Tag: Form ADV

The One With $11 Trillion

There are a few different ways to calculate Assets Under Management. The SEC has prescribed ways to calculate Regulatory Assets Under Management. Often AUM and RAUM will differ depending on an adviser’s business model and client base.

But you can’t just make up RAUM.

Rubin Cedric Williams did so at his firm Vista Financial Advisors. He registered Vista Financial with the Securities and Exchange Commission in December 2021. He filed an update in April 2022 which listed the firm’s RAUM as $10 billion.

This large amount caught the attention of the SEC and started a “newly registered” exam with Vista Financial to kick the tires. During the exam Mr. Williams said his RAUM had grown to $180 billion and his sole client was a foreign trust. In April 2023, Vista Financial filed an updated Form ADV listing its RAUM as $11 trillion.

During the examination, Vista Financial produced a spreadsheet and delivered it to the SEC that was supposed to back up its claimed RAUM. One item was a bank account with 140 billion Euros. The SEC checked with the bank. That account never had more than $3500.

The spreadsheet listed $42 billion in a single issuance of US Treasury Bonds. That would have made the firm likely owning every bond in the issuance. Assuming the issuance was even that big. The SEC found no evidence that Vista Financial held any treasury bonds.

Then there is the fraud-ier stuff. Vista Financial purported to hold $3 billion in bonds from a corporation (unnamed in the filings). Vista Financial tried to open a brokerage account with a margin loan allowance using some of those bonds as collateral and citing Vista Financial’s registration with the SEC to support its legitimacy.

I was waiting to find some details behind this 2023 case hoping there would be some explanation for this craziness. Alas, the case has settled and no more detail have emerged. Mr. Williams agreed to be barred from any SEC registered firm.

Was Mr. Williams the scammer or was he being scammed? I was hoping to get an answer.

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Form ADV FAQ Comes a Little Late

Most investment advisers filed their form ADVs last week, before the March 31 filing deadline. That didn’t stop the Securities and Exchange Commission from publishing a new FAQ about Form ADV on April 6. Hopefully you got it right.

There has been some questions about office locations that need to be disclosed on Form ADV during the pandemic. The general thought was that temporarily working from home during the pandemic didn’t need to be disclosed. Was that the right approach?

Let’s see…

Q: My firm has employees who are temporarily conducting investment advisory business from a temporary location other than their usual place of business (their homes, for example) as part of the firm’s business continuity plan due to circumstances related to coronavirus disease 2019 (COVID-19). Item 1.F of Part 1A requires information about a firm’s principal office and place of business. Section 1.F of Schedule D requires information about “each office, other than your principal office and place of business, at which you conduct investment advisory business.” Is my firm required to update either Item 1.F of Part 1A or Section 1.F of Schedule D in order to list the temporary teleworking addresses of its employees?

A: No. As long as the employees are temporarily teleworking as part of the firm’s business continuity plan due to circumstances related to coronavirus disease 2019 (COVID-19), staff would not recommend enforcement action if the firm does not update either Item 1.F of Part 1A or Section 1.F of Schedule D in order to list the temporary teleworking addresses. For purposes of this FAQ, “temporarily teleworking” includes prolonged plans to telework, provided that the firm maintains a physical office location. (Updated April 6, 2021)

More Filing Relief from the SEC

The SEC must have realized that its relief from Form ADV filing and Form PF filing deadlines was not providing much relief. The SEC issued a new order for the deadlines.

You still have to send the SEC a notice that your firm is relying on the Order, but you no longer have to say why you can’t file the forms on a timely basis and don’t have to provide an estimated date for delivery.

The SEC has not extended the deadline. It’s still only 45 days.

If you are relying on the Order, you still need to post a notice on your firm’s website.

I think most firm’s are not going to take advantage of the order. Nobody wants to tell the SEC that can’t meet a deadline, even in the case of a pandemic.

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CCO Barred for Lying on Form ADV

Gregory M. Prusa was the Chief Compliance Officer of the Salus, LP, a hedge fund. Among other problems, Mr. Prusa made false or misleading statements in the Form ADV filing for Salus. Now he is barred from the securities industry.

The general rule is the the CCO should only be subject to an action if he or she was involved in the wrongdoing, impeded the investigation or completely failed in the compliance program.

Mr. Prusa was also the CEO of Salus and its general partner S.A.I.C., Limited. Two hats can lead to trouble. The problem here was fundraising.

Mr. Prusa and is partner Brandon E. Copeland launched Salus in October 2107 and filed a Form ADV in November 2017. The filing indicated $20 million in RAUM and reasonable expectation to reach the higher RAUM required with filing with the SEC within 120 days.

In April 2018 and January 2019, Salus filed Form ADVs stating that it was a “large advisory firm” with $178 million in RAUM. Some of filings indicated that in addition to the Salus fund the firm also had high net worth individual clients that had a mix of bonds and equities. All of the Form ADV filings stated the auditor, custodian and prime broker for the hedge fund.

None of that information in the Form ADV was true. Salus never had any RAUM or reasonable expectation of having sufficient RAUM. It never had any individual clients. The fund never had any of those key relationships.

Unsurprisingly, the lies carried over to the Confidential Offering Memorandum for the hedge fund. The fund never received any capital commitments, so it never had any investments and never an auditor, custodian or prime broker.

It does have a website. https://www.salushedgefund.com/

The facts lay out Mr. Prusa being involved in the wrongdoing. So it seems appropriate to bring an action against him.

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Regulation Best Interest, Form ADV Part 3 and the Fiduciary Standard

The Securities and Exchange Commission has been working on a way for consumers to better understand the difference between securities brokers and investment advisers. The Department of Labor made an attempt with respect to retirement plans, but that is a mess.

I’m not sure how much of a mess the new Regulation Best Interest is going be for private fund managers. The devil is in the details and the details are in the 524 page release for the new FORM CRS Relationship Summary and Amendments to Form ADV and the 771 pages of the Regulation Best Interest: The Broker-Dealer Standard of Conduct.

According to the press release, the SEC

“voted to adopt a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.  Specifically, these actions include new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940. “

The bigger burden is likely to be on broker-dealers. But changes are required for investment advisers and private fund managers.

One piece of good news is that Regulation BI attempts to clarify the fiduciary standard for investment advisers. That standard is not in the text of the Investment Advisers Act. It’s been developed through court cases.

The SEC published a new Commission Interpretation Regarding Standard of Conduct for Investment Advisers codifies an Investment Advisers’ Fiduciary Duty:

  • Duty of Loyalty
  • Duty of Care
    • Duty to Provide Advice that is in the best interest of the client
    • Duty to Seek Best Execution
    • Duty to Provide Advice and Monitoring over the course of the relationship

Get set for Form ADV Part 3. This new filing is directed at registered investment advisers that offer services to retail investors. Part 3 is the new relationship summary. New Rule 204-5 will require an investment adviser to deliver an electronic or paper version of the relationship summary to each retail investor before or at the time the adviser enters into an investment advisory contract with the retail investor. You’ll also need to post it to your website.

The deadline for compliance is June 30, 2020. We’ve got a year.

Where to turn to first? I’m diving into the Commission Interpretation Regarding Standard of Conduct for Investment Advisers.

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Form ADV and Form PF

With the statutory changes from Dodd-Frank, the Securities and Exchange Commission started gathering basic information about private fund managers and their funds on Form ADV.

The SEC increased that information flow by requiring Form PF. Unlike Form ADV, Form PF provides detailed information about the private fund’s activities and performance. That left many reluctant to release this information.

Apparently many managers followed through on this reluctance. According to a story in IA Watch, the SEC is matching up Form ADV Filings for private funds and identifying the lack of filing in Form PF.

You need a private fund identification number for the private fund in Form ADV. That makes it easy to search through the Form PF database for those filings or lack thereof. Someone in data analytics at the SEC decided to do just that.

That has resulted in at least a few dozen firms getting a letter from the SEC explaining why they didn’t file Form PF.

I understand why some firms may have had confusion over how to identify their funds on Form PF. Those definitions are problematic. But I have not run into anyone saying that they didn’t have to file.

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Dividing Up Clients On Form ADV

For those of us working with registered investment advisers, the deadline for filing Form ADV is quickly approaching.

I’ve heard a few people struggling to classify their clients. I put together this chart to help me think about it.

 

 

With the recent changes to Form ADV, I see the SEC carving client accounts into two big buckets: Separately Managed Accounts and Pooled Investment Vehicles.

Each of those big buckets is separated into further classifications.

I found the name “separately managed accounts” to be confusing because it sounds a lot like the insurance term “separate accounts.”

I heard a lot of uncertainty on how to treat a fund of one. It could be a pooled investment vehicle. Or it could be a separately managed account. I have not heard anything to help draw the line. The best advice I’ve heard is to just be consistent. If you treat the fund of one operationally like you treat your other funds, then label it that way on the Form ADV. If you treat it operationally like you treat your separately managed accounts, then label it that way on the Form ADV.

For real estate managers, it sounds like they have some investment vehicles that are not private funds. Some of this discussion goes back to the 2012 thoughts on whether to register with the SEC or not. A straight real estate investment with a couple of investors with major action consent sounds like it falls out of the “private fund” definition. That real estate investment does not have securities, so it should fall outside the definition of an investment company. Even if it were so treated, it would be entitled to the 3(c)5 exemption. That would keep it outside the “private fund” definition.

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The SEC is Open on March 31

That headline is incorrect. I can’t speak for the entire SEC, especially with Congressional funding in jeopardy between now and then.

However, The IARD system is operating on March 31. If you have to file your Form ADV, it is due to be filed by March 31.

Back in 2013, March 31 fell on a Sunday and the IARD system did not work on the weekends back then. According to the calendar, the IARD system is now operating every day.  So, for you procrastinators, you don’t get extra time over the weekend to finish your Form ADV.

If you are the listed contact, you should have received this email:

IARD Availability on March 31 for Form ADV Annual Updating Amendment Deadline

Please be advised that the Investment Adviser Registration Depository (IARD) system will be open on Saturday, March 31, 2018, from 8am-6pm Eastern Time.  On that date,advisers will be able to submit filings, including amendments to Form ADV.  If an adviser’s fiscal year ended on December 31, 2017, that adviser will be able to file its Form ADV Annual Updating Amendment on March 31, 2018, in order to meet the requirement to file within 90 days after the end of its fiscal year.  If you have questions, please email [email protected].

If you have not noticed, there have been some significant changes to Form ADV.  See the Changes to Form ADV. It’s going to take some extra time to complete the filing this year.

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SEC Releases New Form ADV Frequently Asked Questions

Earlier this month, the Securities and Exchange Commission released 23 new frequently asked questions (“FAQs”) on Form ADV to provide guidance on recent amendments to Form ADV. Those amendments become effective in October.

These new FAQs include guidance on (i) the umbrella registration approach that many private fund sponsors use to register multiple affiliates and (ii) the reporting of significant new information concerning separately managed accounts (not separate accounts).

There are four new FAQs on social media accounts. They are a bit weird. An adviser does not need to report a social media account if a third party controls the account content. So if you have a third party controlling your firm social media account under the firm name, it does not show up. On the other side, the firm does not have to report an employee’s account when the firm controls the account content.

There is an interesting FAQ on the differences between a private fund and a pooled investment vehicle in Item 5D. “[P]ooled investment vehicles include, but are not limited to, private funds.”

“Additionally, the staff believes for purposes of Item 5.D there are some facts and circumstances in which it may be appropriate for an adviser to treat a single-investor fund (also known as a “fund of one”) as a pooled investment vehicle. For example, an adviser could reasonably treat a single-investor fund as a pooled investment vehicle where the fund seeks to raise capital from multiple investors but has only a single, initial investor for a period of time, or where all but one of the investors in the fund have redeemed their interests. However, an adviser generally should not consider a single-investor fund to be a pooled investment vehicle if that entity in fact operates as a means for the adviser to provide individualized investment advice directly to the investor in the fund.”

As for distributing audited financial statements to meet the custody rule, the new FAQ in 7b makes it clear that

You may answer “Yes” if you will distribute the audited financial statements as required, but have not yet done so at the time of filing the Form ADV.

The SEC revised its FAQ on Item 1.O and points out question that many people trip over in Item 1.O. The question is whether the adviser has over $1 billion in assets. It’s not whether the adviser as more than $1 billion in AUM. “Non-proprietary assets, such as client assets under management, should be excluded when responding to Item 1.O, regardless of whether they appear on an investment adviser’s balance sheet.”

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