Form ADV, Item 18.B. specifically requires investment advisers to “disclose any financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.” Item 18.C. also requires the disclosure of any bankruptcy petition during the prior 10 years. As investment advisers struggle financially, compli-pros should assess whether the firm needs to enhance its financial condition disclosure.
censured and barred from the industry the principal of a non-U.S.-based
investment manager for making false Form ADV statements. The SEC charges the firm with falsely claiming
(i) to have over $100 Million in assets under management, (ii) to have retained
a nationally recognized auditor and prime broker for its funds, and (iii) a
principal place of business in the United States, which was only a virtual office. The SEC alleges that the Form ADV statements
violated the antifraud rules of both the Securities Act and the Investment
Advisers Act. The SEC asserts
jurisdiction because the respondents used interstate electronic communications
to further the fraud. The SEC claims proper
venue because the defendants maintained a virtual office in New York.
Form ADV is a securities law filing that gives rise to antifraud liability for misstatements. The regulators will not overlook untruths as innocent marketing exaggerations. Hire a lawyer or compli-pro to help prepare an accurate Form.
The SEC fined and suspended the principal of a defunct investment adviser for falsely claiming SEC registration eligibility. The firm claimed that it had at least $25 Million in assets under management through 2011 and then suddenly claimed it had at least $100 Million assets under management following passage of the Dodd-Frank in 2012. The SEC asserts the firm had no basis for claiming SEC registration eligibility because it did not have the purported assets under management. The SEC also alleges violations of the custody rule arising from the firm’s role as a private fund manager.
OUR TAKE: Lying to the SEC about registration eligibility is more than mere marketing puffery. It can prompt a public enforcement action. Make sure you have records to support the claimed assets under management.
The SEC fined a deregistered investment adviser and barred its former principal for multiple compliance failures involving double dipping, Form ADV disclosures, fee rebates, and misrepresentations. The respondents recommended that clients invest in private funds in which the principal held ownership and managerial interests. Although the SEC acknowledges that clients knew about the conflict, the firm failed to list and describe the conflicts on Form ADV. The SEC also charges the firm with multiple compliance program failures including inadequate policies and procedures and failing to conduct annual testing of the compliance program.
OUR TAKE: There is no such thing as declaring regulatory bankruptcy: the SEC’s long arm won’t let a firm engage in wrongdoing and then simply de-register to avoid consequences. Compli-pros should also note that disclosure alone will not always cure significant conflicts of interest, such as fee double dipping for advisory services along with underlying products.
OUR TAKE: SEC registration has become a qualifying criterion for larger clients who feel more secure with an SEC-regulated firm that has more than $100 Million in AUM. Consequently, firms may feel the pressure to stretch their numbers to qualify, which could result in a painful enforcement action. There is no shortcut to success.
OUR TAKE: Whether to register with the SEC or the relevant state is not a discretionary decision. Either you have $100 Million in AUM or you don’t. Lying on a Form ADV about SEC registration eligibility will result in a public enforcement action, censure and fines.
The SEC’s Division of Investment Management has released additional Form ADV FAQs that affect cross-border investment managers. The staff advises that non-U.S. investment funds, including UCITs or their equivalent, should be classified as “pooled investment vehicles” when describing assets. Also, a non-resident GP or managing agent of a relying adviser must file Form ADV-NR. The FAQs also broadly define “borrowings” for purposes of whether an adviser engages in borrowing transactions on behalf of clients, explain social media disclosure, and clarify that the new Form supersedes SEC no-action relief with respect to relying advisers.
OUR TAKE: The SEC continues to take an extra-territorial regulatory approach to any cross-border adviser that must register in the U.S.
Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues. Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.
Last August, the SEC again re-vamped Form ADV to add significantly more disclosure. Firms with a 12/31 fiscal year have until next year to implement the changes. However, many firms have begun the process as they prepare this year’s annual update. To assist your planning, here are the 10 most significant Form ADV changes:
10 Most Significant Form ADV Changes
Separately Managed Accounts. The new Form ADV requires significant reporting on separately managed account assets including reporting by asset type and related derivative transactions.
Umbrella Registration. The new filing rules allow affiliated advisers to use a single ADV, but the registrant must complete a detailed schedule for each relying adviser
Social Media. Every registrant must include websites and social media addresses.
Offices. An adviser with multiple offices must list its largest 25 offices (used to be 5).
Outside CCO. If a firm retains a Chief Compliance Officer paid by a third party, the new Form requires the registrant to name the CCO and his/her employer.
Assets Under Management. The new Form ADV requires more detailed reporting of regulatory assets under management by client type.
Wrap Programs. Registrants must include more detailed information about the wrap programs in which they participate.
Referral Payments. The new rules require more disclosure about compensation paid, or received for, referrals including amounts paid by, or to, employees.
Bad Actors. The bad actor disclosure (DRP) requires information about all relying advisers.
Auditors. New Form ADV requires information about the auditors to private funds.