will help us better understand a particular adviser's business and
assist in our risk assessment and examination process by making it
easier for our staff to identify the extent to which the firm acts as
sponsor or portfolio manager of wrap fee programs and collect
information across investment advisers involved in a particular wrap
fee program.\184\
---------------------------------------------------------------------------

    \183\ Amended Form ADV, Part 1A, Section 5.I.(2) of Schedule D.
    \184\ Proposing Release, supra footnote 3 at Section II.A.2.
---------------------------------------------------------------------------

    One commenter was generally supportive of our proposed reporting on
wrap fee programs, but questioned its usefulness to investors and
market participants.\185\ As discussed above, our enhanced wrap fee
reporting is designed to assist our staff in its risk assessment and
examination process. Three commenters requested further clarification
regarding the existing definition of a wrap fee program.\186\ We are
not changing or clarifying the existing definition of a ``wrap fee
program'' that is included in Form ADV because, based on our experience
with the Form, we believe it has been sufficiently clear.
---------------------------------------------------------------------------

    \185\ CFA Letter.
    \186\ ASG Letter (asking whether an adviser will be deemed to
participate in a wrap fee program if the adviser negotiates an
asset-based fee with a broker and pays that fee rather than having
the client pay that fee); PCA Letter (asking whether an adviser will
be deemed to ``participate'' in a wrap fee program as a result of
placing client funds (or recommending that clients place non-
discretionary funds) in one or more programs sponsored by
unaffiliated third parties, but in which the adviser does not serve
as the sponsor or a portfolio manager). See also NRS Letter
(suggesting that we require wrap fee program sponsors to report the
combined regulatory assets under management for themselves and any
independent portfolio managers in their program).
---------------------------------------------------------------------------

c. Additional Information About Financial Industry Affiliations and
Private Fund Reporting
    Part 1A, Section 7.A. of Schedule D requires information on an
adviser's financial industry affiliations and Section 7.B.(1) of
Schedule D requires information on private funds managed by the
adviser. We are adopting as proposed amendments to Sections 7.A. and
7.B.(1) of Schedule D that require an adviser to provide identifying
numbers (i.e., Public Company Accounting Oversight Board (``PCAOB'')-
assigned numbers \187\ and CIK Numbers \188\) in response to two
questions to allow us to better compare information across data sets
and understand the relationships of advisers to other financial service
providers.
---------------------------------------------------------------------------

    \187\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23(e).
    \188\ Amended Form ADV, Part 1A, Section 7.A of Schedule D,
Question 4(b).
---------------------------------------------------------------------------

    Two commenters were concerned that, by requiring an adviser to
report the PCAOB-assigned number of its auditing firm (if applicable),
we are suggesting that using a PCAOB-registered auditing firm is
required by the Commission.\189\ This is not our intent. An auditing
firm performing a surprise examination is not required to be registered
with the PCAOB unless the adviser or its related person is serving as
qualified custodian.\190\
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    \189\ Shearman Letter. See Comment Letter of American Institute
of Certified Public Accountants, Financial Reporting Executive
Committee (Aug. 17, 2015) (``AICPA Letter'').
    \190\ Rules 206(4)-2(a)(4) and 206(4)-2(a)(6)(i).
---------------------------------------------------------------------------

    In addition, we are adding a question to Section 7.B.(1) of
Schedule D to require an adviser to a private fund that qualifies for
the exclusion from the definition of investment company under section
3(c)(1) of the Investment Company Act of 1940 (a ``3(c)(1) fund'') to
report whether it limits sales of the fund to qualified clients, as
defined in rule 205-3 under the Advisers Act.\191\ As proposed, the
question would have required an adviser to report, for every private
fund that it advises (including any private fund that qualifies for the
exclusion from the definition of ``investment company'' under section
3(c)(7) of the Investment Company Act of 1940 (``3(c)(7) fund''), the
approximate percentage of the private fund beneficially owned (in the
aggregate) by qualified clients.\192\ One commenter supported the
rationale for our proposal; \193\ however other commenters questioned
the value of the question and were concerned about situations where the
qualified client status of an investor is not known, or does not need
to be determined.\194\ We continue to believe that this information
will give us a better sense of the financial sophistication and nature
of investors in private funds, but in response to comments, we are
making two changes from our proposal.
---------------------------------------------------------------------------

    \191\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 15(b). Current Question 15 will become Question 15(a).
    \192\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 15(b).
    \193\ CFA Letter.
    \194\ ACG Letter; Anonymous Letter; SBIA Letter.
---------------------------------------------------------------------------

    First, we are limiting the question to 3(c)(1) funds because each
investor in a 3(c)(7) fund is required to meet the higher ``qualified
purchaser'' standard.\195\ Second, we are revising the question to
require a simple yes or no response as to whether the adviser limits
sales of a fund to qualified clients instead of requiring advisers to
report the percentage of ownership of the fund by qualified clients.
Commenters noted that many advisers that are not registered with the
Commission (e.g., exempt reporting advisers \196\) are not required to
determine whether the fund's investors are qualified clients.\197\
These advisers may simply respond ``No'' to the revised question. Other
commenters asked us to clarify whether advisers must re-certify the
qualified client status of their investors annually.\198\ As long as an
investor met

the definition of a ``qualified client'' when it entered into the
advisory contract with the adviser, then the investor is considered a
``qualified client'' even if it no longer meets the dollar amount
thresholds of the rule. This is consistent with our existing approach
to the definition of qualified client.\199\
---------------------------------------------------------------------------

    \195\ ``Qualified purchaser'' is defined in Section 2(a)(51) of
the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(51)).
    \196\ An exempt reporting adviser is an investment adviser that
qualifies for the exemption from registration under section 203(l)
of the Advisers Act because it is an adviser solely to one or more
venture capital funds, or under rule 203(m)-1 under the Advisers Act
because it is an adviser solely to private funds and has assets
under management in the United States of less than $150 million. See
Form ADV, Glossary.
    \197\ ACG Letter; SBIA Letter. See also Anonymous Letter.
Section 205(a) of the Advisers Act only applies to advisers who are
registered or required to be registered with the Commission and
generally restricts advisers from entering into, extending,
renewing, or performing any advisory contract that provides for
performance-based compensation. Rule 205-3 permits advisers to
charge performance-based compensation to ``qualified clients,'' as
defined in the rule. Advisers who are registered or required to be
registered with the Commission are otherwise prohibited from
charging performance-based compensation.
    \198\ JGAS Letter; SBIA Letter. See also PCA Letter.
    \199\ See Investment Adviser Performance Compensation,
Investment Advisers Act Release No. 3372 (Feb. 15, 2012) [77 FR
10358 (Feb. 22, 2012)].
---------------------------------------------------------------------------

3. Umbrella Registration
    We are adopting, as proposed, amendments to Form ADV that codify
umbrella registration for certain advisers to private funds. We are
adopting the amendments today because we believe that umbrella
registration should be made available to those private fund advisers
that are registered with us and operate a single advisory business
through multiple legal entities. Umbrella registration is not
mandatory, but we believe it will simplify the registration process for
these advisers, and provide additional and more consistent data about,
and create a clearer picture of, groups of private fund advisers that
operate a single advisory business through multiple legal entities. The
amendments also will allow for greater comparability across private
fund advisers.
    As we discussed in the Proposing Release, the Dodd-Frank Act
repealed the private adviser exemption that used to be in section
203(b)(3) of the Advisers Act.\200\ As a result, many previously
unregistered advisers to private funds,\201\ including hedge funds and
private equity funds, were required to register under the Advisers Act.
Today, about 4,469 registered investment advisers provide advice on
approximately $10.5 trillion in assets to approximately 30,896 private
funds clients.\202\
---------------------------------------------------------------------------

    \200\ Section 403 of the Dodd-Frank Act. Section 203(b)(3) of
the Advisers Act (the ``private adviser exemption'') previously
exempted any investment adviser from registration if the investment
adviser (i) had fewer than 15 clients in the preceding 12 months,
(ii) did not hold itself out to the public as an investment adviser
and (iii) did not act as an investment adviser to a registered
investment company or a company that elected to be a business
development company.
    \201\ Section 202(a)(29) of the Advisers Act defines the term
``private fund'' as ``an issuer that would be an investment company,
as defined in section 3 of the Investment Company Act of 1940 (15
U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that Act.''
    \202\ Based on IARD system data as of May 16, 2016.
---------------------------------------------------------------------------

    For a variety of tax, legal and regulatory reasons, advisers to
private funds may be organized as a group of related advisers that are
separate legal entities but effectively operate as--and appear to
investors and regulators to be--a single advisory business. Although
these separate legal entities effectively operate as a single advisory
business,\203\ Form ADV was designed to accommodate the registration
request of an adviser structured as a single legal entity. As a result,
private fund advisers that operated as a single advisory business but
were organized as separate legal entities may have had to file multiple
registration forms, even though the registration effectively was for
the same advisory business. Multiple Form ADVs for a single advisory
business may distort the data we collect on Form ADV and use in our
regulatory program, be less efficient and more costly for advisers, and
may be confusing to the public researching an adviser on our Web site.
---------------------------------------------------------------------------

    \203\ We treat as a single adviser two or more affiliated
advisers that are separate legal entities but are operationally
integrated, which could result in a requirement for one or both
advisers to register. See Exemptions for Advisers to Venture Capital
Funds, Private Fund Advisers With Less Than $150 Million in Assets
Under Management, and Foreign Private Advisers, Investment Advisers
Act Release No. 3222 (June 22, 2011) [76 FR 39646 (Jul. 6, 2011)]
(``Exemptions Release''). See also In the Matter of TL Ventures
Inc., Investment Advisers Act Release No. 3859 (June 20, 2014)
(settled action).
---------------------------------------------------------------------------

    Our staff provided guidance to private fund advisers before the
compliance date of the Dodd-Frank Act private fund adviser registration
requirements designed to address concerns raised by advisers.\204\ The
guidance provided conditions under which the staff believed one adviser
(the ``filing adviser'') could file a single Form ADV on behalf of
itself and other advisers that were controlled by or under common
control with the filing adviser (each, a ``relying adviser''), provided
that they conducted a single advisory business (collectively an
``umbrella registration'').
---------------------------------------------------------------------------

    \204\ See 2012 ABA Letter, supra footnote 5. The Division of
Investment Management previously provided no-action relief to enable
a special purpose vehicle (``SPV'') that acts as a private fund's
general partner or managing member to essentially rely upon its
parent adviser's registration with the Commission rather than
separately register. See American Bar Association Subcommittee on
Private Investment Entities, SEC Staff Letter (Dec. 8, 2005),
available at http://www.sec.gov/divisions/investment/noaction/aba120805.htm (``2005 ABA Letter'') at Question G1.
---------------------------------------------------------------------------

    We believe that most advisers that can rely on umbrella
registration are doing so, with approximately 743 filing advisers and
approximately 2,587 relying advisers filing umbrella
registrations.\205\ However, the method outlined in the staff guidance
for filing an umbrella registration was limited by the fact that the
form was designed for a single legal entity. This created confusion for
filers and the public. It also complicated our staff's data collection
and analysis on umbrella registrants.\206\ Today's amendments are
designed to ameliorate these issues.
---------------------------------------------------------------------------

    \205\ Based on IARD system data as of May 16, 2016.
    \206\ Under the guidance provided by the staff, for example,
umbrella registration was appropriate where a relying adviser was
not prohibited from registering with the Commission by section 203A
of the Advisers Act. See 2012 ABA Letter, supra footnote 5. However,
a relying adviser did not have a way to answer Item 2 regarding the
basis on which it was eligible for SEC registration. In addition,
relying advisers often had to list owners and executive officers in
a confusing manner in Schedules A and B which were not designed to
accommodate multiple advisers and did not always provide the
Commission staff with useful information on the owners of each
relying adviser. Also, the filing adviser disclosed its reliance on
the 2012 ABA Letter in the Miscellaneous Section of Schedule D.
---------------------------------------------------------------------------

    We are adopting, as proposed, amendments to Form ADV's General
Instructions that establish conditions for an adviser to assess whether
umbrella registration is available. The conditions we are adopting
today are the same as the conditions set forth in the staff's guidance
that many investment advisers have relied on since 2012 (except that
the staff's guidance also included disclosure conditions for Form ADV,
the substance of which is covered elsewhere in this Release).\207\ The
conditions are as follows:
---------------------------------------------------------------------------

    \207\ See 2012 ABA Letter, supra footnote 5 at Question 4.
---------------------------------------------------------------------------

    1. The filing adviser and each relying adviser advise only private
funds and clients in separately managed accounts that are qualified
clients (as defined in rule 205-3 under the Advisers Act) and are
otherwise eligible to invest in the private funds advised by the filing
adviser or a relying adviser and whose accounts pursue investment
objectives and strategies that are substantially similar or otherwise
related to those private funds;
    2. The filing adviser has its principal office and place of
business in the United States and, therefore, all of the substantive
provisions of the Advisers Act and the rules thereunder apply to the
filing adviser's and each relying adviser's dealings with each of its
clients, regardless of whether any client or the filing adviser or
relying adviser providing the advice is a United States person; \208\
---------------------------------------------------------------------------

    \208\ The Glossary to Form ADV provides that ``United States
person'' has the same meaning as in rule 203(m)-1 under the Advisers
Act, which includes any natural person that is resident in the
United States.
---------------------------------------------------------------------------

    3. Each relying adviser, its employees and the persons acting on
its behalf are subject to the filing adviser's supervision and control
and, therefore, each relying adviser, its employees and

the persons acting on its behalf are ``persons associated with'' the
filing adviser (as defined in section 202(a)(17) of the Advisers Act);
    4. The advisory activities of each relying adviser are subject to
the Advisers Act and the rules thereunder, and each relying adviser is
subject to examination by the Commission; and
    5. The filing adviser and each relying adviser operate under a
single code of ethics adopted in accordance with rule 204A-1 under the
Advisers Act and a single set of written policies and procedures
adopted and implemented in accordance with rule 206(4)-(7) under the
Advisers Act and administered by a single chief compliance officer in
accordance with that rule.\209\
---------------------------------------------------------------------------

    \209\ The code of ethics and written policies and procedures
must be administered as if the filing adviser and each relying
adviser are part of a single entity, although they may take into
account, for example, that a relying adviser operating in a
different jurisdiction may have obligations that differ from the
filing adviser or another relying adviser.
---------------------------------------------------------------------------

    The conditions are designed to limit eligibility for umbrella
registration to groups of private fund advisers that operate as a
single advisory business. For purposes of umbrella registration, we
consider the following factors as indicia of a single advisory
business: Commonality of advisory services and clients; a consistent
application of the Advisers Act and the rules thereunder to all
advisers in the business; and a unified compliance program. The
conditions that we are adopting today are designed to demonstrate these
factors. Condition 1 limits eligibility for umbrella registration to
private fund advisers with a commonality of advisory services and
clients. Conditions 2 and 4 are designed to provide assurance that our
staff has access to and can readily examine the filing and relying
advisers and that the Advisers Act and the rules thereunder fully apply
to all advisers under the umbrella registration and clients of those
advisers. Conditions 3 and 5 are designed to provide assurance that the
filing and relying advisers are subject to a unified compliance
program. Based on our experience, we believe that the conditions, when
taken together, are a strong indication of the existence of a single
private fund advisory business operating through the use of multiple
legal entities.
    In addition, we are amending the General Instructions as proposed
to provide advisers using umbrella registration directions on
completing Form ADV for the filing adviser and each relying adviser,
including details for filing umbrella registration requests and the
timing of filings and amendments in connection with an umbrella
registration.\210\ To satisfy the requirements of Form ADV while using
umbrella registration, the filing adviser is required to file, and
update as required, a single Form ADV (Parts 1 and 2) that relates to,
and includes all information concerning, the filing adviser and each
relying adviser, and must include this same information in any other
reports or filings it must make under the Advisers Act or the rules
thereunder (e.g., Form PF). The revisions to the form's Instructions
and Form ADV further specify those questions that should be answered
solely with respect to the filing adviser and those that require the
filing adviser to answer on behalf of itself and its relying
adviser(s).\211\ Additionally, we are amending the Glossary as proposed
to add the following three terms: (i) ``filing adviser;'' \212\ (ii)
``relying adviser;'' \213\ and (iii) ``umbrella registration.'' \214\
---------------------------------------------------------------------------

    \210\ See Form ADV, General Instruction 5.
    \211\ See, e.g., statements added to Form ADV, Instructions and
Part 1A, Items 1, 2, 3, 7, 10 and 11.
    \212\ ``Filing Adviser'' means: ``An investment adviser eligible
to register with the SEC that files (and amends) a single umbrella
registration on behalf of itself and each of its relying advisers.''
See Form ADV, Glossary.
    \213\ ``Relying Adviser'' means: ``An investment adviser
eligible to register with the SEC that relies on a filing adviser to
file (and amend) a single umbrella registration on its behalf.'' See
Form ADV, Glossary.
    \214\ ``Umbrella Registration'' means: ``A single registration
by a filing adviser and one or more relying advisers who
collectively conduct a single advisory business and that meet the
conditions set forth in General Instruction 5.'' See Form ADV,
Glossary.
---------------------------------------------------------------------------

    We also are adopting as proposed a new schedule to Part 1A--
Schedule R--that must be filed for each relying adviser.\215\ Schedule
R requires identifying information, basis for SEC registration, and
ownership information about each relying adviser, some of which was
already filed by an adviser relying on the staff guidance.\216\ This
new schedule consolidates in one location information for each relying
adviser and addresses the problem the staff faced in its guidance that
resulted in information regarding relying advisers being submitted in
response to a number of different items on the Form, in ways not
consistent across advisers, due to the fact that Form ADV was not
designed to accommodate umbrella registration.\217\ We believe that
certain information that we are requiring (such as mailing address and
basis for registration) is the same for nearly all relying advisers,
and the filing adviser can check a box indicating that the mailing
address of the relying advisers is the same as that of the filing
adviser. Finally, we are adding, as proposed, a new question to
Schedule D that requires advisers to identify the filing advisers and
relying advisers that manage or sponsor private funds reported on Form
ADV.\218\ This information will allow us to identify the specific
adviser managing the private fund reported on Form ADV if it is part of
an umbrella registration. We believe that this information will help us
better understand the management of private funds, will provide
information to contact relying advisers, and will help us better
understand the relationship between relying advisers and filing
advisers.
---------------------------------------------------------------------------

    \215\ Advisers that choose to file an umbrella registration are
directed by Item 1.B. to complete a new Schedule R for each relying
adviser. Form ADV, Part 1A, Item 1.B.(2).
    \216\ Schedule R requires the following information for each
relying adviser: Identifying information (Section 1); basis for SEC
registration (Section 2); form of organization (Section 3) and
control persons (Section 4). For basis for SEC registration (Section
2), we did not include categories that would make the relying
adviser ineligible for umbrella registration, such as serving as an
adviser to a registered investment company.
    \217\ Under the staff's guidance in the 2012 ABA Letter, an
adviser reported in its Form ADV (Miscellaneous Section of Schedule
D) that it and its relying advisers were together filing a single
Form ADV in reliance on the position expressed in the letter and
identified each relying adviser by completing a separate Section
1.B., Schedule D, of Form ADV for each relying adviser and
identified it as such by including the notation ``(relying
adviser).'' See 2012 ABA Letter, supra footnote 5 at Question 4.
    \218\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
3(b).
---------------------------------------------------------------------------

    We received multiple comment letters regarding our proposal to
codify umbrella registration, the vast majority of which expressed
support for umbrella registration.\219\ Several commenters also agreed
that umbrella registration should not be mandatory.\220\ However,
several commenters urged the Commission to expand the eligibility for
umbrella registration to additional advisers including non-U.S. filing
advisers, exempt reporting advisers, advisers to other types of
clients, and advisers not independently eligible to register with the
Commission.\221\
---------------------------------------------------------------------------

    \219\ See, e.g., ABA Committee Letter; ACG Letter; AIMA Letter;
ASG Letter; BlackRock Letter; CFA Letter; Dechert Letter; MFA
Letter; NASAA Letter; NRS Letter; NYSBA Committee Letter; PCA
Letter; PEGCC Letter; SBIA Letter; Schulte Letter; Shearman Letter;
SIFMA Letter.
    \220\ ABA Committee Letter; ASG Letter; BlackRock Letter;
Dechert Letter.
    \221\ One commenter suggested that advisers that can, but do not
elect to, file an umbrella registration be required to note that on
Form ADV. CFA Letter.
---------------------------------------------------------------------------

    Many commenters encouraged us to permit umbrella registration for
non-

U.S. filing advisers.\222\ However, as we previously have expressed, we
remain concerned that, absent Condition 2 (which requires that the
filing adviser have its principal place of business in the United
States), a group of related advisers based inside and outside of the
United States could designate a non-U.S. adviser as a filing adviser,
and could assert, based on the theory of operating a single advisory
business, that the Advisers Act's substantive provisions generally
would not apply to the U.S.-based relying advisers' dealings with their
non-U.S. clients.\223\ Many commenters acknowledged this concern.\224\
Some commenters suggested that we address the concern by requiring that
advisers indicate on their umbrella registration that they will follow
applicable law.\225\ We believe that Condition 2 eliminates the
difficult determinations of the Advisers Act's application to these
advisory relationships. The amendments we are adopting today do not
change the Commission's statements with respect to the cross-border
application of the Advisers Act.\226\
---------------------------------------------------------------------------

    \222\ ABA Committee Letter; AIMA Letter; Dechert Letter; NYSBA
Committee Letter; Schulte Letter. See also Shearman Letter.
    \223\ 2012 ABA Letter, supra footnote 5 at n.9; See Exemptions
Release, supra footnote 203 at Section II.D.
    \224\ ABA Committee Letter; AIMA Letter; NYSBA Committee Letter;
Schulte Letter; Shearman Letter.
    \225\ AIMA Letter; NYSBA Committee Letter. See also Dechert
Letter; ABA Committee Letter (suggesting that we state on Form ADV
that the Advisers Act applies with respect to all U.S. clients of
every registered investment adviser, and with respect to all of the
activities of registered investment advisers that have their
principal place of business in the United States).
    \226\ Certain commenters discussed our cross-border application
of the Advisers Act. ABA Committee Letter; Dechert Letter; Schulte
Letter. Most of the substantive provisions of the Advisers Act are
not applied to the non-U.S. clients of a non-U.S. adviser registered
with the Commission but non-U.S. advisers registered with the
Commission must comply with the Advisers Act and the Commission's
rules thereunder with respect to any U.S. clients (and any
prospective U.S. clients) they may have. See Proposing Release,
supra footnote 3 at n.57 and Exemptions Release, supra footnote 203
at Section II.D.
---------------------------------------------------------------------------

    Two commenters suggested permitting umbrella registration for an
organization where all of the advisers have their principal office and
place of business outside of the United States.\227\ However, umbrella
registration is intended to apply only where our staff has access to
and can readily examine the filing and relying advisers and where the
Advisers Act and the rules thereunder fully apply to all advisers (and
clients) under the umbrella registration.\228\ This would not be the
case for a group of non-U.S. advisers.
---------------------------------------------------------------------------

    \227\ Schulte Letter; Shearman Letter.
    \228\ Proposing Release, supra footnote 3 at Section II.A.3.
---------------------------------------------------------------------------

    Several commenters\229\ argued that we should expand the concept of
umbrella registration by registered advisers to include ``umbrella
reporting'' by exempt reporting advisers. Many of these commenters
stated, and we acknowledge, that allowing exempt reporting advisers
that operate a single advisory business through multiple legal entities
to file an ``umbrella report'' would provide many of the same benefits
as umbrella registration.\230\ However, we are not expanding the
concept of umbrella registration to include ``umbrella reporting'' by
exempt reporting advisers at this time. Some of the conditions required
for umbrella registration reflect certain requirements that apply only
to registered advisers.\231\ Different conditions might be more
appropriate for ensuring that a group of exempt reporting advisers is
operating a single advisory business and therefore should be able to
take advantage of ``umbrella reporting.''
---------------------------------------------------------------------------

    \229\ ABA Committee Letter; ACG Letter; AIMA Letter; ASG Letter;
MFA Letter; NYSBA Committee Letter; SBIA Letter; Schulte Letter;
Shearman Letter.
    \230\ ABA Committee Letter; AIMA Letter; MFA Letter; SBIA
Letter; Schulte Letter. See also ACG Letter.
    \231\ Specifically, exempt reporting advisers are not subject to
the requirement for compliance policies and procedures pursuant to
rule 206(4)-7 under the Advisers Act or for a code of ethics
pursuant to rule 204A-1 under the Advisers Act. See ACG Letter.
---------------------------------------------------------------------------

    Certain commenters questioned the status of a set of Frequently
Asked Questions \232\ that permits certain exempt reporting advisers to
file a single Form ADV on behalf of multiple special purpose
entities.\233\ The views of the staff as expressed in these Frequently
Asked Questions are not withdrawn as a result of today's amendments to
Form ADV.
---------------------------------------------------------------------------

    \232\ Frequently Asked Questions on Form ADV and IARD, Reporting
to the SEC as an Exempt Reporting Adviser (Mar. 2012), available at
https://www.sec.gov/divisions/investment/iard/iardfaq.shtml#exemptreportingadviser.
    \233\ ABA Committee Letter; AIMA Letter; NYSBA Committee Letter.
---------------------------------------------------------------------------

    Two commenters disagreed with Condition 5's requirement that the
filing adviser and each relying adviser operate under a single code of
ethics adopted in accordance with rule 204A-1 under the Advisers Act
and a single set of written policies and procedures adopted and
implemented in accordance with rule 206(4)-(7) under the Advisers Act
and administered by a single chief compliance officer in accordance
with that rule.\234\ One commenter argued that Condition 5 was too
restrictive and suggested that we allow groups of related advisers with
``substantially similar'' codes of ethics and sets of policies and
procedures administered by several chief compliance officers operating
under a ``common compliance regime'' to file an umbrella
registration.\235\ Based on our experience with private fund advisers
that operate a single private fund advisory business through multiple
legal entities, we believe that they commonly have a unified compliance
program which is characterized by a single code of ethics and a single
set of compliance policies and procedures administered by a single
chief compliance officer. Because we believe that the existence of a
unified compliance program that meets the requirements of Condition 5
is a meaningful indicia of a single private fund advisory business, we
are not modifying Condition 5 at this time.
---------------------------------------------------------------------------

    \234\ Capital Research Letter. See ACG Letter (stating that
Condition 5 would have the practical effect of excluding exempt
reporting advisers from eligibility for umbrella registration
because exempt reporting advisers are not required by Advisers Act
rule 204A-1 to adopt a code of ethics, nor are they required by
Advisers Act rule 206(4)-7 to adopt compliance policies and
procedures).
    \235\ Capital Research Letter.
---------------------------------------------------------------------------

    Several commenters disagreed with limiting umbrella registration
eligibility to advisers operating a single private fund advisory
business as described in Condition 1.\236\ Some commenters urged the
Commission to make umbrella registration available where the advisers
operate a single advisory business for types of clients other than
those described in Condition 1, including registered investment
companies and business development companies.\237\ Another commenter
disagreed with limiting eligibility to a single advisory business of
any kind and suggested that umbrella registration apply to all related
persons of a filing adviser.\238\ However, as we stated in the
Proposing Release, we do not believe umbrella registration is
appropriate for advisers that are related but that operate separate
advisory businesses as it would compromise data quality and complicate
analyses that rely on data from Form ADV.\239\ We believe that by
adopting umbrella registration as proposed, we are best able to
accommodate the unique needs of

private fund advisers that operate a single advisory business through
multiple legal entities without compromising the data quality or
analyses that rely on data from Form ADV.
---------------------------------------------------------------------------

    \236\ ASG Letter; BlackRock Letter; Capital Research Letter;
Dechert Letter; Comment Letter of Tannenbaum Helpern Syracuse &
Hirschtritt LLP (Aug. 5, 2016) (``Tannenbaum Letter'') (disagreed
with ``substantially similar or otherwise related'' language,
because advisers may operate a single business with different
investment strategies).
    \237\ ASG Letter; Dechert Letter. See also BlackRock Letter.
    \238\ Capital Research Letter.
    \239\ Proposing Release, supra footnote 3 at Section II.A.3.
---------------------------------------------------------------------------

    Several commenters took issue with the proposal's requirement to
determine asset-based eligibility for umbrella registration on an
entity-by-entity, rather than consolidated, basis.\240\ These
commenters suggested that the goals of providing a clearer picture of
groups of related advisers that operate as a single business and
establishing a more efficient method for registration for separate
legal entities that collectively conduct a single advisory business
would be better served by allowing the group to determine asset-based
eligibility for umbrella registration on a consolidated basis.\241\
Umbrella registration was intended to consolidate the multiple
registration forms that may otherwise have been required by a single
advisory business. It was not intended to alter or modify the
eligibility for registration with the Commission.\242\
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    \240\ Dechert Letter; Morgan Letter; NRS Letter; NYSBA Committee
Letter. See MFA Letter (arguing that a registered private fund
adviser that serves as a filing adviser should be able to add a
relying adviser that is an exempt reporting adviser to its umbrella
registration).
    \241\ Id.
    \242\ See Proposing Release, supra footnote 3 at Section II.A.3.
To the extent there is concern about the eligibility of SEC
registration for newly-formed relying advisers, rule 203A-2(c)
provides an exemption for advisers that expect to be eligible for
Commission registration within 120 days.
---------------------------------------------------------------------------

    Some commenters disagreed with the requirement contained in
Condition 1 that separately managed accounts be owned by qualified
clients.\243\ One commenter stated that the qualified client
requirement for separately managed accounts is not related to the
single business requirement.\244\ Condition 1 also requires that the
qualified clients be otherwise eligible to invest in the private funds
advised by the filing adviser or a relying adviser and that their
accounts pursue investment objectives and strategies that are
substantially similar or otherwise related to those private funds.
Condition 1, including the qualified client requirement, is intended to
ensure the commonality of clients that we believe is an important
indicia of a single private fund advisory business. For example, if a
group of advisers advised private funds as well as separately managed
accounts held by non-qualified clients or separately managed accounts
that pursue investment objectives or strategies that differ from the
private funds they advise, we do not believe they would be operating a
single private fund advisory business. The offering of separately
managed accounts to clients other than qualified clients (such as
retail clients) or separately managed accounts that pursue investment
objectives or strategies that differ from the private funds they advise
indicate that the group of advisers is engaged in lines of business
that differ from a single private fund advisory business that we intend
to cover with umbrella registration. Accordingly, at this time, we
continue to believe that a group of advisers' ability to comply with
Condition 1, including the qualified client requirement for separately
managed accounts, is a meaningful indicia of a single private fund
advisory business, and we are therefore adopting Condition 1 as
proposed.
---------------------------------------------------------------------------

    \243\ Morgan Letter; NYSBA Committee Letter; Tannenbaum Letter.
See also PCA Letter.
    \244\ NYSBA Committee Letter.
---------------------------------------------------------------------------

    We also received several comments on the new amendments to Form ADV
to accommodate umbrella registration. Two commenters generally
supported the benefits of new Schedule R, which requires separate
reporting of indirect and direct ownership for relying advisers
(similar to current Schedules A and B of Form ADV).\245\ One commenter
was concerned that relying advisers, which may act as special purpose
general partners or similar entities and may be owned by employees
sharing in the performance-based compensation paid by the fund, would
in effect be forced to share the details of employee compensation on a
public filing.\246\ The ownership information required of relying
advisers is consistent with the ownership information required of
filing advisers. We believe this information will more accurately
reflect the full nature and scope of the single advisory business
conducted by the group of related advisers and will be more informative
for advisory clients and private fund investors as well as the
Commission.\247\
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    \245\ ASG Letter; PEGCC Letter.
    \246\ Shearman Letter.
    \247\ See Proposing Release, supra footnote 3 at Section II.A.3.
---------------------------------------------------------------------------

4. Clarifying, Technical and Other Amendments to Form ADV
    We are adopting, largely as proposed, several amendments to Form
ADV that are designed to clarify the form and its instructions. As
noted in the Proposing Release, we believe these amendments to Form ADV
will make the filing process clearer and more efficient for advisers
and increase the reliability and the consistency of information
provided by investment advisers. More reliable and consistent
information will improve our staff's ability to interpret, understand,
and place in context the information provided by advisers, allow our
staff to make comparisons across investment advisers and improve the
risk assessment and examination program. Many of these amendments are
derived from questions frequently received by our staff. Except where
noted, we did not receive comments on these amendments.
a. Amendments to Item 2
    Item 2.A. of Part 1A of Form ADV requires an adviser to select the
basis upon which it is eligible to register with the Commission, and
Item 2.A.(9) includes as a basis that the adviser is eligible for
registration because it is a ``newly formed adviser'' relying on rule
203A-2(c) because it expects to be eligible for SEC registration within
120 days.\248\ Section 2.A.(9) of Schedule D is entitled ``Newly Formed
Adviser'' and requests the adviser to make certain representations. As
noted in the Proposing Release, our staff has received questions about
whether the exemption from the prohibition on Commission registration
contained in rule 203A-2(c) under the Advisers Act applies only to
entities that have been ``newly formed,'' i.e., newly created as
corporate or other legal entities. It does not only apply to newly
created entities and therefore, as proposed, we are deleting the phrase
``newly formed adviser'' from Item 2.A.(9) and Section 2.A.(9) of
Schedule D. Section 2.A.(9) will be renamed ``Investment Adviser
Expecting to be Eligible for Commission Registration within 120 Days.''
\249\
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    \248\ Form ADV, Part 1A, Item 2.A.(9) and Section 2.A.(9) of
Schedule D.
    \249\ Amended Form ADV, Part 1A, Item 2.A.(9); see rule 203A-
2(c) under the Advisers Act.
---------------------------------------------------------------------------

b. Amendments to Item 4
    Item 4 of Part 1A of Form ADV addresses successions of investment
advisers, and the Instructions to Item 4 provide that a new
organization has been created under certain circumstances, including if
the adviser has changed its structure or legal status (e.g., form of
organization or state of incorporation). As noted in the Proposing
Release, our staff frequently receives questions from investment
advisers regarding this item and, as proposed, we are adding to Item 4
and Section 4 of Schedule D text that is currently contained in the
Instructions to Item 4 that succeeding to the business of a registered
investment adviser includes, for example, a change of

structure or legal status (e.g., form of organization or state of
incorporation).\250\
---------------------------------------------------------------------------

    \250\ Amended Form ADV, Part 1A, Item 4.A. and Section 4 of
Schedule D.
---------------------------------------------------------------------------

c. Amendments to Item 7
    Item 7 of Part 1A of Form ADV and corresponding sections of
Schedule D require advisers to report information about their financial
industry affiliations and the private funds they advise. We are
adopting several technical amendments to Item 7. As proposed, we are
revising Item 7.A., which requires advisers to check whether their
related persons are within certain categories of the financial
industry, to clarify that advisers should not disclose in response to
this item that some of their employees perform investment advisory
functions or are registered representatives of a broker-dealer, because
this information is required to be reported on Items 5.B.(1) and
5.B.(2) of Part 1A, respectively. Items 5.B.(1) and 5.B.(2) request
information about an adviser's employees. Adding this text to Form ADV
should assist filers in filling out the form as well as provide more
accurate data to us and the general public.\251\
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    \251\ Amended Form ADV, Part 1A, Item 7. The staff has provided
this clarification and it is currently available online at our
staff's Frequently Asked Questions on Form ADV and IARD, available
at http://www.sec.gov/divisions/investment/iard/iardfaq.shtml.
---------------------------------------------------------------------------

    Item 7.B. of Part 1A of Form ADV asks whether the adviser serves as
adviser to any private fund. Section 7.B.(1) of Schedule D requires
advisers to provide information about the private funds they manage. We
are adding text to Item 7.B. clarifying that Section 7.B.(1) of
Schedule D should not be completed if another SEC-registered adviser or
SEC exempt reporting adviser reports the information required by
Section 7.B.(1) of Schedule D. Currently the instructions only refer to
another adviser. We are also adopting, as proposed, several amendments
to Section 7.B.(1) of Schedule D. Question 8 of Section 7.B.(1)
currently asks whether the private fund is a ``fund of funds,'' and if
it is, whether the private fund invests in funds managed by the adviser
or a related person of the adviser. Below those two questions there is
a note informing advisers when they should answer yes to the first
question regarding whether the private fund is a ``fund of funds.'' We
are moving the note to directly after Question 8.(a).\252\ We believe
this change will assist filers in answering Question 8.
---------------------------------------------------------------------------

    \252\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Questions 8.(a)-(b).
---------------------------------------------------------------------------

    Question 10 of Section 7.B.(1) of Schedule D asks the adviser to
identify the category of the private fund. As proposed, we are deleting
text in Question 10 that directs advisers to refer to the underlying
funds of a fund of funds when selecting the type of fund, in order to
reconcile differences with Form PF, which permits advisers to disregard
any private fund's equity investments in other private funds.\253\
Question 19 of Section 7.B.(1) of Schedule D asks whether the adviser's
clients are solicited to invest in the private fund. We are adding text
to Question 19, as proposed, to make clear that the adviser should not
consider feeder funds as clients of the adviser to a private fund when
answering whether the adviser's clients are solicited to invest in the
private fund.\254\ As noted in the Proposing Release, this is a common
question that our staff receives and the intent of Question 19 is not
to capture affiliated feeder funds. Question 21 of Section 7.B.(1) of
Schedule D asks whether the private fund relies on an exemption from
registration of its securities under Regulation D of the Securities Act
of 1933 and Question 22 asks for the private fund's Form D file number.
We are adopting a clarifying revision to Question 21 as proposed to ask
if the private fund has ever relied on an exemption from registration
of its securities under Regulation D, in order to better reflect the
intention of the Question.\255\ The current Question 21, if answered in
the negative, would not require the adviser to provide the private
fund's Form D file number in Question 22, meaning we would not receive
Form D file numbers in the event there was past reliance on Regulation
D.\256\
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    \253\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 10. See Form PF, General Instruction 7.
    \254\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 19.
    \255\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 21.
    \256\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
21.
---------------------------------------------------------------------------

    We are adopting revisions to Question 23.(a)(2) as proposed.
Currently, this question requires an adviser to check a box to indicate
whether the private fund's financial statements are prepared in
accordance with U.S. generally accepted accounting principles
(``GAAP'').\257\ We are adding text instructing advisers that they are
required to answer Question 23.(a)(2) only if they answer ``yes'' to
Question 23.(a)(1), which asks whether the private fund's financial
statements are subject to an annual audit.\258\ This revision will
clarify when an adviser is actually required to answer Question
23.(a)(2). We are also revising Question 23.(g) as proposed. The
question currently asks whether the private fund's audited financial
statements are distributed to the private fund's investors. We are
adding ``for the most recently completed fiscal year'' to clarify the
question. In addition, we are revising Question 23.(h) as proposed.
This question currently asks whether the report prepared by the
auditing firm contains an unqualified opinion.\259\ As noted in the
Proposing Release, this question has prompted questions from advisers
regarding which report and what timeframe the question refers to. To
clarify, we are revising the question, as proposed, to ask whether all
of the reports prepared by the auditing firm since the date of the
adviser's last annual updating amendment contain unqualified
opinions.\260\ Finally, as proposed, we are adding Question 25.(g),
which requests the legal entity identifier, if any, for a private fund
custodian that is not a broker-dealer, or that is a broker-dealer but
does not have an SEC registration number. The legal entity identifier
is a unique identifier associated with a single entity and is intended
to provide a uniform international standard for identifying parties to
financial transactions. Furthermore, the reporting of legal entity
identifier information on Form ADV facilitates the ability of investors
and the Commission to link the data reported with data from other
filings or sources that is reported elsewhere as legal entity
identifiers become more widely used by regulators and the financial
industry. This information will help our examination staff more readily
identify the use of particular custodians by private funds.
---------------------------------------------------------------------------

    \257\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
23.(a)(2).
    \258\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23.(a)(2).
    \259\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
23.(h).
    \260\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23.(h).
---------------------------------------------------------------------------

d. Amendments to Item 8
    Based on inquiries from filers, we are adopting the proposed
amendments to Item 8 with a modification to clarify that newly-formed
advisers should answer questions in the item based on the types of
participation and interest they expect to engage in during the next
year. In the Proposing Release, we did not specify that the instruction
was for newly-formed advisers, and commenters expressed concern that
the proposal

would make Item 8 the only section in Part 1A requesting forward-
looking information, and were concerned about the difficulty around
gauging the likelihood of future events and the possibility for ``false
positives.'' \261\ We agree and, as adopted here, we have updated the
Item to address commenters' concerns.
---------------------------------------------------------------------------

    \261\ See IAA Letter; Oppenheimer Letter; SIFMA Letter.
---------------------------------------------------------------------------

    Item 8.B.(2) of Part 1A of Form ADV currently asks whether the
adviser or any related person of the adviser recommends the purchase of
securities to advisory clients for which the adviser or any related
person of the adviser serves as underwriter, general or managing
partner, or purchaser representative.\262\ The current wording has
caused confusion regarding the treatment of purchaser representatives.
As proposed, we are rewording the question to ask whether the adviser
or any related person of the adviser recommends to advisory clients or
acts as a purchaser representative for advisory clients with respect to
the purchase of securities for which the adviser or any related person
of the adviser serves as underwriter or general or managing partner. As
noted in the Proposing Release, this edit is designed to clarify that
the question applies to any related person who recommends to advisory
clients or acts as a purchaser representative for advisory clients with
respect to the purchase of securities for which the adviser or any
related person of the adviser serves as underwriter or general or
managing partner.\263\
---------------------------------------------------------------------------

    \262\ Form ADV, Part 1A, Item 8.B.(2).
    \263\ Amended Form ADV, Part 1A, Item 8.B.(2).
---------------------------------------------------------------------------

    Item 8.H. of Part 1A of Form ADV asks whether the adviser or any
related person of the adviser, directly or indirectly, compensates any
person for client referrals. We are revising Item 8.H. as proposed to
break the question into two parts to increase our understanding of
compensation for client referrals. Revised Item 8.H.(1) will cover
compensation to persons other than employees for client referrals.\264\
Revised Item 8.H.(2) will cover compensation to employees, in addition
to employees' regular salaries, for obtaining clients for the
firm.\265\ Item 8.I. asks whether the adviser or any related person of
the adviser directly or indirectly receives compensation from any
person other than the adviser or related person of the adviser for
client referrals. We are also adding text to Item 8.I., as proposed, to
clarify that advisers should not include the regular salary that the
adviser pays to an employee in responding to this item.\266\
---------------------------------------------------------------------------

    \264\ Amended Form ADV, Part 1A, Item 8.H.(1).
    \265\ Amended Form ADV, Part 1A, Item 8.H.(2).
    \266\ Amended Form ADV, Part 1A, Item 8.I.
---------------------------------------------------------------------------

    Two commenters thought that the proposed amendment to Item 8.H was
highly subjective and needed additional guidance.\267\ In addition, one
commenter suggested that Part 2B of Form ADV provided adequate
disclosure of employee compensation.\268\ While we appreciate these
comments, we are adopting these amendments as proposed. We continue to
believe Item 8.H and the accompanying instructions are sufficiently
clear and are appropriate to accommodate responses from and provide
flexibility to varying types of advisory businesses and compensation
arrangements. As noted in the Proposing Release, we are adopting these
amendments to Item 8.H to better understand how advisers compensate
both their staff and third parties for client referrals. The revisions
to this item do not change the scope of the information collected, but
instead provide more precise information about compensation for client
referrals.
---------------------------------------------------------------------------

    \267\ See MMI Letter (Item 8.H.(2) should be modified to conform
with Item 5 of Part 2B, where economic benefits for providing
advisory services are disclosed, but not regular salaries or
bonuses). See also PCA Letter.
    \268\ JAG Letter.
---------------------------------------------------------------------------

e. Amendments to Section 9.C. of Schedule D
    Section 9.C. of Schedule D requests information about independent
public accountants that perform surprise examinations in connection
with the Advisers Act custody rule, rule 206(4)-2. We are adopting two
changes to Section 9.C. of Schedule D as proposed. First, we are adding
text requiring an adviser to provide the PCAOB-assigned number of the
adviser's independent public accountant. This will improve our staff's
ability to cross-reference information submitted through other systems
and evaluate compliance with the custody rule.\269\ Section 9.C.(6)
currently requires advisers to report whether any report prepared by an
independent public accountant that audited a pooled investment vehicle
or examined internal controls contained an unqualified opinion. We are
amending Section 9.C.(6) in a manner similar to Section 7.B.(1) of
Schedule D, Question 23.(h) as described above to provide clarity to
filers. Accordingly, the question will now ask whether all of the
reports prepared by the independent public accountant since the date of
the last annual updating amendment have contained unqualified
opinions.\270\
---------------------------------------------------------------------------

    \269\ Amended Form ADV, Part 1A, Section 9.C.(3) of Schedule D.
    \270\ Amended Form ADV, Part 1A, Section 9.C.(6) of Schedule D.
---------------------------------------------------------------------------

    We received requests from multiple commenters to amend Item 9 of
Part 1A and Section 9.C. of Schedule D related to custody.\271\ We
appreciate commenters' suggestions, but these suggested amendments to
Item 9 or Section 9.C. are outside the scope of this rulemaking and we
are not amending them at this time.
---------------------------------------------------------------------------

    \271\ See ASG Letter; Comment Letter of Pat Hyman (June 11,
2015) (``Hyman Letter''); IAA Letter; PCA Letter and Schwab & Co.
Letter.
---------------------------------------------------------------------------

f. Amendments to Disclosure Reporting Pages
    Item 11 of Part 1A of Form ADV requires registered advisers and
exempt reporting advisers to provide information about their
disciplinary history and the disciplinary history of their advisory
affiliates. Those advisers who report an event for purposes of Item 11
are directed to complete a Disclosure Reporting Page (``DRP'') to
provide the details of the event. DRPs can be removed from Form ADV
under certain circumstances, including when ``the adviser is registered
or applying for registration with the SEC and the event was resolved in
the adviser's or advisory affiliate's favor.'' \272\ As proposed, we
are amending this text in each DRP to add ``or reporting as an exempt
reporting adviser with the SEC'' after ``applying for registration with
the SEC'' to clarify that both registered and exempt reporting advisers
may remove a DRP from their Form ADV record if a criminal, regulatory
or civil judicial action was resolved in the adviser's (or advisory
affiliate's) favor.\273\ As discussed in the Proposing Release, these
amendments will make disciplinary reporting uniform across registered
and exempt reporting advisers, consistent with requiring exempt
reporting advisers to report disciplinary events on Form ADV.
---------------------------------------------------------------------------

    \272\ Form ADV, Part 1A, Criminal, Regulatory Action and Civil
Judicial Action Disclosure Reporting Pages.
    \273\ Amended Form ADV, Part 1A, Criminal, Regulatory Action and
Civil Judicial Action Disclosure Reporting Pages.
---------------------------------------------------------------------------

g. Amendments to Instructions and Glossary
    Together with the amendments to Part 1A, we are also adopting, as
proposed, conforming amendments to the General Instructions and the
Glossary for Form ADV. As discussed above, we are amending the General
Instructions to include instructions regarding umbrella registration.
As proposed, we are also removing outdated references to

``Special One-Time Dodd-Frank Transition Filing for SEC Registered
Advisers'' and ``recent'' amendments to Form ADV Part 2 that are no
longer needed. We retained one sentence from those instructions that
specifies that every application for registration must include a
narrative brochure prepared in accordance with the requirements of Part
2A of Form ADV.\274\ We also added clarifying language that exempt
reporting advisers submitting other than annual amendments should
update corresponding sections of Schedules A, B, C and D,\275\ and
provided updated mailing instructions for FINRA.\276\ In the glossary,
we are updating the definition of ``Legal Entity Identifier'' to
reflect recent advancements in this protocol.\277\
---------------------------------------------------------------------------

    \274\ Amended Form ADV, General Instructions, Instruction 3.
    \275\ Amended Form ADV, General Instructions, Instruction 4.
    \276\ Amended Form ADV, General Instructions, Instruction 9.
    \277\ The definition of Legal Entity Identifier is: A ``legal
entity identifier'' assigned by a utility endorsed by the Global LEI
Regulatory Oversight Committee (ROC) or accredited by the Global LEI
Foundation (GLEIF). See Amended Form ADV, Glossary. In Item 1.P., we
are removing outdated text referring to the ``legal entity
identifier'' as being ``in development'' in the first half of 2011.
---------------------------------------------------------------------------

    Where applicable, we are making technical revisions, as proposed,
to specify that an adviser must ``apply for registration'' (rather than
simply ``register'') to more accurately reflect the rule text. As
proposed, we are also deleting text in the instructions related to Item
1.O. because this text is going to appear directly in the corresponding
section of Part 1 of Form ADV. We are adding text clarifying that a
change in information related to Item 1.O. does not necessitate a
prompt other-than-annual amendment (as changes to Item 1 otherwise do).
    We have also received numerous comment letters recommending
additional amendments to clarify other sections of Form ADV.\278\ While
we appreciate commenters raising their concerns with us, these
suggested recommendations are outside the scope of this rulemaking and
we decline to take action to further modify Form ADV based on these
comments.
---------------------------------------------------------------------------

    \278\ See, e.g., ASG Letter (Items 6 and 7); JGAS Letter; PCA
Letter (Item 8); NYSBA Committee Letter (Items 5 and 8 and Schedule
D); PCA Letter (Items 5 and 8); T. Rowe Price Letter (definition of
``regulatory assets under management'' in subadvisory arrangements).
BlackRock also recommended we use XML format for Form ADV filings.
See BlackRock Letter.
---------------------------------------------------------------------------

B. Amendments to Investment Advisers Act Rules

1. Amendments to Books and Records Rule
    We are adopting two amendments to the Advisers Act books and
records rule, rule 204-2, largely as proposed, that will require
advisers to maintain additional materials related to the calculation
and distribution of performance information.
    Rule 204-2(a)(16) currently requires advisers that are registered
or required to be registered with us to maintain records supporting
performance claims in communications that are distributed or circulated
to ten or more persons.\279\ Consistent with the proposal, we are
amending rule 204-2(a)(16) by removing the ten or more persons
condition and replacing it with ``any person.'' Accordingly, under the
amended rule, advisers will be required to maintain the materials
listed in rule 204-2(a)(16) that demonstrate the calculation of the
performance or rate of return in any communication that the adviser
circulates or distributes, directly or indirectly, to any person.
---------------------------------------------------------------------------

    \279\ Rule 204-2(a)(16) requires advisers to make and keep ``All
accounts, books, internal working papers, and any other records or
documents that are necessary to form the basis for or demonstrate
the calculation of the performance or rate of return of any or all
managed accounts or securities recommendations in any notice,
circular, advertisement, newspaper article, investment letter,
bulletin or other communication that the investment adviser
circulates or distributes, directly or indirectly, to 10 or more
persons (other than persons connected with such investment adviser);
provided, however, that, with respect to the performance of managed
accounts, ``the retention of all account statements, if they reflect
all debits, credits, and other transactions in a client's account
for the period of the statement, and all worksheets necessary to
demonstrate the calculation of the performance or rate of return of
all managed accounts shall be deemed to satisfy the requirements of
this paragraph.''
---------------------------------------------------------------------------

    We are also adopting amendments to rule 204-2(a)(7). Rule 204-
2(a)(7) currently requires advisers that are registered or required to
be registered with us to maintain certain categories of written
communications received and copies of written communications sent by
such advisers.\280\ Consistent with the proposal, we are amending rule
204-2(a)(7) to require advisers to also maintain originals of all
written communications received and copies of written communications
sent by an investment adviser relating to the performance or rate of
return of any or all managed accounts or securities recommendations.
---------------------------------------------------------------------------

    \280\ Rule 204-2(a)(7) requires advisers to make and keep:
``Originals of all written communications received and copies of all
written communications sent by such investment adviser relating to
(i) any recommendation made or proposed to be made and any advice
given or proposed to be given, (ii) any receipt, disbursement or
delivery of funds or securities, or (iii) the placing or execution
of any order to purchase or sell any security.''
---------------------------------------------------------------------------

    Several commenters expressed general support for the proposed
amendments to the books and records rule,\281\ while other commenters
felt the proposed amendments would be unnecessary and a significant
burden on advisers.\282\ Several commenters also suggested the proposed
amendments be modified to exclude one-on-one communications that are
customized responses from investors or communications with
sophisticated investors or clients.\283\ In addition, two commenters
raised concerns about the applicability of the amendments to rule 204-2
to performance information that predated the effective date of the
amendments.\284\
---------------------------------------------------------------------------

    \281\ See, e.g., ABA Committee Letter; CFA Letter; LPL Letter
(supporting the proposed amendments to rule 204-2(a)(7) but
suggesting an exception to rule 204-2(a)(16) for communications
addressed to a single client regarding that client's particular
account or security in the account); NASAA Letter; PCA Letter
(finding the proposed rule change sufficient but expressing concern
with the Commission linking the requirement to maintain records
pertaining to calculation of individual client account performance
history, which are communications and not advertising, to the
enforcement of rule 206(4)-1); Comment Letter of Wells Fargo Funds
Management, LLC (Aug. 11, 2015) (``Wells Fargo Letter'').
    \282\ See, e.g., ACG Letter; Anonymous Letter (citing specific
costs of increased training needed to implement and possible
software updates); ASG Letter (asserting the amended requirement is
burdensome because advisers do not always maintain copies of
individual performance provided on an ad hoc basis); PEGCC Letter
(stating the Commission significantly understates the burden of
complying with the proposed amendments); SBIA Letter (noting that
while the amendments themselves are not burdensome, when they are
aggregated with other recordkeeping obligations, they could lead to
overall compliance burdens for smaller advisers); Schnase Letter
(advisers may find it difficult to discern whether particular
materials are subject to the rule). One commenter suggested that the
amendments to rule 204-2(a)(7) are not necessary because other
recordkeeping provisions already require advisers to maintain those
records. See IAA Letter.
    \283\ PEGCC Letter. See also Comment Letter of Michael D. Berlin
(June 8, 2015) (``Berlin Letter''); LPL Letter.
    \284\ See Comment Letter of Arnstein & Lehr LLP (Dec. 3, 2015);
NRS Letter.
---------------------------------------------------------------------------

    Based on a comment we received,\285\ we are making one non-
substantive modification to the proposed amendments. To clarify and
avoid confusion, we are adding the new subsection (iv) of rule 204-
2(a)(7) immediately following subsection (iii) of the rule and
preceding the proviso regarding unsolicited market letters and

records of names and addresses of persons to whom an adviser sent
particular items. A commenter noted that this placement of the new
subsection raised questions about whether the proviso also applied to
new subsection (iv). The proviso does apply to new subsection (iv) and
we believe that, by moving subsection (iv) to immediately after
subsection (iii) and before the proviso, we have addressed the
commenter's concern.
---------------------------------------------------------------------------

    \285\ See IAA Letter (noting that the new subsection (iv) of
rule 204-2(a)(7), as it currently appears, is unclear on whether an
adviser would be required to maintain records relating to
unsolicited market letters or other communications discussing the
performance of securities that the adviser recommended to its
clients).
---------------------------------------------------------------------------

    We are adopting the rest of the amendments to rule 204-2 as
proposed. While we appreciate the concerns raised by commenters, we
continue to believe the veracity of performance information is
important regardless of whether it is a personalized client
communication or in an advertisement sent to ten or more persons. As
noted in the Proposing Release, a recent enforcement action
demonstrated to us the disadvantages of not requiring investment
advisers to maintain records forming the basis of performance
calculations or performance communications sent to individuals.\286\
Moreover, it has been our staff's experience that investment advisers
routinely make and preserve communications containing performance
information and records to support the performance claims. Based on our
staff's experience and the confirmation of several commenters, we
believe that most advisers already maintain this information.\287\
---------------------------------------------------------------------------

    \286\ In the Matter of Michael R. Pelosi, Investment Advisers
Act Release No. 3141 (Jan. 14, 2011); Initial Decision Release No.
448 (Jan. 5, 2012); Investment Advisers Act Release No. 3805 (Mar.
27, 2014) (Commission opinion dismissing proceeding against
associated person of registered investment adviser charged with
providing false and misleading performance information because the
record lacked an evidentiary basis from which to determine that the
performance information was materially false or misleading).
    \287\ See, e.g., ABA Committee Letter; Morningstar Letter; PCA
Letter. See also IAA Letter.
---------------------------------------------------------------------------

    We believe these records will be useful in examining and evaluating
adviser performance claims. Investors will benefit to the extent that
the amendments reduce the incidence of misleading or fraudulent
advertising and communications. For these reasons, we are adopting the
amendments to the Adviser Act books and records rule, rule 204-2, as
proposed.
    These amendments will apply to communications circulated or
distributed after the compliance date of amended rule 204-2. Advisers
that circulate or distribute communications after the compliance date
that include performance information, including information on
performance that predates the effective date of these amendments, will
be required to maintain materials listed in rule 204-2(a)(16) that
demonstrate the calculation of the performance.\288\
---------------------------------------------------------------------------

    \288\ We note that to the extent this information was previously
or is currently included in an advertisement, the adviser is already
required to maintain the information under rule 204-2(a)(16).
---------------------------------------------------------------------------

2. Technical Amendments to Advisers Act Rules
    We are adopting the proposed technical amendments to several rules
under the Advisers Act and withdrawing transition rule 203A-5 under the
Advisers Act. Consistent with the proposal, we are removing transition
provisions from rules where the transition process is complete. Three
of the provisions were added as part of the implementation of the Dodd-
Frank Act. Two of the provisions were added when we amended Form ADV
and several Advisers Act rules to require advisers to electronically
file their brochures with the Commission. One commenter specifically
supported removal of the transition provisions.\289\
---------------------------------------------------------------------------

    \289\ See NRS Letter.
---------------------------------------------------------------------------

a. Rule 203A-5
    The Dodd-Frank Act amended section 203A of the Advisers Act to
prohibit from SEC registration ``mid-sized'' advisers that generally
have assets under management of between $25 million and $100
million.\290\ Rule 203A-5 provided a temporary exemption from the
prohibition on registration for mid-sized advisers to facilitate their
transition to state registration.\291\ As proposed, we are withdrawing
rule 203A-5 because the transition of mid-sized advisers from SEC to
state registration was completed in June 2012.
---------------------------------------------------------------------------

    \290\ See Section 410 of the Dodd-Frank Act.
    \291\ See Implementing Release, supra footnote 133.
---------------------------------------------------------------------------

b. Rule 202(a)(11)(G)-1(e)
    Section 409 of the Dodd-Frank Act created a new exclusion from the
definition of ``investment adviser'' in section 202(a)(11)(G) of the
Advisers Act for family offices. The Commission adopted rule
202(a)(11)(G)-1 \292\ defining a family office and provided two
extended transition periods for family offices with certain charitable
organization clients and family offices relying on the rescinded
``private adviser'' exemption.\293\ As proposed, we are removing
paragraph (e) of rule 202(a)(11)(G)-1 because subparagraph (1) of the
transition provisions provided for by it expired on December 31, 2013,
and subparagraph (2) expired on March 30, 2012.
---------------------------------------------------------------------------

    \292\ Family Offices, Investment Advisers Act Release No. 3220
(June 22, 2011) [76 FR 37983 (June 29, 2011)].
    \293\ Section 203(b)(3) of the Advisers Act as in effect before
Jul. 21, 2011, repealed by section 403 of the Dodd-Frank Act.
---------------------------------------------------------------------------

c. Rule 203-1(e)
    Rule 203-1 outlines the procedures for advisers to register with
the Commission. Paragraph (e) of the rule was added as part of the
implementation of the Dodd-Frank Act and allowed companies that were
relying on the rescinded ``private adviser'' exemption \294\ to remain
exempt from registration until March 30, 2012 under certain
conditions.\295\ As proposed, we are removing paragraph (e) from Rule
203-1 because the transition for private advisers is now complete.
---------------------------------------------------------------------------

    \294\ Id.
    \295\ See Implementing Release, supra footnote 133. The rule
203-1(e) exemption from registration requires not only reliance on
the former private adviser exemption but also that an adviser have
fifteen or fewer clients in the preceding twelve months and neither
hold itself out to the public as an investment adviser nor act as an
investment adviser to a registered investment company or business
development company.
---------------------------------------------------------------------------

d. Rule 203-1(b), Rule 204-1(c) and Rule 204-3(g)
    Rule 203-1 and Rule 204-1 were amended in 2010 to provide
transition periods for advisers to file narrative brochures required by
Part 2A of Form ADV electronically with the Investment Adviser
Registration Depository (``IARD'').\296\ Rule 203-1(b), entitled
``transition to electronic filing,'' requires investment advisers
applying for registration after January 1, 2011 to file their brochures
electronically unless they receive a continuing hardship
exemption.\297\ Rule 204-1(c) requires investment advisers that are
required to file a brochure and had a fiscal year that ended on or
after December 31, 2010 to electronically file a Part 2A brochure as
part of their next annual updating amendment. As proposed, we are
removing paragraph (b) from rule 203-1 and paragraph (c) from rule 204-
1 because the transition to electronic filing is now complete.\298\ We
also are making a technical, conforming additional change by removing
rule 204-3(g) because it refers to the transition provision in rule
204-1(c).\299\
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    \296\ Amendments to Form ADV, Investment Advisers Act Release
No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)].
    \297\ The continuing hardship exemption under rule 203-3 will
not be withdrawn by these technical amendments.
    \298\ Current paragraphs (c) and (d) of Rule 203-1 are
redesignated as (b) and (c) and current paragraphs (d) and (e) of
Rule 204-1 are redesignated as (c) and (d).
    \299\ Current paragraph (h) of Rule 204-3 is redesignated as
(g).

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III. Effective and Compliance Dates

A. Effective Date

    The effective date of the amendments to rules 204-2, 202(a)(11)(G)-
1, 203-1, 204-1 and 204-3, and the amendments to Form ADV is October
31, 2016. Rule 203A-5 is removed effective October 31, 2016.

B. Compliance Dates

1. Amendments to Form ADV
    Several commenters requested a compliance date of at least one year
after adoption.\300\ Any adviser filing an initial Form ADV or an
amendment to an existing Form ADV on or after October 1, 2017 will be
required to provide responses to the form revisions we are adopting
today. Our staff is working closely with FINRA to re-program IARD and
we understand that the system is expected to be able to accept filings
of revised Form ADV by October 1, 2017. This date is over one year from
adoption. In addition, most advisers will not be filing their annual
updating amendment until the first quarter of 2018, and therefore we
believe this compliance period is appropriate.
---------------------------------------------------------------------------

    \300\ See Anonymous Letter; Capital Research Letter; Dechert
Letter; IAA Letter; MMI Letter; SIFMA Letter.
---------------------------------------------------------------------------

2. Amendments to Investment Advisers Act Rules
    Our amendments to the books and records rule, 275.204-2, will apply
to communications circulated or distributed after October 1, 2017. As
discussed in Section II.B.(1), advisers that circulate or distribute
communications after October 1, 2017 that include performance
information, including information on performance that predates that
date, will be required to maintain the materials listed in 275.204-
2(a)(16) that demonstrate the calculation of the performance.

IV. Economic Analysis

A. Introduction

    We are sensitive to the benefits and costs imposed by our rules and
understand that there will be costs associated with complying with the
amendments. The following economic analysis identifies and considers
the benefits and costs--including the effects on efficiency,
competition, and capital formation--that will result from the
amendments to Form ADV and the amendments to and rescission of certain
rules under the Investment Advisers Act. The economic effects
considered in adopting the amendments are discussed below.
    We are adopting amendments to Form ADV and the Advisers Act books
and records rule 204-2, and technical amendments to several other rules
under the Advisers Act. In summary, and as discussed in greater detail
in Section II. above, we are adopting the following amendments to Form
ADV and Advisers Act rules:
     Amendments to Form ADV designed to fill certain data gaps
and enhance current reporting provided by investment advisers in order
to improve the depth and quality of the information we collect on
investment advisers and to facilitate our risk monitoring objectives;
     Amendments to Form ADV to incorporate ``umbrella
registration'' for private fund advisers;
     Clarifying, technical and other amendments to Part 1A of
Form ADV;
     Amendments to the Advisers Act books and records rule to
require advisers to make and keep supporting documentation that
demonstrates performance calculations or rates of return in any written
communications that the investment adviser circulates or distributes;
and
     Technical amendments to several rules under the Advisers
Act to remove transition provisions that are no longer necessary.
    As discussed in the Proposing Release, we rely on information
reported by investment advisers on Form ADV to monitor trends, assess
emerging risks, inform policy choices and rulemaking, and assist our
staff in examination and enforcement efforts.\301\ We believe that the
amendments to Form ADV will improve the information provided by
investment advisers to the Commission, clients and prospective clients,
and may improve investor protection by informing policy choices and
focusing examination activities. We also believe that the amendments to
the Advisers Act books and records rule may improve investor
protections by providing useful information to our examination and
enforcement staff in evaluating advisers' performance claims. While, as
stated above, we believe that most that can rely on umbrella
registration are doing so, incorporating umbrella registration into
Form ADV will make the existence of umbrella registration more widely
known to advisers, which may result in more eligible advisers taking
advantage of the opportunity to umbrella register. This could, make
filing ADV more efficient for such advisers, reducing their filing
costs. In addition, we believe that incorporating umbrella registration
into Form ADV will benefit the Commission, clients and prospective
clients by improving the consistency and quality of the information
that private fund advisers disclose about their business.
---------------------------------------------------------------------------

    \301\ Proposing Release, supra footnote 3 at Section III.A.
---------------------------------------------------------------------------

    The regulatory regime as it exists today for investment advisers
serves as the economic baseline against which the costs and benefits,
as well as the impact on efficiency, competition, and capital formation
of the amendments are discussed. The baseline includes the current
requirement for investment advisers to file Form ADV, the staff
guidance regarding a filing adviser filing a single Form ADV on behalf
of itself and each relying adviser,\302\ the current requirements for
investment advisers to maintain books and records, and other current
rules under the Advisers Act. The parties that will be affected by the
amendments are: investment advisers that file Form ADV, including
private fund advisers that rely on, or will rely on, umbrella
registration, and investment advisers that currently manage, or will
manage, separately managed accounts; the Commission; current and future
advisory clients; and other current and future users of investment
adviser information reported on Form ADV, including third-party
information providers.
---------------------------------------------------------------------------

    \302\ See 2012 ABA Letter, supra footnote 5.
---------------------------------------------------------------------------

    Based on IARD system data as of May 16, 2016, approximately 12,024
investment advisers are registered with the Commission, and 3,248
exempt reporting advisers file reports with the Commission.
Approximately 8,718 investment advisers registered with the Commission
(73%) reported assets under management attributable to separately
managed account clients. Of those 8,718 advisers, approximately 2,538
advisers reported regulatory assets under management attributable to
separately managed account clients of at least $500 million and less
than $10 billion and approximately 545 advisers reported regulatory
assets under management attributable to separately managed account
clients of at least $10 billion.\303\ Advisers with at least $10
billion in regulatory assets under management attributable to
separately managed accounts will be subject to

additional reporting on separately managed accounts on Form ADV.
Approximately 743 registered advisers to private funds currently submit
a single Form ADV on behalf of themselves and 2,587 relying advisers,
relying on the 2012 ABA Letter. All investment advisers registered or
required to be registered with the Commission are subject to the
Advisers Act books and records rule.
---------------------------------------------------------------------------

    \303\ Based on IARD system data as of May 16, 2016. These
estimates are approximations because Form ADV currently collects
information about assets under management by client type and the
number of clients of each type in broad ranges. Item 5.D.(1)-(3)
will require advisers to specify their assets under management and
number of clients by client type, which will benefit our ability to
understand and oversee the investment advisers that advise these
accounts and recognize potential risks.
---------------------------------------------------------------------------

    As we explained in the Proposing Release, we have sought, where
possible, to quantify the costs, benefits, and effects on efficiency,
competition, and capital formation expected to result from the
amendments to Form ADV and Investment Advisers Act rules, and
reasonable alternatives.\304\ In many cases, however, we are unable to
quantify the economic effects because we lack the information necessary
to provide reasonable estimates. The economic effects of the amendments
also depend upon a number of factors which we often cannot estimate.
Examples include the extent to which investor protection and our
ability to oversee investment advisers will improve, and the extent to
which investors will utilize the information in Form ADV to choose or
retain an investment adviser. Therefore, some of the discussion below
is qualitative in nature. Several commenters raised concerns about the
burdens and costs associated with these amendments, and in some cases
suggested that our quantitative estimates in the Proposing Release
underestimated these costs. We describe their comments below, and have
modified certain provisions in response to the comments.
---------------------------------------------------------------------------

    \304\ Proposing Release, supra footnote 3 at Section III.A.
---------------------------------------------------------------------------

B. Amendments to Form ADV

    Certain amendments to Form ADV are designed to address potential
gaps in information, such as information about advisers' separately
managed accounts, and obtain additional information on areas such as
social media, additional offices, foreign clients, and wrap fee
accounts. We believe this information will improve the depth and
quality of information that we collect on investment advisers, which
will assist the Commission in our oversight activities and clients and
potential clients in assessing advisers.\305\ We also are adopting
amendments to Form ADV to establish a more efficient method for
multiple private fund adviser entities operating a single advisory
business to register with us using a single Form ADV. Finally, we are
adopting several clarifying, technical and other amendments to Form
ADV.
---------------------------------------------------------------------------

    \305\ See supra Section I.
---------------------------------------------------------------------------

1. Economic Baseline and Affected Market Participants
    As noted above and in the Proposing Release, the investment adviser
regulatory regime currently in effect serves as the economic baseline
against which the costs and benefits, as well as the impact on
efficiency, competition and capital formation, of the amendments to
Form ADV are discussed. Investment advisers use Form ADV to register
with the Commission and with the states. Once registered, an investment
adviser is required to file an annual amendment within 90 days of the
end of its fiscal year, and more frequently if required by the
instructions to Form ADV.\306\ Form ADV is also used by exempt
reporting advisers to submit, and periodically update, reports to the
Commission by completing a limited subset of items on Form ADV.
Information filed on Form ADV is publicly available through the IAPD
Web site.\307\ The parties that will be affected by the amendments to
Form ADV are: Investment advisers that file Form ADV with the
Commission; the Commission; current and future advisory clients; and
other current and future users of information filed on Form ADV,
including third-party information providers.
---------------------------------------------------------------------------

    \306\ See rule 204-1(a) under the Advisers Act.
    \307\ Certain personal identifying information is not made
public.
---------------------------------------------------------------------------

2. Analysis of the Amendments to Form ADV and Alternatives
    As discussed in Section II. above, we believe the amendments to
Form ADV will improve our ability to oversee investment advisers and
identify potential risks by increasing the amount, consistency, and
reliability of the information disclosed by investment advisers, which
will enhance our staff's ability to effectively carry out the risk-
based examination program and other risk monitoring activities, and may
improve investor protection by informing policy choices and focusing
examination activities. The amendments to Form ADV will address certain
data gaps by requiring advisers to report additional information.
Clients and potential clients may indirectly benefit to the extent that
the amendments improve our oversight of investment advisers.
    The enhanced reporting requirements also may directly improve the
ability of clients and potential clients of investment advisers to make
more informed decisions about the selection and retention of investment
advisers.\308\ To the extent that clients and future clients use the
information investment advisers file in Form ADV to differentiate
between investment advisers, the enhanced reporting requirements may
result in a limited increase in competition among investment advisers
for clients. The amendments will likely not have a significant effect
on capital formation or on the ability of investors to efficiently
allocate capital across investments because the amendments do not
directly relate to the amount of capital investors allocate to
investments or their ability to allocate capital across investments. We
further identify effects on efficiency, competition, and capital
formation in the discussion below.
---------------------------------------------------------------------------

    \308\ See supra Section II.A.2.a.
---------------------------------------------------------------------------

a. Information Regarding Separately Managed Accounts
    We are adopting amendments to Form ADV that will require investment
advisers to report information regarding separately managed accounts,
which are managed for clients other than pooled investment
vehicles.\309\ Based on IARD system data, approximately 73% of
investment advisers registered with the Commission reported assets
under management attributable to separately managed accounts.\310\
---------------------------------------------------------------------------

    \309\ See supra Section II.A.1.
    \310\ Based on IARD system data as of May 16, 2016.
---------------------------------------------------------------------------

    We do not currently collect information from investment advisers
specific to separately managed accounts, but we currently collect
detailed information about an adviser's registered investment company
and private fund clients. The absence of detailed information about
separately managed accounts limits the ability of our staff to
understand, monitor and oversee the investment advisers that advise
these accounts and recognize the risk exposures relating to these
accounts. The newly reported information on Form ADV regarding
separately managed accounts is intended to enhance the ability of our
staff to effectively carry out our risk-based examination program and
other risk-monitoring activities, as it does with other information on
ADV and other filings by the Commission. The additional information
regarding separately managed accounts will also assist us in addressing
regulatory issues and identifying areas for additional examination and
enforcement activities.
    The additional information investment advisers will file relating
to separately managed accounts will be

publicly available.\311\ As discussed above, we continue to believe
that public disclosure of information about separately managed accounts
on Form ADV is appropriate in the public interest as well as for the
protection of investors. Commenters expressed concern relating to the
public disclosure of the separately managed account information and its
potential impact on competition between investment advisers. Many
commenters opposing the public disclosure of separately managed account
information cited the potential cost of disclosure of confidential
information, particularly for advisers with a small number of
separately managed account clients.\312\ In addition, other commenters
cited the potential disclosure of proprietary investment or trading
strategies as a potential cost of publicly releasing the separately
managed account information.\313\
---------------------------------------------------------------------------

    \311\ See supra Section II.A.1.e.
    \312\ AIMA Letter; BlackRock Letter; IAA Letter; Invesco Letter;
NYSBA Committee Letter; Oppenheimer Letter; PEGCC Letter; Shearman
Letter; SIFMA Letter. One commenter suggested that investors may
instead invest in a fund structure, or forego investment
opportunities with an investment adviser altogether, rather than
place assets in a separately managed account and risk the disclosure
of separately managed account information. Schulte Letter. As
discussed above, the modifications from the proposal should reduce
the potential for the disclosure of private or sensitive information
relating to separately managed accounts, and should alleviate
potential investor concerns and the effect of the disclosure on
their investment decisions.
    \313\ ABA Committee Letter; Dechert Letter; IAA Letter; Invesco
Letter; MFA Letter; NYSBA Committee Letter; Oppenheimer Letter;
Schulte Letter; Shearman Letter; SIFMA Letter.
---------------------------------------------------------------------------

    We revised certain items on the form to address commenters'
concerns regarding the potential disclosure of confidential or
proprietary information. As proposed, Item 5.D. would have required
investment advisers to report the number of clients even for investment
advisers that manage fewer than five accounts. In addition, under the
proposed amendments, Section 5.K.(2) of Schedule D would have required
investment advisers to report the number of accounts and the net asset
value of the accounts.\314\ In response to comments, we have revised
Item 5.D. by adding a ``Fewer than 5 clients'' column, which allows
advisers with fewer than five clients in a particular category to avoid
reporting the exact number of clients in that category. In addition,
Section 5.K.(2) in Schedule D will not require investment advisers to
report the number of separately managed accounts. We believe that these
changes mitigate the risk of any client-specific information being
disclosed. In addition, as we discussed in Section II.A., this
information would be reported for one or two data points per year,
depending on the amount of regulatory assets under management
attributable to separately managed accounts, ninety days after the end
of the adviser's fiscal year, and only on an aggregate basis for all
the separately managed account clients that an adviser manages. Given
the limited number of data points that advisers to separately managed
accounts must report on, the fact that the information is reported in
aggregate across an adviser's separately managed accounts, and the time
lag between those data points and any public reporting, we do not
believe that this reporting could compromise trading strategies.
---------------------------------------------------------------------------

    \314\ Also, investment advisers will be required to report the
total dollar amount of borrowings that correspond to ranges of gross
notional exposure and not the weighted average amount. See supra
Section II.A.1.c.
---------------------------------------------------------------------------

    In the Proposing Release, we also discussed other alternatives. For
example, we could have required different information regarding
separately managed account regulatory assets under management such as
information at different time intervals or with different asset
categories. We have determined not to require reporting at a higher
frequency or in a more granular manner, because, as discussed above, we
believe that the information we are requiring today will appropriately
enhance our staff's ability to effectively carry out our risk-based
examination program and other risk assessment and monitoring
activities, and that more frequent or granular reporting requirements
may increase the costs to investment advisers to report the
information. One commenter suggested as an alternative a separate form
for separately managed account reporting that would be filed on a
confidential basis, but, as discussed above, we believe that given the
changes discussed above, we have mitigated concerns about client
confidentiality.
    We proposed to require at least some information about separately
managed accounts from all advisers, and additional information from
advisers with at least $150 million in regulatory assets under
management. In response to commenters who requested modifications to
alleviate potential reporting burdens on smaller advisers relative to
the proposal, we are adopting amendments that require less information
about separately managed accounts than what was proposed for investment
advisers managing at least $150 and less than $500 million in
regulatory assets.\315\ Another alternative would be to require, as
proposed, investment advisers with at least $150 million in separately
managed account regulatory assets under management to provide this
additional information regarding these accounts. However, the higher
threshold we are adopting will reduce the number of investment advisers
required to provide this additional information by approximately 2,800
advisers, thereby reducing costs for those advisers with at least $150
million but less than $500 million in assets under management that
would no longer have to report the additional information. As discussed
in Section II.A.1.c., the $500 million threshold was suggested by
commenters and will provide us information with respect to over 98% of
the separately managed account assets that would have been reported
under the proposed approach.\316\
---------------------------------------------------------------------------

    \315\ See supra Section II.A.1.c.
    \316\ See IAA Letter; NYSBA Committee Letter; Schwab & Co.
Letter.
---------------------------------------------------------------------------

    Another alternative would be to collect different information
regarding derivatives in separately managed accounts. For example,
commenters raised concerns about the utility of gross notional exposure
as a measure of derivative risk exposures. Several commenters stated
that gross notional metrics are not accurate measures of risk or
leverage,\317\ and expressed concern that gross notional metrics could
be misleading to or misunderstood by investors without additional
context.\318\ Other commenters suggested alternative measures of
derivative risk exposures.\319\ We recognize that gross notional
metrics do not always reflect the way in which derivatives are used in
a separately managed account and are not a risk measure, but rather
they are commonly used metrics that are comparable to information
collected in Form PF regarding private funds. On balance, therefore, we
continue to believe that, for most types of derivatives the gross
notional metrics generally provide a measure of the scale of an
account's derivatives activities that is sufficient for this regulatory
purpose, which is to collect information about the scale of an
account's derivatives activities, rather than to collect specific risk
metrics or more granular information regarding the ways

in which derivatives are used in a separate account.\320\
---------------------------------------------------------------------------

    \317\ See BlackRock Letter; Dechert Letter; IAA Letter; MFA
Letter.
    \318\ See Dechert Letter; IAA Letter; Invesco Letter; MFA
Letter; NYSBA Committee Letter.
    \319\ See AIMA Letter; BlackRock Letter; Dechert Letter.
    \320\ See supra Section II.A.1.c.
---------------------------------------------------------------------------

    We are also adopting, as proposed, amendments that will require
investment advisers to report the identity of the custodians that
account for at least ten percent of each adviser's total separately
managed account regulatory assets under management, and the amount held
at such custodians. As discussed in the Proposing Release,\321\
alternatives to the custodian reporting requirements include collecting
different information, changing reporting thresholds, changing the
frequency of reporting, obtaining information from other parties and
not requiring certain information, such as the location of the
custodian's office.\322\ Although requiring less information would
decrease the reporting requirements and the costs to investment
advisers to file Form ADV, as discussed above, we believe that the
reporting requirements as adopted will provide information important to
us and improve the ability of our examination staff to identify
advisers whose clients use the same custodian in the event a concern is
raised about a particular custodian. One commenter suggested that we
should collect data about custodians of separately managed accounts
from the custodians themselves, but considering that the Commission
does not directly regulate all custodians (including banks), we do not
think this alternative appropriately addresses our regulatory
objective.
---------------------------------------------------------------------------

    \321\ See Proposing Release, supra footnote 3 at Section II.A.1.
    \322\ See AIMA Letter; IAA Letter; MMI Letter; NRS Letter;
Oppenheimer Letter; SIFMA Letter regarding the custodian's office
location. See also supra Section II.A.1.d.
---------------------------------------------------------------------------

b. Additional Information Regarding Investment Advisers
    In addition to information regarding separately managed accounts,
we are also adopting amendments to collect additional information about
the business of investment advisers and other additional identifying
information. For example, we are adopting amendments to require
investment advisers to disclose information regarding their use of
social media platforms. We are also adopting amendments to request
additional information about an adviser's participation in and assets
under management attributable to wrap fee programs. Other amendments
include replacing ranges with more precise information about the number
of advisory clients and the amount of assets under management, the
total number of offices that conduct investment advisory business, and
information regarding each adviser's top twenty-five largest offices in
terms of numbers of employees. For several items we are requiring
additional identifying information. The additional identifying
information includes the CIK Numbers for all advisers that have
obtained one or more such numbers, PCAOB-assigned numbers for auditing
firms, and the SEC file number and the CRD number for sponsors of wrap
fee programs.
    We believe the additional information describing the adviser's
business and the additional identifying information will be useful to
the risk assessment, examination, and oversight of investment advisers.
For example, the information regarding social media platforms will
improve our understanding of how advisers use social media to
communicate with current and potential clients. The additional
identifying information will improve the ability of our staff and other
current and future users of Form ADV information to cross-reference
information from Form ADV with information from filings and other
sources to investigate and obtain a more complete understanding of the
business and relationships of investment advisers, and improve our
oversight of investment advisers. In addition, to the extent that
current and future investment advisory clients are interested in the
information, the information may improve their ability to make informed
decisions about the selection and retention of investment advisers.
    Several commenters expressed concern that the additional
information describing the advisory business and the additional
identifying information would increase the burden on investment
advisers to file Form ADV.\323\ In addition, commenters questioned the
benefits of the additional information and the additional identifying
information to clients or potential clients and to the Commission. For
example, one commenter raised concern regarding the usefulness of
replacing ranges with the number of advisory clients and the regulatory
assets under management attributable to each client type.\324\ In
addition, commenters believed that information regarding social media
would not be informative to investors, who may be more likely to obtain
the information through the adviser's Web site or internet
searches.\325\ Several commenters also expressed concern that the
reporting of adviser offices would impose a significant burden on
advisers with little or no benefit to either the Commission or
investors.\326\
---------------------------------------------------------------------------

    \323\ Several commenters stated that advisers would need to
update computer systems to obtain this data, and raised concerns
about the increased burden that our proposal would place on
advisers. ASG Letter; IAA Letter; LPL Letter; MMI Letter. Commenters
also expressed concerns that investment advisers would need to
update the additional information on more than an annual basis which
would increase the burden on investment advisers. See BlackRock
Letter; Morningstar Letter; NRS Letter; SIFMA Letter. We have
clarified that certain information, such as information about
additional offices, must only be updated on an annual basis, which
should help address these concerns.
    \324\ ACG Letter.
    \325\ ASG Letter; JAG Letter; Morgan Letter; Morningstar Letter;
NRS Letter; NYSBA Committee Letter.
    \326\ ACG Letter; CFA Letter; Morningstar Letter; NRS Letter;
NYSBA Committee Letter.
---------------------------------------------------------------------------

    Alternatives to the amendments regarding disclosure of additional
information about advisers include the disclosure of different
information, more information, or less information on topics such as
social media or advisers' offices.\327\ When determining the specific
amendments to Form ADV for adoption, we considered what information
would be important for our oversight activities and for advisory
clients and prospective clients to make decisions regarding the
selection or retention of investment advisers against the costs to
investment advisers to report this information. We believe that the
amendments we are adopting today strike an appropriate balance of
providing important information to the Commission, advisory clients and
prospective clients while mitigating the burden on investment advisers
to report the information. As noted above, however, we recognize that
the burden on some large advisers might be significant, especially in
the initial reporting cycle when they are required to report the
additional information for the first time. However, we believe that the
burden will decrease after the initial filing because in subsequent
filings, advisers will only be reporting changes to their previously
reported information.
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    \327\ See supra footnote 111 and accompanying text.
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    Another alternative to the amendments to Form ADV would be for us
not to require investment advisers to report additional information but
instead for us to undertake targeted examinations of investment
advisers. We believe it is more efficient to compile information about
advisers that can then be utilized to identify specific advisers for
examinations. An absence of information about advisers also would
reduce our ability to identify industry trends and assess risks.

c. Costs Applicable to Reporting Information Regarding Separately
Managed Accounts and Additional Information on Form ADV
    The amendments that will require investment advisers to provide
additional information about certain aspects of their business will
impose additional costs, at least initially, for investment advisers to
file Form ADV, but we believe based on our experience that much of the
information we are requiring is readily available because it is used by
investment advisers to conduct their business. Costs will vary across
advisers, depending on the nature and size of an adviser's
business.\328\ For example, advisers that manage a limited number of
separately managed accounts or that have smaller amounts of assets
under management in those accounts will have fewer reporting
requirements than advisers that manage a large number of separately
managed accounts or that have larger amounts of assets under management
in those accounts. In addition, investment advisers with a larger
number of offices will have greater reporting requirements than
investment advisers with fewer offices, particularly in the case of the
initial filing. The one-time costs to initially report the information
on Form ADV will also be greater for those investment advisers that
currently do not collect or maintain the information. In addition, some
amendments to Form ADV will require information that will impose a
fixed filing cost that is not scalable with size, and therefore will
have a relatively greater impact on small investment advisers.
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    \328\ Several commenters expressed concern that the proposed
amendments would increase the costs for small advisers. See Comment
Letter of Adrian Day Asset Management (May 21, 2015) (``Adrian Day
Letter''); AIMA Letter; Diercks Letter; IAA Letter; SBIA Letter;
Schwab & Co. Letter. For a discussion of these comments, please see
the Final Regulatory Flexibility Analysis in Section V infra.
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    To the extent possible, we have attempted to quantify the costs of
these amendments to Form ADV. Certain commenters questioned the cost
estimates of the amendments to Form ADV, and some commenters noted that
advisers will have to create new systems or processes to capture the
additional information required and that the Commission underestimated
these costs.\329\ We believe that much of the information, such as
regulatory assets under management, should be readily available to
advisers, and that modifications to the proposed amendments, such as
the reporting requirements relating to separately managed accounts,
help mitigate the costs to investment advisers of reporting the
additional information. As discussed in Section V., for purposes of the
increased Paperwork Reduction Act (``PRA'') burden for Form ADV, we
estimate that each adviser will incur average costs in connection with
the amendments to Form ADV of approximately $1,273,\330\ for a total
aggregate cost of $15,306,552.\331\
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    \329\ Adrian Day Letter; Financial Engines Letter; IAA Letter;
NRS Letter; PCA Letter; SBIA Letter. One commenter noted that it
would require significant systems work to aggregate gross notional
exposure calculations at the investment adviser level. SIFMA II
Letter. Other commenters also noted that investment advisers would
need to modify or update computer software systems. ASG Letter; MMI
Letter.
    \330\ We estimate that each adviser will spend, on average, 3
hours to complete the questions regarding separately managed
accounts. We further estimate that the amendments to Part 1A that
request other additional information will take each adviser, on
average, 2 hours to complete. As a result, we estimate a 5 hour
increase in the total average time burden related to the amendments
to Form ADV. We expect that the performance of this function will
most likely be equally allocated between a senior compliance
examiner and a compliance manager. Data from the Securities Industry
Financial Markets Association's Management & Professional Earnings
in the Securities Industry 2013 (``SIFMA Management and Professional
Earnings Report''), modified by Commission staff to account for an
1,800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead,
suggest that costs for a senior compliance examiner and a compliance
manager are $221 and $288 per hour, respectively. [2.5 hours x $221
= $553] + [2.5 hours x $288 = $720] = $1,273.
    \331\ 12,024 advisers x $1,273 = $15,306,552.
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d. Umbrella Registration
    The amendments to Form ADV that will incorporate the concept of
umbrella registration and establish a method on Form ADV for certain
private fund advisers to use umbrella registration will simplify, and
therefore make more efficient the filing procedures for these advisers
and provide greater certainty about the availability of umbrella
registration. The amendments will also improve the consistency and
quality of the information that private fund advisers disclose about
their business and provide a more complete picture of groups of private
fund advisers that operate as a single business, thus allowing for
greater comparability across private fund advisers that rely on
umbrella registration.\332\ As of May 16, 2016, approximately 743
registered advisers indicated on Form ADV that they relied on the 2012
ABA Letter. Additional advisers may be eligible to use umbrella
registration but do not currently do so.
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    \332\ See supra Section II.A.3.
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    Several commenters suggested that the Commission expand the
eligibility for umbrella registration to even more advisers. For
example, many commenters recommended expanding eligibility for umbrella
registration to non-U.S. filing advisers,\333\ and other commenters
suggested expanding eligibility for umbrella registration to exempt
reporting advisers.\334\ Other commenters recommended that we expand
the eligibility for umbrella registration to apply to all related
persons of a filing adviser.\335\ Although expanding the eligibility
for umbrella registration to all related persons might decrease the
aggregate costs of filing Form ADV, as we discussed above, we do not
believe umbrella registration is appropriate for advisers that are
related but that operate separate advisory businesses as it would
compromise data quality and complicate analyses that rely on data from
Form ADV.
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    \333\ ABA Committee Letter; AIMA Letter; Dechert Letter; NYSBA
Committee Letter; Schulte Letter; Shearman Letter.
    \334\ ABA Committee Letter; ACG Letter; AIMA Letter; ASG Letter;
MFA Letter; NYSBA Committee Letter; SBIA Letter; Schulte Letter;
Shearman Letter.
    \335\ ACG Letter; Capital Research Letter; Dechert Letter;
Morgan Letter; NRS Letter; NYSBA Committee Letter.
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    For purposes of the PRA, we estimate that each adviser that files
Schedule R will incur average costs of approximately $255,\336\ for a
total aggregate cost of $189,465.\337\ We do not believe the amendments
to provide for umbrella registration will impose significant costs on
investment advisers because advisers currently relying on the 2012 ABA
Letter are already reporting much of the information that will be
reported on Schedule R. We believe that the additional information that
will be reported for relying advisers on Schedule R, such as the basis
for SEC registration and form of organization, will be readily
available to filing advisers.\338\
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    \336\ We estimate that for purposes of the PRA, the filing
adviser will spend on average 1 hour completing Schedule R on behalf
of its relying advisers. We expect that the performance of this
function will most likely be equally allocated between a senior
compliance examiner and a compliance manager. Data from the SIFMA
Management and Professional Earnings Report, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead, suggest that costs for a senior compliance
examiner and a compliance manager are $221 and $288 per hour,
respectively. (.5 hours x $221 = $111) + (.5 hours x $288 = $144) =
$255.
    \337\ 743 advisers x $255 = $189,465.
    \338\ One commenter was concerned that relying advisers would in
effect be forced to share the details of employee compensation on a
public filing. See Shearman Letter. The ownership information
required of relying advisers, however, is consistent with the
ownership information currently required of filing advisers.

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e. Clarifying, Technical and Other Amendments to Form ADV
    The clarifying, technical and other amendments to Form ADV will
make the filing process clearer and therefore more efficient for
advisers, and increase the reliability and the consistency of
information provided by investment advisers. More reliable and
consistent information will improve our staff's ability to interpret
and evaluate the information provided by advisers, make comparisons
across investment advisers, and better identify the investment advisers
that may need additional outreach or examination. To the extent the
clarifying and technical amendments we adopt today would make Form ADV
easier to understand and complete, the amendments will decrease future
filing costs, especially for those investment advisers registering with
us for the first time.
    As proposed, we are adding questions to Form ADV that request an
entity's legal entity identifier, if any.\339\ As discussed above, the
legal entity identifier is a unique identifier associated with a single
entity and is intended to provide a uniform international standard for
identifying parties to financial transactions. This information will
help our examination staff more readily identify the use of particular
custodians by separately managed accounts and private funds.
Furthermore, the reporting of legal entity identifier information on
Form ADV facilitates the ability of investors and the Commission to
link the data reported with data from other filings or sources that is
reported elsewhere as legal entity identifiers become more widely used
by regulators and the financial industry. For example, this could aid
in the performance of market analysis studies, surveillance activities,
and systemic risk monitoring by the Commission.\340\
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    \339\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(3)(f)
(requesting the LEI, if any, for a custodian of separately managed
accounts that is not a broker-dealer or that is a broker-dealer but
does not have an SEC registration number) and 7.B.(1), Question 25g
(similar question for private fund custodians); Schedule R, Section
1.G. (requesting LEI for relying adviser).
    \340\ We note that, as of May 31, 2016, approximately 6.80% of
all registered investment advisers report a legal entity identifier
when filing Form ADV.
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    We do not believe that the clarifying, technical and other
amendments to Form ADV will result in any additional costs for
investment advisers and could result in some cost savings to the extent
that advisers have fewer questions to research when completing the
form. We have identified provisions of Form ADV that have caused
confusion among filers in the past or that have resulted in
inconsistent or unreliable information. As we discussed above, we
believe that the clarifications and revisions to the questions and
instructions of Form ADV will increase the efficiency of investment
advisers to disclose information, and our ability to oversee investment
advisers. Finally, given the nature of the clarifying, technical and
other amendments to Form ADV that we are adopting today, we do not
believe that these amendments will have an impact on capital formation
or competition in the asset management industry or the markets in
general.
f. Exempt Reporting Advisers
    We believe the amendments to Form ADV will have a limited economic
effect on exempt reporting advisers, including on their costs.\341\
Exempt reporting advisers are currently required to complete only a
limited number of items in Part 1A of Form ADV (consisting of Items 1,
2.B., 3, 6, 7, 10, 11 and corresponding schedules). We are adopting
limited amendments to the items that exempt reporting advisers are
required to complete, including the amendments to Item 1 regarding the
use of social media and the reporting of information on up to 25
offices.\342\ We do not know the extent of social media use by exempt
reporting advisers, and we recognize that these advisers will incur
some costs associated with social media account reporting. We believe
these costs will be limited based on the nature of exempt reporting
adviser clients, which include venture capital funds and private funds.
Approximately 15 of the approximately 3,248 exempt reporting advisers
that file information with the Commission on Form ADV reported that
they had five or more other offices. Thus, although exempt reporting
advisers will incur costs to report the additional information, based
on our staff's experience and given the nature of the clients these
funds advise, we expect that the amendments should result in a limited
increase in reporting costs relative to other advisers.
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    \341\ See supra Section II.A.2.c. for a discussion of exempt
reporting advisers and Amended Form ADV, Part 1A, Schedule D,
Section 7.B.(1), Question 15(b).