SEC Releases New and Updated Form ADV FAQs
2023 has been an incredibly busy year for the SEC. There has been a bevy of new rules and regulations and enforcement actions throughout the year that many firms are working diligently to slowly catch up on. Firms continue to seek guidance on various elements of new regulations and often find that guidance in Risk Alerts or FAQs released by the SEC. Recently, the SEC posted further guidance into the Form ADV process by releasing 38 new and updated frequently asked questions on Form ADV and IARD. In today's blog, we will highlight some of these new and updated FAQs
Hint: to find the new FAQs, search for “October” on the webpage.
Description of Material Changes
A clarification from the SEC released in these new FAQs discusses listing material changes on Item 2 of Form ADV 2A and how simple identification is not sufficient.
The SEC clarifies, “An adviser must identify and discuss material changes; in the staff's view, providing a list of material changes is not a sufficient discussion of material changes. See the instructions for Item 2 of Form ADV Part 2A.”
Clarification of Supervised Persons Names
One new answer from the SEC deals with requirements under Form ADV Part 1, Item 1.B.(1) to list the names of advisory businesses used by supervised persons – specifically if they differ from the name(s) listed in Item 1.A.
The SEC staff states that “Advisers are required to list all names under which they primarily conduct their advisory business. In the staff's view, this list should include the names of all businesses through which the adviser's supervised persons, investment adviser representatives, and independent contractors that fall under the Form ADV glossary definition of “employee,” primarily conduct advisory business on behalf of the adviser, if different from the name reported in Item 1.A.”
Registering Under the Related Adviser Exemption
Some firms commonly work as sub-firms to other investment advisers (“IA”), and this can cause confusion regarding SEC registration requirements. A new answer speaks to whether a firm needs to meet a threshold amount of regulatory assets under management (“AUM”) if they are controlled by an investment adviser that is registered with the SEC and shares a principal office and place of business.
According to the SEC, the answer is no, the related adviser is not required to have a specific amount of regulatory AUM. The SEC continues by saying“[t]he only requirements for registration under this rule are that (a) the adviser controls, is controlled by, or is under common control with an investment adviser eligible to register, and that is registered, with the SEC and (b) the adviser has the same principal office and place of business as that other investment adviser. For purposes of this exemption, “control” means the power to direct or cause the direction of the management or policies of an investment adviser, whether through ownership of securities, by contract, or otherwise. Any person that directly or indirectly has the right to vote 25 percent or more of the voting securities, or is entitled to 25 percent or more of the profits, of an investment adviser is presumed to control that investment adviser. Please see rule 203A-2(b); Form ADV: Instructions for Part 1A, Instruction 2.f.”
Withdrawing Federal IA Registration
One IA inquired, “If I mark Item 2.A.(13), which states that I am an investment adviser that is no longer eligible to remain registered with the SEC, does that withdraw me from SEC registration?”
The SEC's clarification stated that this is incorrect, and it does not formally withdraw an adviser. The SEC advised that an IA must file Form ADV-W to withdraw from SEC registration and, if this form is not filed, the firm will continue to be registered with the SEC and subject to all applicable rules and regulations.
The SEC then provided a warning stating, “If your firm is not going out of business, and you are withdrawing your SEC registration because you are 'switching' to state registration, you must make sure that there is no 'gap' in your registration. Register with state authorities before your SEC registration is withdrawn.”
Counting Clients During Reporting
One question that is often asked by IA's is how to report client numbers on Form ADV, Part 1, Item 5.C.(1) and 5.D. IA's ask if they must report all advisory clients, even if there are some for whom the adviser does not have assets under management.
The SEC confirmed that, yes, the adviser must include those clients. Specifically, they state,“[a]ny clients for whom an adviser provides investment advisory services, but for whom the adviser does not have regulatory assets under management, should be included in the adviser's responses to both of these Items. Similarly, the definition of 'client' for Form ADV states that advisers must count clients who do not compensate the adviser. If your firm also provides other services (e.g., accounting services), this term does not include clients that are not investment advisory clients.”
Filing On Time
Advisers should note the SEC's question clarification regarding filing the Form ADV by the deadline and the usage of the temporary hardship exemption. In one FAQ, an adviser asks, “Despite my firm's best efforts, we will be unable to submit our annual updating amendment to Form ADV by the deadline...Can the staff provide my firm with a grace period during which my firm may make its filing?”
The SEC is firm in its response that it does not provide a “grace period” to Form ADV filings and if the adviser does not file an amendment to Form ADV by the deadline provided in rule 204-1, the adviser is in clear violation of the rule.
The SEC adds continued guidance in stating, “Whether the staff would recommend action based on such a violation will depend on the facts and circumstances of the late filing. Advisers should file the required filing as soon as possible. When an adviser files its annual updating amendment, the adviser may consider including a note in the Miscellaneous section of Schedule D explaining the circumstances of the late filing. Additionally, the adviser may consider including a note to be maintained in the adviser's books and records explaining the reason for the late filing, the steps the adviser took to address the late filing, and the steps the adviser is taking to prevent any late filings in the future. The adviser may also wish to consider changes to its policies and procedures to avoid this error in the future.”
Form ADV Filing Guidance
These are just a few key answers from the SEC's updated ADV FAQs. We encourage advisers to review all of the new and updated FAQs for any clarification that they may need regarding ADV filings. If you or your firm need extra guidance or clarification, the Joot compliance team can easily assist with Form ADV instruction and assistance. Don't hesitate to reach out to our team.