On January 24, 2018, two of our compliance consultants presented an hour-long webinar on the revised Form ADV. Kurt Nuñez, senior compliance consultant, led the webinar, with Adam Stutz providing additional insight and knowledge throughout the presentation. The webinar included a deep dive into additional categories related to SMA assets, reporting derivatives and borrowing, and more, which provided opportunities for attendees to submit specific questions to be answered in the Q&A at the end of the webinar.
What is New on Form ADV?
We began with an overview of what’s new on the Form ADV. Adam and Kurt discussed the pertinent changes to the form and the new information required.
The first few minutes of the webinar discussed specific changes in Form ADV Part 1 impacting Items 1 & 5, as well as Sections 1 & 5, of Schedule D. The changes are mainly around how advisers report their Regulatory Assets under Management (“RAUM”), as well as additional identifying information including social media sites, whether or not the CCO is employed by an outside firm, and listing the largest offices for the firm. and the new Schedule R.
Gathering the New Regulatory Assets Under Management Data: When Should I Begin?
Due to the scope of the information required in this year’s Annual amendment, and the new processes you may need to gather that data, you should start preparing now. This shouldn’t come as a surprise to most firms, but with the number of advisers that still say they’re waiting to file for one reason or another, they’re at risk of errors or filing late if they don’t start as soon as possible.
Once your firm has a clear process for gathering this new data, the process of gathering the data may not be so time consuming during subsequent amendments.
What is Considered a Separately Managed Account?
A Separately Managed Account (“SMA”), has a clear definition per the SEC. SMAs are considered “to be […] 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))…”etc.
While many advisers may associate SMAs with wrap accounts, the SEC has taken a very broad view, so unless your company is only managing registered or unregistered pooled investment vehicles, you need to count assets in all other accounts as SMA assets. If you are still unsure, confirming whether your accounts are classified as SMAs may be worth a call to a dedicated compliance consultant who can help you confirm if your accounts should be considered SMAs under the SEC’s definition.
SMA Assets: Determining Asset Categories
One challenging aspect of the Form ADV changes is that the SEC is requiring advisers to break their assets into percentages of 12 different asset categories in Schedule D Section 5.K.(1).
Kurt discussed specific, practical examples of this, while Adam described the necessary information to provide context to what the SEC expects in this section. The SEC has acknowledged that the categorization of assets can be complicated by the fact that many assets can fall into multiple categories, and while there is some flexibility allowed in the classification of the assets, the documentation and backup of the methodology used in the classification of your asset categories will be essential.
Organize Your Resources
With so many changes to the Form ADV this year, a detailed action plan for gathering and organizing data for efficient completion of the Form ADV updates is more important than ever.
Webinar attendees received the Core Compliance℠ Form ADV Part 1 Questionnaire before the webinar began, to use as a starting point for data collection at their firms as well as a Form ADV timeline identifying target milestones as well as key deadlines, allowing them to adapt the timeline for their own firms.
Several minutes were spent reviewing best practices and providing strategies for how to collect and organize the data. Tactics such as assigning specific tasks for data gathering to specific people within your firm, or creating a committee specifically in charge of Form ADV data collection may be beneficial, or, if your firm is on the smaller side, creating practical organizational strategies to employ with your custodians for data collection.
Preparing for Subsequent Amendments
Near the end of the webinar, a recap was done to outline suggestions on how to use the methodologies to create procedures that can set you up to gather the correct information in subsequent years from each department. A suggested best practice was to utilize technology as much as possible so that calculating certain data points can be automated, and Kurt and Adam stressed that documenting procedures and the methodologies used for data gathering are a must.
Be sure to document any changes that may affect your ADV 2A. If your ADV 1A and ADV 2A have inconsistencies, you may find yourself facing an SEC examination or worse.
Looking for more information?
The webinar covered far more information and topics than a single blog can recap. However, by now, your investment advisory firm is likely to need specific, targeted answers to your questions.
If you’re looking for additional help and information, you can request time to speak with one of our consultants by clicking the button below.