RIA Compliance and Practice Management Blog

New RIA Form ADV Separately Managed Account Disclosure Requirements

Posted by RIA in a Box

Jul 11, 2017 9:17:44 AM

Separately Managed Account Item 5.K. Form ADV Part 1As part of the SEC's new Form ADV filing requirements taking effect on October 1, 2017, registered investment adviser ("RIA") firms that have separately managed account ("SMA") regulatory assets under management ("AUM") will now be required to disclose additional SMA information. The SEC staff notes "that collecting additional information about separately managed accounts will enhance our staff's ability to effectively carry out our risk-based examination program and other risk assessment and monitoring activities."


Download the SEC 2017 RIA Top 10 Exam Priorities Checklist

What is a Separately Managed Account?

While the SEC does not technically define a "separately managed account," for the purposes of the Form ADV, the SEC defines SMAs as any regulatory AUM attributable to clients excluding Item 5.D.(3)(d)-(f). Furthermore, the SEC staff writes, "for purposes of reporting on Form ADV, 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." Given this broad definition, the vast majority of RIA firms are deemed to utilize separately managed accounts. 

Form ADV Changes Taking Effect on October 1, 2017

Beginning on October 1, 2017, when an RIA firm files a Form ADV amendment, the firm will need to provide additional information related to SMAs. Item 5.K. of the Part 1A will now read:

K. Separately Managed Account Clients

(1) Do you have regulatory assets under management attributable to clients other than those listed in Item 5.D.(3)(d)-(f) (separately managed account clients)?

 Yes  No

If yes, complete Section 5.K.(1) of Schedule D.

(2) Do you engage in borrowing transactions on behalf of any of the separately managed account clients that you advise?

 Yes  No

If yes, complete Section 5.K.(2) of Schedule D.

(3) Do you engage in derivative transactions on behalf of any of the separately managed account clients that you advise?

 Yes  No

If yes, complete Section 5.K.(2) of Schedule D.

(4) After subtracting the amounts in Item 5.D.(3)(d)-(f) above from your total regulatory assets under management, does any custodian hold ten percent or more of this remaining amount of regulatory assets under management?

 Yes  No

If yes, complete Section 5.K.(3) of Schedule D for each custodian.

If answering yes to any of the above questions, the RIA firm may also need to disclose additional SMA information in Section 5.K. of the Schedule D which will now have three sections:

  • 5.K.(1): Disclose the approximate regulatory AUM percentage of SMAs attributable to the following asset categories:
    1. Exchange-Traded Equity Securities
    2. Non Exchange-Traded Equity Securities
    3. U.S. Government/Agency Bonds
    4. U.S. State and Local Bonds
    5. Sovereign Bonds
    6. Investment Grade Corporate Bonds
    7. Non-Investment Grade Corporate Bonds
    8. Derivatives
    9. Securities Issued by Registered Investment Companies or Business Development Companies
    10. Securities Issued by Pooled Investment Vehicles (other than Registered Investment Companies or Business Development Companies)
    11. Cash and Cash Equivalents
    12. Other

RIA firms with more than $10 billion in regulatory AUM attributable to SMAs will also need to disclose mid-year percentages. 

  • 5.K.(2): Additional disclosures related to use of borrowings and derivatives in SMAs
    • Firms with regulatory AUM attributable to SMAs of at least $10 billion or more will need to disclose mid-year and end of year detail including:
      • Gross Notional Exposure
      • Regulatory Assets Under Management
      • Borrowings
        • Interest Rate Derivative
        • Foreign Exchange Derivative
        • Credit Derivative
        • Equity Derivative
        • Commodity Derivative
        • Other Derivative
    • Firms with regulatory AUM attributable to SMAs of between $500 million to $10 billion or more will need to disclose end of year detail including:
      • Gross Notional Exposure
        • Less than 10%
        • 10-149%
        • 150% or more
      • Regulatory Assets Under Management
      • Borrowings

For the purposes of the Form ADV, the SEC defines gross notional exposure of an account as "the percentage obtained by dividing (i) the sum of (a) the dollar amount of any borrowings and (b) the gross notional value of all derivatives, by (ii) the regulatory assets under management of the account."

  • 5.K.(3): Additional disclosures related to custodians for SMAs reads as follows:

Complete a separate Schedule D Section 5.K.(3) for each custodian that holds ten percent or more of your aggregate separately managed account regulatory assets under management.

(a) Legal name of custodian: __________________________________

(b) Primary business name of custodian: ______________________________

(c) The location(s) of the custodian’s office(s) responsible for custody of the assets (city, state and country): _____________________

(d) Is the custodian a related person of your firm?  Yes  No

(e) If the custodian is a broker-dealer, provide its SEC registration number (if any) 8-______

(f) If the custodian is not a broker-dealer, or is a broker-dealer but does not have an SEC registration number, provide its legal entity identifier (if any) _______________

(g) What amount of your regulatory assets under management attributable to separately managed accounts is held at the custodian? ______________________

New Form ADV FAQ SEC Staff Guidance

On June 12, 2017, in preparation for the upcoming Form ADV changes, the SEC staff released new Form ADV FAQs related to the forthcoming separately managed account Item 5.K disclosure requirements:  

Q: I am an adviser relying on rule 203A-2(c) to register with the SEC because I expect to be eligible for SEC registration within 120 days of filing my initial Form ADV filing. I do not currently manage any assets. How should I respond to Schedule D, Section 5.K.?

A: For purposes of providing end of year information to respond to Section 5.K.(1), the staff believes that you should enter "100%" in the "Other" category and indicate in the Miscellaneous section of Schedule D that you do not have any responsive data to report for Schedule D, Section 5.K.(1) because you are relying on rule 203A-2(c) as your basis for registration.

If you are required to report mid-year information on Schedule D, Sections 5.K.(1) and 5.K.(2), but did not manage assets for separately managed account clients as of the mid-year date, you may adopt the same approach. That is, you also may enter "100%" in the “Other” category and indicate in the Miscellaneous section of Schedule D that you do not have responsive data to report for the mid-year date in Schedule D, Section 5.K.(1).

As noted in Schedule D, Section 5.K., each column should add up to 100%.

Q: I am an adviser to private funds and report information about parallel managed accounts to the private funds that I manage in Question 11 of Form PF, in accordance with the instructions to that form. Should I treat those parallel managed accounts as separately managed accounts for purposes of answering Item 5.K. and Schedule D, Section 5.K of Form ADV?

A: Yes. Item 5.K. instructs advisers to report regulatory assets under management attributable to clients "other than those listed in Item 5.D.(3)(d)-(f)." Because parallel managed account (which is defined in the Form PF Glossary of Terms) clients that are not registered investment companies, business development companies, or pooled investment vehicles are not reported in Item 5.D.(3)(d)-(f), they should be considered separately managed account clients for purposes of responding to questions in Item 5.K or Schedule D, Section 5.K. 

Q: Item 5.K.(2) asks whether an adviser engages in borrowing transactions on behalf of any of the adviser's separately managed account clients. What types of transactions should I consider to be borrowings for purposes of reporting on Item 5.K.(2) and Schedule D, Section 5.K.(2)?

A: For purposes of Item 5.K.(2) and Schedule D, Section 5.K.(2), the staff believes that borrowings should include traditional lending activities such as client bank loans and margin accounts, other secured borrowings and unsecured borrowings, synthetic borrowings and transactions involving synthetic borrowings (e.g., total return swaps that meet the failed sale accounting requirements), transactions selling securities short, and transactions in which variation margin is owed, but as a result of not reaching a certain set threshold, has not been paid by the client. For the purposes of Item 5.K.(2) and Schedule D, Section 5.K.(2), the staff believes that advisers should not report leverage embedded through the use of derivatives, securities lending or repurchase agreements as borrowings.

Q: A client of my advisory firm arranged a personal loan without the firm's knowledge and used those loan proceeds to invest assets in its advisory account. Should I report this as a “borrowing transaction” for purposes of Item 5.K.(2)?

A: Item 5.K.(2) requires advisers to report if they "engage in borrowing transactions on behalf of any of the separately managed account clients" that they advise. Accordingly, advisers are not required to report client borrowings of which they are not aware. However, the adviser may not indirectly arrange borrowing transactions for separately managed account clients in order to circumvent any obligation to report those transactions on Form ADV.

Q: When answering Schedule D, Section 5.K.(2) about the use of borrowings and derivatives on behalf of separately managed account clients that I advise, do I have to indicate Gross Notional Exposure of "Less Than 10%" if there is no gross notional exposure in connection with the assets I manage for my separately managed account clients?

A: No. If there is no gross notional exposure to report for the assets you manage for your separately managed account clients, you do not need to complete this section. As the instructional notes following Items 5.K.(2) and 5.K.(3) indicate, only those advisers that report that they engage in borrowing or derivatives transactions on behalf of any of the separately managed account clients that they advise should complete Schedule D, Section 5.K.(2). 

Q: A custodian that holds ten percent or more of my separately managed account clients' regulatory assets under management has arranged to use a "sub-custodian" for some custodial services, such as settling trades or trade execution. For purposes of Item 5.K.(4) and Schedule D, Section 5.K.(3), am I required to report such a sub-custodian?

A: No. In the circumstances described above, the staff believes that you are only required to report the custodian in response to Item 5.K.(4) and Schedule D. Section 5.K.(3).

In preparation for the upcoming Form ADV changes, RIA firms should determine which client accounts should be categorized as separately managed accounts. An RIA firm that files a Form ADV amendment on or after October 1, 2017 should be prepared to disclose all relevant SMA information including the attributable regulatory AUM by category and custodian. Advisory firms need to ensure that portfolio management and reporting systems are modified to properly categorize regulatory AUM attributable to SMAs. In addition, firms need to determine whether they may be deemed to be engaged in any borrowing or derivative activity related to SMAs. All RIA firm principals and Chief Compliance Officers should also review the latest SEC Office of Compliance Inspections regulatory exam priority list released earlier this year which lists wrap fee programs as a continued focus area.

Download our 2017 RIA Technology Landscape Infographic 

Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Compliance

RIA Compliance & Practice Management

Stay up to date on the latest RIA compliance, operations, and technology topics.

Hear from industry experts as they keep you up to date on the latest regulatory developments and practice management topics.

Subscribe to Email Updates

Recent Posts

POSTS BY TOPIC

cta-ria-compliance

cta-ria-operations

cta-ria-technology