The SEC recently made available the comments received on IA-4091, Amendments to Form ADV and Investment Advisers Act Rules. First, let’s revisit some specifics of the amendments, originally introduced on May 20, 2015. The first of the amendments is to Form ADV Part 1A, specifically as it relates to the inclusion of an adviser’s separately managed account (SMA) business. Another amendment facilitates a standard process for registration of private fund advisers. There were also two proposed amendments to Rule 204-2 of the Investment Advisors Act of 1940, the books and records rule, for which this article is specifically focused.
As it stands, Rule 204-2(a)(16) requires registered advisers, or those required to be registered, to maintain records supporting performance claims in communications such as notices and advertisements that are distributed to ten or more persons. The proposed amendment simply removes the “ten or more persons” wording from the rule and replaces it with “any person.” This proposed change will likely cause advisers to review and potentially enhance their policies and procedures surrounding performance calculations and how they communicate performance data, regardless of whether it’s personalized for a specific client or used more broadly in an advertisement.
Additionally, proposed amendments to Rule 204-2(a)(7) would add another category of required original documentation: all communications related to the performance or rate of return of any or all managed accounts or securities recommendations. The impetus for this proposed amendment appears to have been an enforcement action, In the Matter of Michael R. Pelosi, where a lack of evidence prohibited the action from moving forward.
The SEC requested comment on whether investment advisers currently maintain these records, whether there might be alternate ways to collect performance information and communicate it to clients, and any potential exceptions that should be considered.
In total, 45 comment letters were received and published, although many addressed amendments not related to the books and records rule. Those that did focus on Rule 204-2 varied widely. Several respondents supported the amendments, mentioning that they already maintain such information and it would not be a significant additional burden. However, numerous respondents felt that the SEC is greatly underestimating the burden that maintaining this information would place on advisers, particularly smaller advisers and private equity firms. If the amendment is adopted, these commenters argued that there should be a lengthy adoption period.
There were also a few respondents who asked for clarification on several items, including the meaning of “original” in this digital age and the scope of “all written communications received and copies of written communications sent.” Commenters worried that adding the additional category of required original documentation for all communications could encompass more than intended.
These amendments won’t come without a cost, as advisers will have to determine how they will gather and maintain the information to comply. Firms should keep an eye on these amendments and the status of this project as it progresses.
We will be happy to provide further information relating to this subject. For more information, contact Craig B. Evans, Manager, Audit & Accounting and member of Kreischer Miller’s Investment Industry Group at firstname.lastname@example.org or 215.441.4600.
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