The biggest change to the Form ADV is reporting on separately managed accounts. The Securities and Exchange Commission is looking for data and insight into advisers’ operations. I think the benefit to consumers is a side benefit.
I have to admit that I was confused as I was browsing through the new changes to Form ADV. I mistook “separately managed accounts” for “separate accounts.” That left me particularly confused when the section started with the scope of the changes:
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.
Later on in the release, the SEC specifically chooses not to define “separately managed accounts.” That only exacerbated my initial confusion. Many advisers and fund managers are familiar with separate accounts, a species of investing vehicle used by insurance companies
Then the light came on and realized that the SEC had created a completely new term that compliance professionals for registered investment advisers will need to learn and understand. There are “separate accounts” and “separately managed accounts.” To add to the confusion, a separate account could be a separately managed account. But maybe that was just me.
With Dodd-Frank giving the SEC more oversight over private funds, it realized that it was collected vast amounts of information about private funds, but much less about the bread and butter separately managed accounts. But rather than collect that information in the private manner for Form PF, the SEC is mandating additional disclosure in the public Form ADV filing.
Registered investment advisers will have to report the approximate percentage of their separately managed account assets invested in twelve asset categories:
- exchange-traded equity securities;
- non-exchange traded equity securities;
- U.S. government bonds;
- U.S. state and local bonds;
- sovereign bonds;
- corporate bonds – investment grade;
- corporate bonds – non-investment grade;
- derivatives;
- securities issued by registered investment companies and business development companies;
- securities issued by other pooled investment vehicles;
- cash and cash equivalents; and
- other
Don’t look for definitions of these terms in Form ADV. The SEC is leaving it up to advisers to determine how to categorize assets, so long as the methodology is consistently applied. If an adviser has more than $10 billion in RAUM, the information will have to be reported twice a year, instead of just an annual filing.
If an adviser has more than $500 million in RAUM, the adviser will have to disclose the use of borrowing attributable to those assets. If the adviser has more than $10 billion in RAUM, the adviser will also have to report on the use of derivatives in those accounts.
As with private funds, advisers will need to report information on the use of custodians. The new Item 5.K.(3) requires investment advisers to identify any custodian that accounts for at least 10 percent of total RAUM attributable to its separately management accounts, the custodian’s office location and the amount of RAUM held at the custodian.
Sources:
One slight amendment to what is written above. In the article above the author states “If an adviser has more than $10 billion in RAUM, the information will have to be reported twice a year, instead of just an annual filing.”
However, the rule actually requires an adviser with more than $10 billion in RAUM to make only an annual report. In that annual report the adviser will be required to report both the mid-year and end of year percentages, while advisers with $10 billion or less RAUM will only report the end of year percentages.
The applicable passage of the rule is on page 10 in Section II.A.1.b “Section 5.K.(1) of Schedule D”. The passage is also transcribed 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.
Thank you for the clarification. I’m still trying to figure out the details of this new reporting.