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IA Annual Form ADV Update for 2017

Investment Adviser Registration Update Due March 31

Under SEC and state regulations, registered investment advisers and exempt reporting advisers (“ERAs”) must file an annual amendment to Form ADV within 90 days of the end of its fiscal year. For most firms this means that the annual updating amendment is due by March 31, 2017.

Process and Major ADV Update Items

The annual update can be completed through the IARD system either (i) internally by the firm’s CCO or (ii) externally by a firm’s compliance consultant or fund attorney. The process generally will entail a review of the current Form ADV, and Form ADV Part 2 if applicable, to make sure that all information is up to date and accurate. In general, once the review process has begun, the update can be completed in a few days depending on the complexity of firm’s operations and the capacity of the updater to make changes in the system. For many firms whose operations have not changed throughout the year, the update should be fairly straight forward – for private fund managers in this situation, the focus mostly will be on the Schedule D, Item 7.B.(1) items (Private Fund Reporting) which include updates to the following items for each fund:

  • Gross asset value of the private fund as of 12/31/16 (essentially RAUM of the fund, described below)
  • Total number of investors
  • % of the fund owned by the advisor and/or its related persons
  • % of the fund that is owned by fund of funds
  • % of the fund that is owned by non-US persons

Private Fund RAUM

The SEC has defined regulatory assets under management (“RAUM”) in Item 5b of the Form ADV instructions (see Form ADV and Filing Instructions for more information).  Generally, RAUM should include the securities portfolios for which a manager provides continuous and regular supervisory or management services as of the date of filing or update of the Form ADV. Unlike AUM, the RAUM calculation requires managers to report assets managed without the deduction of any outstanding indebtedness or other accrued but unpaid liabilities (including accrued fees or expenses) that remain in a client’s account. A fund manager’s RAUM may be higher than its normally reported AUM because it includes:

  • Cash and cash equivalents (i.e., bank deposits, certificates of deposit, bankers acceptances, and similar bank instruments)
  • Long and short positions (on a gross basis)
  • Leverage
  • Margin
  • Family or proprietary accounts
  • Accounts for which the manager receives no compensation for its services
  • Accounts of clients who are not United States persons

RAUM should be calculated based on the current market value of the assets as determined within 90 days prior to the date of filing the Form ADV.  For private funds, the SEC has stated that a manager may rely on the gross assets as reflected on the fund’s balance sheet, and the manager may assess the value of financial instruments under the applicable accounting standards, which is GAAP in this industry.  We urge managers to reach out to their accounting firm if they are unsure about the treatment of any financial instruments for purposes of the RAUM calculation.

Other Items

While it is important to make sure all parts of the Form ADV are accurate and complete, special attention should also be paid to the Part 2 brochures. Some firms also take this opportunity to review their compliance program but given this update requirement and the audit deadline for pooled investment vehicles, the annual compliance review will often be pushed back until later in the year.  While we are quickly coming up to March 31, there is still plenty of time to complete the update and private fund managers should reach out to us if they would like our assistance preparing the amendment for this year.

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Bart Mallon provides investment adviser registration and compliance services to investment advisers and private fund managers through Cole-Frieman & Mallon LLP.   Mr. Mallon can be reached directly at 415-868-5345.

SEC Guidance on Registration of Investment Advisory Affiliates

The SEC’s Division of Investment Management issued a no-action letter on January 18, 2012 that provides guidance for registered investment advisers who have multiple entities in control relationships. The no-action letter affirms prior SEC guidance for investment advisers who have entities that serve as general partners and managing members to private funds and other similar special purpose vehicles (“SPVs”). Additionally, other investment advisers who “conduct a single advisory business” through multiple separate legal entities may use a single registration (i.e. register on a single Form ADV) under certain circumstances.

Affiliates Serving as Fund General Partners, Managing Members and Similar SPVs

Entities that function as fund general partners, fund managing members, and similar SPVs are not required to separately register as an investment adviser, as long as the following conditions are satisfied:

1. The investment adviser to a private fund establishes the SPV to act as the fund’s general partner or managing member;

2. The SPV’s formation documents designate the investment adviser to manage the private fund’s assets;

3. All of the investment advisory activities of the SPV are subject to the Investment Advisers Act of 1940 (the “Advisers Act”), Advisers Act rules, and SEC examination; and

4. All employees and persons acting on behalf of the registered investment adviser and/or an SPV are subject to supervision and control of the investment adviser.

For SPVs that have independent directors, the independent directors are excepted from the condition that they be under the registered investment adviser’s supervision and control, and thus are not “persons associated with” the registered investment adviser.

Other Investment Advisory Affiliates Under Common Control

Under the SEC’s guidance, a registered investment adviser (the “filing adviser”) can file a single Form ADV on behalf of itself and each entity that is controlled by or under common control with the filing adviser (each, a “relying adviser”) as long as those entities are conducting a single advisory business. Under the no action letter, using a single registration is appropriate under the following circumstances:

1. The filing adviser and each relying adviser advise only private funds and separate account clients that are “qualified clients” (as defined in Rule 205-3 promulgated under the Investment Advisers Act of 1940 (the “Advisers Act”));

2. Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control;

3. The filing adviser has its principal office and place of business in the United States;

4. The advisory activities of each relying adviser are subject to the Advisers Act and SEC examination;

5. The filing adviser and each relying adviser operate under a single code of ethics and single set of compliance policies and procedures; and

6. The filing adviser discloses in its Form ADV (Miscellaneous Section of Schedule D) that it and its relying advisers are together filing a single Form ADV and each relying adviser is identified by completing a separate Section 1.B, Schedule D, with the notation “relying adviser.”

For more information on whether the above guidance applies to your firm, please contact us directly.

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Cole-Frieman & Mallon LLP provides investment adviser registration and compliance services. Bart Mallon can be reached directly at bmallon@colefrieman.com and by phone at 415-868-5345.

Annual ADV Updating Amendment for IA Firms

Under SEC and state regulations, a registered investment advisory firm must file its annual amendment to Form ADV within 90 days of the end of its fiscal year.  For most firms this means that the Annual Updating Amendment is due by March 31.  In addition to the traditional updates which firms need to make on Form ADV, advisers will also need to be aware of the new regulations with respect to ADV Part 2 which may require the adviser to complete a new form ADV part 2 during the updating process.  We are making special note of the updating requirement earlier than usual because of the new ADV 2 requirement.

Overview of Major Items on ADV to Update

When a firm completes an annual update to Form ADV, the firm should go through each question and make sure disclosures are accurate and up to date.  In general the firm’s chief compliance officer will complete the update or work with an outside investment adviser compliance firm or law firm to complete the update.

Some of the key items of Form ADV which need to be updated include:

  • Employees (Items 5.A. and 5.B.)
  • Number of clients (Items 5.C. and 5.H.)
  • Number of accounts (Item 5.F.)
  • Assets under management (Item 5.G.)
  • Other material changes can also be disclosed on the Annual Updating Amendment, such as changes to reportable disciplinary and financial disclosures, contact information, custody, and ownership.   [Note: these items need to be updated on Form ADV within 30 days of when they take place.]

While Part 1 of Form ADV can be completed using the online form on the IARD system, the new ADV Part 2 must be filed electronically as a text-searchable PDF.  You will not be able to

submit a PDF file of a scanned copy Part 2 on the IARD system.

New Regulations Regarding ADV Part 2

IA firms applying for SEC registration as of January 1, 2011 and existing firms filing Annual Updating Amendments are now required to use the new Part 2A, the “firm brochure.”  In addition, the SEC has established the following compliance dates regarding Part 2B, the “brochure supplement:”

SEC Compliance Dates for Delivery of Brochure Supplements to Clients

SEC Compliance Dates Extensions*
New/Prospective Clients Existing Clients New/Prospective Clients Existing Clients
New IA registrants Applying as of 01/01/11, deliver upon registering Applying between 01/01/11 and 04/30/11, begin delivering by 05/01/11

Applying after 04/30/11, deliver upon registering

Applying between 01/01/11 and 04/30/11, deliver by 07/01/11.
Existing IAs Upon filing Annual Updating Amendment Within 60 days of filing Annual Updating Amendment Registered as of 12/31/10 with fiscal year ending 12/31/10 through 04/30/11, begin delivering by 07/31/11

Registered as of 12/31/10 with fiscal year ending after 04/30/11, deliver upon filing Annual Updating Amendment

Registered as of 12/31/10 with fiscal year ending 12/31/10 through 04/30/11, deliver by 09/30/11

Registered as of 12/31/10 with fiscal year ending after 04/30/11, deliver within 60 days of filing Annual Updating Amendment

*On December 28, 2010, the SEC extended the compliance dates by four months to provide certain IAs more time to deliver the brochure supplement.

Incorporating the New ADV Part 2 for State Registrations

Because not all states have adopted the new ADV Part 2, state-registered IAs should check their state rules to confirm whether they need to use the new form or if they can continue to use the old form.  In many states, the next amendment to Form ADV must include the new ADV Part 2, even if it is not the Annual Updating Amendment.  For example, as of January 1, 2011, states including Alaska, California, Connecticut, Indiana, Maine, Maryland, Massachusetts, Ohio, Oregon, and Tennessee are requiring that registered IAs use the new ADV Part 2 as part of any amendment, as well as the required Annual Updating Amendment.

For more information on ADV Part 2, especially with respect to state adoptions, please see our update on new ADV Part 2.

For information on expected costs to prepare the new Form ADV 2, please see this post.

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Bart Mallon provides investment adviser registration and compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Form ADV Requirements for Exempt Reporting Advisers

As we’ve discussed previously, the SEC has proposed two new exemptions from SEC registration for certain firms who would otherwise be required to register with the SEC as investment advisers:

  1. Section 203(l) (see Rule 203(l)-1) generally exempts investment advisers who only advise one or more “venture capital funds” and
  2. Section 203(m) (See Rule 203(m)-1) generally exempts investment advisers who only advise private funds and have AUM in the U.S. of less than $150MM.

To implement these new exemptions and to assist the SEC with identifying such advisers, their owners, their business models, and any potential risks to investors, proposed Rule 204-4 would require these “exempt reporting advisers” (“ERAs”) to submit, and to periodically update, reports to the SEC by completing specific items on Form ADV.

This article provides an overview of what information ERAs would have to report.

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ERA Reporting Items

Proposed Rule 204-4 requires exempt reporting advisers to provide the SEC with the following items on Form ADV:

  • Item 1 – Identifying Information
    • A new question would require ERAs (and registered advisers) to indicate whether the adviser had $1 billion or more in AUM to assist the SEC in identifying excessive incentive-based compensation arrangements.
    • ERAs (and registered advisers) would be required to provide contact information for the adviser’s chief compliance officer, indicate whether any control person is a public reporting company, and add “limited partnership” as a cohise advisers can select to indicate how their organization is formed.
  • Item 2C – SEC Reporting by Exempt Reporting Advisers
  • Item 3 – Form of Organization
  • Item 6 – Other Business Activities:  this item would require the ERAs to indicate the advisers other business activities.  The list of activities would be expanded to include trust companies, registered municipal advisors, registered security-based swap dealers, majority security-based swap participants, and accountant firms.
  • Item 7 – Financial Industry Affiliations from Private Fund Reporting: this item would be expanded as Item 6 will be expanded.
  • Item 10 – Control Persons
  • Item 11 – Disclosure Information
    • ERAs (and registered advisers) would have to indicate whether the disclosure (i.e. criminal, regulatory) pertains to the adviser or any of its supervised persons
  • Schedule A – Direct Owners
  • Schedule B – Indirect Owners
  • Schedule C – Amendments to Schedule A and B
  • Schedule D
    • Items 6 and 7.A. would require additional information corresponding with the answers provided in Items 6 and 7 in the main part of Form ADV.
    • Item 7.B. would require ERAs (and registered advisers) to provide more information about the private funds they (and not their related persons) advise, which generally includes all pooled investment vehicles, regardless of whether they are organized as limited partnerships.
    • Item 7.B.1. would require ERAs (and registered advisers) to provide more information about the basic organizational, operation, and investment characteristics of the fund, amount of assets, nature of the investors, and service providers.
    • Part A of Item 7.B.1. would also require additional information including:
      • the name of the fund (including an option to preserve the anonymity of the private fund client);
      • the state or country where the fund is organized;
      • the name of the general partner, directors, trustees or other persons with similar positions;
      • the organization of the fund (e.g. master-feeder);
      • regulatory status of the fund; and
      • other questions about the fund’s investment activities (e.g. size of the fund, gross/net assets, minimum investment amounts, conflicts of interest, etc.)
    • Part B of Item 7.B.1. would require ERAs (and registered advisers) to provide information about the 5 types of service providers that generally perform the “gatekeeper” role for a fund–auditors, prime brokers, custodians, administrators and marketers.

The ERA would not be required to prepare a client brochure (Form ADV Part 2).

Updates to Form ADV

In addition to filing an initial Form ADV, ERAs would also be required to file updating amendments (pursuant to the new amendment to Rule 204-1).  Rule 204-1 would require ERAs, like registered advisers, to amend Form ADV:

  • at least annually, within 90 days of the fiscal year end;
  • more frequently, as required by Form ADV.  The new General Instruction 4 of Form ADV would require ERAs to update Items 1, 3, and 11 if they become inaccurate in any way.  They would be required to update Item 10 if it becomes materially inaccurate; and
  • pursuant to Rule 204-4, the ERA would have to amend Form ADV when it ceases to be an ERA (indicate it is filing a final report pursuant to Rule 204-4).  Note: many times, the adviser would be simultaneously applying for registration.

Filing Deadlines

ERAs would be required to file their initial report on Form ADV by August 20, 2011.

Filing Fee

The ERAs would have to pay a filing fee charged by FINRA.   Currently, the SEC anticipates that the fees would be the same as those for registered IAs and range from $40 to $200, based on AUM.

Other Items

Why Form ADV?

The SEC has proposed for ERAs to use Form ADV to meet their reporting requirement because the Buy viagra china Form ADV and IARD system are already established and doing so avoids additional delay and expense related to creating a new form.  In addition, many ERAs will already have to use Form ADV for their state registrations – using Form ADV allows such advisers to satisfy the state requirement and Rule 204-4 in a single filing.  The ERA reports filed via Form ADV will be publicly available on the SEC’s website.

Other Changes to Form ADV

Form ADV would be re-titled to reflect its dual purpose–as the “Uniform Application for IA Registration” and “Report by Exempt Reporting Advisers.”  The ERA would indicate that it was reporting to the SEC, rather than registering with the SEC.

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Bart Mallon Esq. is a hedge fund attorney and provides hedge fund compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

SEC Extends Compliance Date for “Brochure Supplement,” Part 2B of Form ADV

On July 21, 2010, the Securities and Exchange Commission (“SEC”) adopted amendments to cheap viagra brand Part 2 of Form ADV that became effective October 12, 2010.  Part 2A of Form ADV, the “firm brochure,” contains information about the advisory firm itself.  Part 2B of Form ADV, the “brochure supplement,” contains information about the advisory personnel.

On December 28, 2010, the SEC issued a four-month extension for the Part 2B compliance dates.   The new compliance dates for Part 2B are as follows:

  • New IAs – All newly registered IAs filing their applications for registration with the SEC from January 1, 2011 through April 30, 2011, have until May 1, 2011 to begin delivering Part 2B to new and prospective clients. These advisers have until July 1, 2011 to deliver Part 2B to existing clients. The compliance dates for delivering Part 2B for newly-registered IAs filing applications for registration after April 30, 2011 remain unchanged.
  • Existing registered IAs – All IAs registered with the SEC as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011, to begin delivering Part 2B to new and prospective clients. These advisers have until September 30, 2011 to deliver Part 2B to existing clients. The compliance dates for delivering Part 2B for existing registered IAs with fiscal years ending after April 30, 2011 remain unchanged.

The compliance dates for Part 2A remain unchanged.  More information about the compliance dates initially set by the SEC are available here.

For the full SEC release, please see SEC Extends Compliance Deadline for ADV Part 2.

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Other related articles:

Bart Mallon Esq. is a hedge fund attorney and provides hedge fund compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Form ADV Part 2 and State Registration

A couple of weeks ago the SEC announced that they approved certain updates for Form ADV Part 2 .  While these forms will be required for managers who are subject to registration with the SEC (under the new rules, those managers with either $100 or $150 million of assets under management depending on the circumstance), the states are still determining how they are going to handle new Part 2.  We have done a preliminary investigation by calling a number of the more popular states and found that most states are planning to implement new Part 2, but are not sure when the requirement will be finalized.  From our research, Texas is the only state that has set a date for implementation of new Part 2.

The list of states is below.  We will continue to update this list.

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  • Arizona – will require but not sure starting when
  • California – will require but not sure when
  • Colorado – will require but not sure starting when
  • Connecticut – discussing now and will have a decision at the end of the month
  • Illinois – will require but not sure starting when
  • Massachusetts – will require but not sure starting when
  • Texas – will require starting 01/11

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Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides legal support and hedge fund compliance services to all types of investment managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

New Form ADV Part 2 Format Released

SEC Announces New Format for ADV Part 2

Advisors registered with the SEC should have received a notification from the SEC about the new Part 2 format.  We have posted that release below and the communication we received from the SEC.  We have also posted the new release as well as the instructions for the new ADV Part 2.  We will be providing an overview and our thoughts on these changes in the coming days.

Complete Release – New Form ADV Part 2

New Form ADV Part 2 Instructions

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Form ADV Part 2: New Format and Brochure Supplements Required

The SEC recently adopted amendments to Part 2 of Form ADV and related rules that require investment advisers to prepare plain English narrative brochures and brochure supplements. You may view the adopting release and amended form at http://www.sec.gov/rules/final/2010/ia-3060.pdf . The revised form and rules require you to file a narrative brochure(s) electronically in a text searchable PDF format on IARD and to deliver the brochure to clients. You must also prepare, and deliver to clients, brochure supplements for certain employees and maintain them in your files. If your fiscal year ends on December 31, you are required to file a narrative brochure(s) with your annual amendment filing that is due by March 31, 2011. If your fiscal year end is other than December 31, you are required to file a narrative brochure(s) with your annual amendment filing for your 2011 year end. Please review the final release, amended rules, and amended Part 2 of Form ADV for additional information on when and how you are required to comply with these amendments. You cannot reply to this email. If you have questions, please email IARULES@SEC.GOV.

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Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides legal support and hedge fund compliance services to all types of investment managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

SEC Approves ADV Part II Update

New Form to Require More Disclosure

On July 21, the SEC approved changes to the Form ADV Part II which are designed to provide more and better information to investors.  Currently Part II (and Schedule F which qualifies much of the information on Part II) contains a series of check the box options and also provides much of the same information which is also provided on Form ADV.  The changed proposed below will go into effect 60 days from the publication in the Federal Register which means that most advisers will need to have the new Part II in place by the first quarter of 2011.  In addition to traditional investment advisers, the new Part II disclosure requirements will also be applicable to hedge fund managers who are subject to registration after the passage of the Dodd-Frank reform bill.

The proposed major changes include the following:

  • Increased narrative – currently Part II and Schedule F are composed of a series of check the box answers describing an adviser’s business.  The SEC wants to move towards more of a narrative, “plain English” approach to disclosure which will be “clear and concise”.
  • Discussion of advisory business and fee structure – more disclosure will be required about the advisor’s business and the fee structure.  Increased disclosure will be required about expenses like brokerage and custody fees.
  • Performance fee discussion – the big issue is that if a manager charges performance fees to some accounts and not others, the manager will need to explain the conflicts of interest which are involved.
  • Discussion of investment methodology and risk factors – the manager will be required to explain the material risks involved in the investment program.
  • Disciplinary information – all disciplinary information material to the adviser’s business will need to be disclosed.  If there is new disciplinary disclosures which become necessary after the relationship has been established, the adviser will need to promptly update the client.
  • Supplements – the adviser will need to provide supplements to the client regarding the specific person who will be providing investment advice to the client.  This supplement will include information about the person’s education, business experience, disciplinary history, etc.

After the changes become effective, both hedge fund managers and other investment advisers will need to update their forms and also update their compliance manuals and policies and procedures.  Managers should also note that the information included in Part II will be publicly available online.

While we completely agree with appropriate and easy to understand disclosure, some of the proposed changes may have the unintended effect of creating brochures which are so long and comprehensive that investors will simply not read them.  For example, we have discussed “prospectus creep” and there is the possibility for this to happen with the Part II -especially with respect to risk disclosures.  Managers and lawyers will certainly err on the side of over-disclosure instead of under-disclosure when faced with a potential risk factor which may or may not be “material” in the eyes of the SEC (see, especially, the Goldman case).

What we see with the supplements is essentially a first step towards developing a self-regulatory organization (SRO) to oversee investment advisers.  FINRA has shown a willingness to take on this responsibility and it has become an even greater likelihood as the SEC is tasked with greater responsibilities under the Dodd-Frank bill.  While we believe that a SRO can relieve much of the regulatory burden of a government agency (see the NFA), we must note that all SROs have their own issues and this must be weighed against the increased costs (both in time and money) to investment advisers.

Text of Chairman Shapiro’s speech can be found here.
SEC News Release can be found here.

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Cole-Frieman & Mallon LLP provides legal support and hedge fund compliance services to all types of investment managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

SEC fines adviser and revokes registration

The SEC fined an investment adviser and revoked its registration because of willful refusal to follow simple investment adviser rules such as updating form ADV and submitting to a reasonable examination of its books and records.

From SEC website:

Commission Declares Decision as to Amaroq Asset Management, LLC and Dwight Andre Sean O’Neal Jones Final

The decision of an administrative law judge ordering Amaroq Asset Management, LLC, and Dwight Andree Sean O’Neal Jones to cease and desist from committing or causing any violations or future violations of Section 204 of the Investment Advisers Act of 1940 and Advisers Act Rule 204-1 has been declared final. The law judge further ordered that the registration of Amaroq Asset Management, LLC be revoked; that Dwight Andree Sean O’Neal Jones be barred from association with any investment adviser, with a right to apply for association after one year; and ordered that Jones pay a civil penalty in the amount of $15,000.

The law judge concluded that Jones willfully aided and abetted and was a cause of Amaroq’s failure to: (1) file annual amendments to Form ADV; (2) promptly update its Form ADV to reflect its current business address; (3) submit to a reasonable examination and failing to furnish copies of the required books and records in connection with the scheduled examination. The law judge found that Jones showed indifference and/or a series of broken promises, when Commission attorneys repeatedly and explicitly informed him of the law’s requirements, thereby demonstrating extreme recklessness. (Rel. IA-2770) Finality Order; File No. 3-12822)

For final decision, click here.