SEC’s New Form ADV Expands Scrutiny on Registered Advisers

Registered investment advisers (RIAs) will need to share a lot more than they’re used to with the Securities Exchange Commission (SEC) now that updates to the Form ADV are in affect.

The changes require RIA firms to disclose additional information about their social media activity, separately managed accounts (SMAs), the overall client base, and assets under management, among other topics.  

G.J. King, president of consulting firm RIA in a Box, tells PLANADVISER that over time, this additional data may allow the SEC to more easily “scan the RIA space to pinpoint which firms may pose significant market risks or compliance issues, among other problems.” When it comes to social media usage, King says the SEC can also use its expanded information set to make sure RIAs are complying with marketing standards. 

“As it relates to RIAs, social media is like any other form of advertising in the SEC’s eyes,” King explains. “We can assume that over time, the SEC will have better capabilities to programmatically scan social media postings for particular keywords or problematic posts. They’re going to be scanning for phrases like ‘guarantee’ or ‘beat the market,’ anything making a promise or testimonial which may be prohibited as it relates to RIA advertising.”

Some of those can be false-positives, of course. But recent changes have made it easier for the SEC to find this data. According to RIA in a Box, firms must be very cautious about what type of social media information they choose to display on their websites. As a rule of thumb, any websites should only link to or mention such accounts belonging to the firm and in which the RIA controls the content.

According to an SEC release speaking about the new Form ADV and other topics, “staff may use this information to help prepare for examinations of investment advisers and compare information that advisers disseminate across different social media platforms, as well as to identify and monitor new platforms.” King adds that, “Being active on social media is not a prohibited activity by any means. We’re seeing more RIAs utilizing social media as part of their marketing campaigns every day. Just like with any form of advertising, you need to make sure you’re archiving your social media posts.”

NEXT: Separately managed accounts 

RIAs will need to start to disclose additional details about SMAs including types of assets held in each account and where they are held, as well as the use of derivatives and borrowing. The SEC release states, “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.”

For all accounts, RIA firms will need to identify the number of clients in different categories—such as individuals or institutions—as well as the total AUM for each client type.

“RIAs are now going to have to provide more data about the types of securities they’re investing in for clients and also where those assets are held from a custody standpoint,” explains King. “This will help the SEC scan and prioritize firms for examination. It’s also going to help them conduct a higher level of market-risk analysis. For example, if a custodian is having financial trouble, the SEC will have more accurate data to zero in on where those challenges may be and how impactful this is to the overall financial system.”

David Solander, counsel with Goodwin Law Group, points out that the last recession of 2008-09 caused the SEC “to realize they didn’t really have the information they thought they needed to be better prepared for a financial disaster. The SEC computer systems are now built to process more data and allocate trends and identify risk areas.”

Certainly a net positive for market stability, reporting the additional data needed to enhance the SEC’s visibility can be burdensome for advisers. King says the recent changes may require firms to “organize data in a different manner and to think about investing in new reporting and portfolio management systems to make sure they’re able to capture this data.”

However, the scope of this reporting also depends on the size and complexity of the firm, and smaller ones may get some wiggle room. As Solandar explains, there is even a cut off: “For example, RIAs that manage less than a certain amount in assets in separately managed accounts may have a little less onerous disclosure.”

NEXT: Other changes to consider 

Firms working with outsourced chief compliance officers (CCOs) will need to disclose this operation as well as any entities paying the CCO for services.

In addition, larger firms will need to list the 25 largest branch offices based on number of employees. Beforehand, RIAs only needed to disclose the five biggest braches.

“These are the ways the SEC is hoping to fill in the blanks about the RIA space,” King concludes. “This is why the SEC wants substantially more information regarding advisers’ separately managed accounts and other topics. The SEC has fairly good data about mutual fund holdings. There’s also more reporting on private funds. But they don’t really have this much information on separately managed accounts.”

Given that such a large percentage of assets in the RIA space are managed via separately managed accounts, “there is a cap in the data system,” King says. “And closing that gap, may allow the SEC to achieve greater ‘big data’ capabilities in terms of monitoring the securities space in an ever-evolving digital world.”

RIAs who have made changes after October 1, 2017, won’t need to disclose additional information about AUM, SMAs, or wrap-fee programs until they file their annual Form ADVs in 2018. However, they will have to report other changes if they are made after this date, but before they file their annual Form ADVs.

The SECs Final Rule on Form ADV can be accessed at SEC.gov, and an FAQ on Form ADV is also available.