In May, the US Securities and Exchange Commission (SEC) released its proposed amendments to Form ADV reporting requirements, along with a change to Rule 204-2 under the Investment Advisers Act of 1940.
At their core, the amendments codify prior guidance issued, or initiatives pursued, by the SEC. But the effect of the proposed updates (if adopted in their current form) will vary significantly from adviser to adviser – making some CCOs’ lives easier, making some much more difficult, and leaving others no better or worse off than before.
“There will be additional disclosure requirements, which could be more significant depending on your structure and use of separately managed accounts, but it is not likely to place a significant additional resource burden on most private equity sponsors,” notes Jeff Wright, associate general counsel and CCO at GTCR.
As of July 1, the proposed rules are a little more than halfway through their comment period. The comments on the SEC website reveal that smaller managers with limited compliance resources are frustrated to have more data gathering and filing to worry about, while larger GPs with bigger separate account portfolios are worried about publicly disclosing more information.
“At the end of the day, most fund managers will view this as more data overkill for the SEC,” says Michael Suppappola, a partner in Proskauer’s private investment funds practice.
But what additional data requests – and other changes – are being considered exactly? Let’s break it down:
Umbrella registration
The proposed amendments codify guidance set forth in a 2012 no-action letter to the American Bar Association (ABA), explaining the “umbrella” registration process for private fund adviser entities operating as a single advisory business. This amendment is a “welcome” one, notes Wright, as it clarifies that these separate entities can file just one ADV.
However, the proposal may bring about some confusion, says Suppappola. “They don’t go into too much detail as far as how to treat different types of GP entities and other special purpose vehicles (SPVs) and they did not take the opportunity to help clarify that the proposed umbrella registration rules would not require separate disclosures with respect to those vehicles in contrast to affiliated management companies,” he notes.
While the ABA no-action letter clarified that SPVs did not need to separately register as long as the affiliated registered adviser subjects the SPV and its personnel to the Advisers Act, the SEC does not address the SPV versus management company distinction in its proposal, something industry professionals hope will be clarified by the time the final rules are established.
Separate accounts
A large portion of the recommendations focus on further disclosure regarding separately managed accounts, requiring advisers to provide aggregate information related to the assets held by the separately managed accounts and the use of borrowing and derivatives within them.
As more private fund managers offer separately managed accounts, this requirement will have an increasing effect on the industry, and the biggest question circulating about this amendment is confidentiality. Under the proposal, advisers would be required to provide in their ADVs information about assets held in SMAs, which is similar to that currently required for private funds in Form PF filings. But unlike Form PF, the Form ADV information would be publicly available.
“The SEC is certainly going to receive comments on that,” says Paul Miller, partner in the investment management group at Seward & Kissel. If the SEC adopts the amendments as proposed, it’s likely that service providers who currently offer support with Form PF filing will tailor a similar service to this section of Form ADV, he adds.
Social media links
Recognizing that there’s more to a firm’s online presence than a website, the SEC is asking advisers to include links to social media platforms, including Twitter, Facebook and LinkedIn, within Part 1A and in addition to the adviser’s web address in Schedule D.
When accessing these accounts, the SEC is likely looking into what kinds of information managers are disclosing online: whether they’re touting performance records, discussing certain products they offer, or other details that could potentially run afoul of private placement rules, notes Miller. “The accounts would likely be used to assess the risk of advisers who should be examined,” he says.
Although a robust social media presence is relatively rare in private equity, especially among smaller firms, questions are still circulating around the proposed rule, notes Michael Minces, founding partner and general counsel at compliance consultant Blue River Partners. “The Advisers Act prohibits testimonials or client statements as marketing, but how do you interpret that with someone ‘liking’ your firm on Facebook?”
And if the SEC were to determine that tweets or other forms of digital communication were liable to be regulated, everything would need to be archived the same way firms archive emails now. “This would become a very realistic problem, and could result in a books and records violation,” Minces says.
As of now, the current proposals do not require individual employee accounts to be listed, but GPs are concerned that, if those accounts are used for business communications, the SEC may add this requirement by time the amendments are finalized.
If that is the case, firms may be better off instituting a prohibition on employee social media accounts for business purposes, notes Minces, as the effort of monitoring such communications would be excessive, especially for larger firms.
Third-party CCOs
The SEC is also proposing that advisers be required to report whether their CCOS are compensated or employed by any person other than the adviser and, if so, to include information on that third party firm.
“Our examination staff has observed a wide spectrum of both quality and effectiveness of outsourced chief compliance officers and firms,” the amendments state. This information “could be used to improve our ability to assess potential risks.”
How the SEC utilizes this new data could have long-term effects on the use of outsourced CCOs in the industry, Suppappola predicts.
“For many years, the SEC has been firing warning shots, indicating that they weren’t entirely convinced these third party ‘rent-a-cop’ CCOs were doing a sufficient job and able to sufficiently fulfill their obligations as compliance officers,” he says. “After these proposals pass, if GPs see an uptick in SEC examinations for advisers that use third-party CCOs, that could start to ebb the tide and cause more advisers to hire someone or appoint someone from within to serve as the exclusive full time CCO.”
The upshot
Now that the proposed requirements are laid out and up for public comment, two big timing questions still remain: when will the final rules be put into effect, and how much more time will it take to fill out the updated ADV?
It’s difficult to peg down exactly when the rules will come into effect, says Jack Rader, senior principal consultant at ACA Compliance Group, although it’s likely the SEC will try to sync up the compliance date with the date when most firms typically submit their annual ADVs: March 31.
And CCOs – regardless if the updated rules target their firms’ specific activities – should be prepared to allot more time to the ADV come that deadline, just to ensure they are following the new requirements to the letter, warn compliance pros.
“The first Form ADV filing process after the final rules are approved will require a good deal of effort from managers in order to understand the guidance and exactly what’s being asked of them,” says Rader. But that initial pain won’t last forever, he promises. “A couple of years down the road, the amount of work private equity fund managers put into the ADV won’t be incrementally different.”
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