Institutional investors this year will find significant changes to the Form ADV — filed by investment and fund managers to register with the U.S. Securities and Exchange Commission — due to amendments adopted by the SEC in 2016 and that took effect last October.
Among the many changes made, the most significant are found in Part 1 and require:
- Greater specificity concerning separately managed accounts serviced by the manager and the gross notional exposure from borrowings and derivatives used in the manager's strategy.
- Information concerning "umbrella registrations" for private fund sponsors and any "relying advisers" registered under this ADV.
- Specific identifying information for custodians, compliance consultants and broker-dealers used by the manager.
These changes provide a welcome increase in transparency with respect to the investment strategy and business operations of investment managers. Institutional investors would be well-served to review the new information and compare it to information previously received from their managers.
Separately managed accounts Item 5 of Part 1 requires an investment manager to provide information about its advisory business. In the newly added subsection 5.K., institutional investors will find detailed information on the management of SMAs, including the total assets under management in such accounts and an approximate dollar and percentage breakdown of how this AUM is allocated across 12 predefined asset categories as of the fiscal year-end. If the investment manager has more than $10 billion in assets under management through SMAs, the breakdown must be provided for both the midyear and year-end periods.
Additionally, subsection 5.K. provides information on the use of borrowings and derivatives in the SMAs, including the "gross notional exposure" of such borrowings and the "gross notional value" of the derivatives held in such accounts.
Managers with at least $500 million but less than $10 billion in AUM managed through separately managed accounts provide the year-end breakdown of such dollar amounts among three broad categories of gross notional exposure: less than 10%, 10% to 149% and 150% or more. However, those with at least $10 billion in AUM are also required to report the midyear and year-end gross notional value of derivatives across six categories of exposure: interest rate, foreign exchange, credit, equity, commodity and "other." A manager may also include a narrative description of its use of borrowings and derivatives in its strategies if it believes the gross notional metrics, by themselves, are misleading without further explanation.