ADV FAQ Breakdown
Main Contributor: Gretchen Sturdivan, CSCP, Creative Director & Compliance Manager
Background
The new year brings us all renewed energy, usually in the form of salads and gym memberships, but for Advisers, it also brings a heap of ADV energy! Luckily, if only asset updates are needed, it can be an easier quarter, but this year, the SEC has additional FAQs for us, which were published on October 26th, 2023. These FAQs clarify certain requirements and explain how to deal with unique situations. This article will highlight in Q&A format those we think are most pertinent to our clients, but please take time to read through them all (especially if you are a new adviser or an exempt reporting adviser).
Hot tip! Open the page and “control+find” for 2023 – this saves substantial time trying to identify the new FAQ.
Form ADV: Item 1.B
Q: In Item 1.B.(1), am I required to list the names under which my supervised persons primarily conduct advisory business relating to my advisory firm, if different from the name listed in Item 1.A?
A: Advisers are required to list all names under which they primarily conduct their advisory business. In the staff’s view, this list should include the names of all businesses through which the adviser’s supervised persons, investment adviser representatives, and independent contractors that fall under the Form ADV glossary definition of “employee,” primarily conduct advisory business on behalf of the adviser, if different from the name reported in item 1.A.
Form ADV: Item 5.C.(1) and 5.D
Q: Items 5.C.(1) and 5.D ask about the number of clients I have. For the purposes of these questions, should I report advisory clients for whom I do not have regulatory assets under management?
A: Yes. Any clients for whom an adviser provides investment advisory services, but for whom the adviser does not have regulatory assets under management, should be included in the adviser’s responses to both of these Items. Similarly, the definition of "client" for Form ADV states that advisers must count clients who do not compensate the adviser. If your firm also provides other services (e.g., accounting services), this term does not include clients that are not investment advisory clients.
Form ADV: Item 5.G
Q: If I provide automated advice, should I report that I provide "robo-advice" or "robo-services" by selecting the “Other” category?
A: No, if the sole reason you are selecting the “Other” category is because you provide automated advice. The staff believes an adviser providing automated advice should not select category “(12) Other” on that basis or specify “robo-advice” or “robo-services” as another type of advisory service. The staff views automated advice as a means of providing an advisory service, not as a separate type of advisory service. An adviser providing robo-advice should also consider whether the disclosure in its brochure prepared pursuant to Part 2A of Form ADV is consistent with “Robo-Advisers,” IM Guidance Update No 2017-02 (February 2017).
Form ADV: Schedule D, Section 5.K.(1)
Q: In Schedule D, Section 5.K.(1), how should interests in exchange-traded funds (“ETFs”) be classified?
A: The staff believes interests in ETFs should be classified as “securities issued by registered investment companies or business development companies” (and not as “exchange-traded equity securities”).
Form ADV: Schedule D, Section 7.B.(1)
Question 23(a)
Q: I am an adviser to a newly created private fund. When should I report in question 23(a) of Schedule D, Section 7.B.(1) that the private fund is subject to an annual audit?
A: In the staff’s view, an adviser should not report that a private fund’s financial statements are subject to an annual audit if an auditing firm has not been engaged to conduct an audit for the applicable fiscal year.
Question 23(g)
Q: How should I answer question 23(g) of Schedule D, Section 7.B.(1) if the private fund’s audited financial statements for the most recently completed fiscal year will be distributed to the private fund’s investors, but have not yet been distributed to the private fund’s investors?
A: In the staff's view, if the applicable deadline for the distribution of the private fund’s audited financial statements for the most recently completed fiscal year has not yet passed, an adviser may answer “Yes” if it has engaged an auditor and the audited financial statements will be distributed as required. In the staff’s view, an adviser should answer “No” if the applicable deadline for distribution has passed and audited financial statements were not delivered to clients for the most recently completed fiscal year.
Question 27
Q: I am an adviser to a private fund. 100% of my private fund client’s assets (by value) were valued by my administrator. Specifically, my administrator carried out the valuation procedure established for all assets and I used that administrator’s valuation for purposes of investor subscriptions, redemptions, distributions, and fee calculations. The administrator is not my related person. I consider my firm to be ultimately responsible for valuing the private fund's assets. In response to Schedule D, Section 7.B.(1), Question 27, should I enter 0% to indicate that I am ultimately responsible? Or enter 100% to indicate that the administrator values the assets?
A: In the staff’s view, an adviser should enter 100%.
Form ADV: Schedule C
Q: I am already registered and have listed my firm’s direct owners, executive officers, and indirect owners on Schedule A and B, respectively. The instructions tell me to make updates on Schedule C but, when I enter IARD, I don’t see Schedule C. What should I do?
A: The IARD system presents Schedule C together with Schedules A and B to permit changes to occur more easily. An adviser should use Schedule A/C to update the information about its direct owners and executive officers, and Schedule B/C to update the information about its indirect owners.
Form ADV: Schedule R
Q: My firm includes two investment advisers. On our Form ADV, Adviser A is the "filing adviser" and reports on Form ADV the other adviser (Adviser B) is a "relying adviser." My firm would now like to reflect that Adviser B will become the filing adviser, and Adviser A will become the relying adviser. What is the correct way to make this change on Form ADV?
A: To avoid a period during which neither Adviser A nor Adviser B is registered with the Commission, the following process should be followed: (1) Adviser B should file an initial application for SEC registration and include on that initial application a Schedule R listing Adviser A as a "relying adviser". (2) Once Adviser B’s registration request is approved, then Adviser A should file Form ADV-W to withdraw its registration.
Q: Can a relying adviser be deleted from a Form ADV simply by selecting Item (9) (“are no longer eligible to remain registered with the SEC”) in Section 2?
A: No. In addition to selecting Item (9), the filing adviser must also select one of the two options under “Delete a Schedule R” at the top of Schedule R and remove the relying adviser’s name from all applicable entries in Section 7.B.(1) of Schedule D.
Form ADV Part 2A: Item 2
Q: When responding to Item 2 of Form ADV Part 2A, is providing a list of material changes sufficient or must I discuss such material changes?
A: An adviser must identify and discuss material changes; in the staff’s view, providing a list of material changes is not a sufficient discussion of material changes. See the instructions for Item 2 of Form ADV Part 2A.
For the Procrastinators
Q: Despite my firm’s best efforts, we will be unable to submit our annual amendment to Form ADV by the deadline. In addition, we have not requested a temporary hardship exemption under rule 203-3because we did not have unanticipated technical difficulties that prevented us from submitting the filing. Can the staff provide my firm with a grace period during which my firm may make its filing?
A: No. SEC staff is unable to provide any “grace period”. If an adviser does not file an amendment to Form ADV by the deadline provided in rule 204-1, the adviser is in violation of the rule. Whether the staff would recommend action based on such a violation will depend on the facts and circumstances of the late filing. Advisers should file the required filing as soon as possible. When an adviser files its annual updating amendment, the adviser may consider including a note in the Miscellaneous section of Schedule D explaining the circumstances of the late filing. Additionally, the adviser may consider including a note to be maintained in the adviser’s books and records explaining the reason for the late filing, the steps the adviser took to address the late filing, and the steps the adviser is taking to prevent any late filings in the future. The adviser may also wish to consider changes to its policies and procedures to avoid this error in the future.
Q: The IARD system is down and has caused me to not make my filing in time. Can I receive an extension?
A: Each year, IARD shuts down for several days near the end of December to process renewals of state notice filings and registrations. During this period, advisers are not able to submit filings. Advisers may wish to review the text of rule 0-4(a)(3), which permits certain filings to be considered timely if they were due during the period IARD is shut down and they are made no later than the following January 7. The text of the rule is available here. There may be other times in the year where IARD has scheduled outages. The availability schedule is here. In the event that a filing is delayed due to IARD being shut down, the staff believes that an adviser should file as soon as the system becomes available. An adviser may also wish to maintain a note in the firm’s books and records explaining the reason for the filing date.
Conclusion
When you are filing your annual amendment this year, keep these FAQs in mind to ensure that you are meeting the Commission’s expectations. Several other FAQs on their page may be specific to your firm’s situation, and we encourage you to review them, as needed. As always, reach out to us at SCS if you have any questions.