

Item 7 of Part 1A of Form ADV and corresponding sections of Schedule D require advisers to report information about their financial industry affiliations and the private funds they advise. We are adopting several technical amendments to Item 7. As proposed, we are revising Item 7.A., which requires advisers to check whether their related persons are within certain categories of the financial industry, to clarify that advisers should not disclose in response to this item that some of their employees perform investment advisory functions or are registered representatives of a broker-dealer, because this information is required to be reported on Items 5.B.(1) and 5.B.(2) of Part 1A, respectively. Items 5.B.(1) and 5.B.(2) request information about an adviser's employees. Adding this text to Form ADV should assist filers in filling out the form as well as provide more accurate data to us and the general public.

251

Amended Form ADV, Part 1A, Item 7. The staff has provided this clarification and it is currently available online at our staff's Frequently Asked Questions on Form ADV and IARD,

available at http://www.sec.gov/divisions/investment/iard/iardfaq.shtml.

Item 7.B. of Part 1A of Form ADV asks whether the adviser serves as adviser to any private fund. Section 7.B.(1) of Schedule D requires advisers to provide information about the private funds they manage. We are adding text to Item 7.B. clarifying that Section 7.B.(1) of Schedule D should not be completed if another SEC-registered adviser or SEC exempt reporting adviser reports the information required by Section 7.B.(1) of Schedule D. Currently the instructions only refer to another adviser. We are also adopting, as proposed, several amendments to Section 7.B.(1) of Schedule D. Question 8 of Section 7.B.(1) currently asks whether the private fund is a “fund of funds,” and if it is, whether the private fund invests in funds managed by the adviser or a related person of the adviser. Below those two questions there is a note informing advisers when they should answer yes to the first question regarding whether the private fund is a “fund of funds.” We are moving the note to directly after Question 8.(a).

252

We believe this change will assist filers in answering Ques

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.