[Federal Register Volume 80, Number 113 (Friday, June 12, 2015)]
[Proposed Rules]
[Pages 33717-33838]
[FR Doc No: 2015-12778]

Vol. 80

Friday,

No. 113

June 12, 2015

Part III

Securities and Exchange Commission

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17 CFR Parts 275 and 279

Amendments to Form ADV and Investment Advisers Act Rules; Proposed Rule

Federal Register / Vol. 80 , No. 113 / Friday, June 12, 2015 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-4091; File No. S7-09-15] RIN 3235-AL75

Amendments to Form ADV and Investment Advisers Act Rules

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing amendments
to Form ADV that are designed to provide additional information
regarding advisers, including information about their separately
managed account business; incorporate a method for private fund adviser
entities operating a single advisory business to register using a
single Form ADV; and make clarifying, technical and other amendments to
certain Form ADV items and instructions. The Commission also is
proposing amendments to the Advisers Act books and records rule and
technical amendments to several Advisers Act rules to remove transition
provisions that are no longer necessary.

DATES: Comments should be received on or before August 11, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File No. S7-09-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-09-15. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Web site (http://www.sec.gov/rules/proposed.shtml).
Comments are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
    Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Bridget D. Farrell, Senior Counsel,
Sarah A. Buescher, Branch Chief, or Daniel S. Kahl, Assistant Director,
at<PHONE_NUMBER> or<EMAIL_ADDRESS>Investment Adviser Regulation
Office, Division of Investment Management, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
rules 204-2 [17 CFR 275.204-2], 202(a)(11)(G)-1 [17 CFR
275.202(a)(11)(G)-1], 203-1 [17 CFR 275.203-1], and 204-1 [17 CFR
275.204-1] under the Investment Advisers Act of 1940 [15 U.S.C. 80b]
(``Advisers Act'' or ``Act''),\1\ and amendments to Form ADV [17 CFR
279.1] under the Advisers Act. The Commission is also proposing to
rescind rule 203A-5 [17 CFR 275.203A-5] under the Advisers Act.

Table of Contents

I. Background
II. Discussion
    A. Proposed Amendments to Form ADV
    1. Information Regarding Separately Managed Accounts
    2. Additional Information Regarding Investment Advisers
    3. Umbrella Registration
    4. Proposed Clarifying, Technical and Other Amendments to Form
ADV
    B. Proposed Amendments to Investment Advisers Act Rules
    1. Proposed Amendments to Books and Records Rule
    2. Proposed Technical Amendments to Advisers Act Rules
III. Economic Analysis
    A. Introduction
    B. Proposed Amendments to Form ADV
    1. Economic Baseline and Affected Market Participants
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    \1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act, we are referring
to 15 U.S.C. 80b of the United States Code, at which the Advisers
Act is codified, and when we refer to rules under the Advisers Act,
or any paragraph of these rules, we are referring to title 17, part
275 of the Code of Federal Regulations [17 CFR 275], in which these
rules are published.
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    2. Benefits
    3. Costs
    4. Alternatives
    C. Proposed Amendments to Advisers Act Rules
    1. Economic Baseline and Affected Market Participants
    2. Benefits
    3. Costs
    4. Alternatives
    D. Request for Comment
IV. Paperwork Reduction Act Analysis
    A. Form ADV
    1. Changes in Average Burden Estimate and New Burden Estimates
    2. Annual Burden Estimates
    3. Total Revised Burdens
    B. Rule 204-2
    C. Request for Comment
V. Initial Regulatory Flexibility Analysis
    A. Reason for the Proposed Action
    B. Objectives and Legal Basis
    C. Small Entities Subject to the Rule and Rule Amendments
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    G. Solicitation of Comments
VI. Consideration of Impact on the Economy
VII. Statutory Authority
Text of Rule and Form Amendments
Appendix A: Form ADV: General Instructions
Appendix B: Form ADV: Instructions for Part 1A
Appendix C: Form ADV: Glossary of Terms
Appendix D: Form ADV, Part 1A

I. Background

    Form ADV is used by investment advisers to register with the
Commission and with the states. The information collected on Form ADV
serves a vital role in our regulatory program and our ability to
protect investors. Our staff uses Form ADV data to prepare for,
conduct, and implement our risk-based examination program of investment
advisers, and that data also assists our staff in conducting
investigations and bringing enforcement actions. In addition to
providing information about each investment adviser, Form ADV data is
also aggregated by our staff across investment advisers to obtain
census data and to monitor industry trends. Census data and industry
trend information inform our regulatory program and the assessment of
emerging risks. Importantly, Form ADV also benefits clients and
prospective clients because the information filed by advisers is
available to the public on our Web site.\2\
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    \2\ Information on Form ADV is available to the public through
the Investment Adviser Public Disclosure System (``IAPD''), which
allows the public to access the most recent Form ADV filing made by
an investment adviser and is available at http://www.adviserinfo.sec.gov.

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    We have amended Form ADV several times to improve our ability to
oversee investment advisers. Most recently we significantly enhanced
reporting requirements for advisers to private funds in connection with
the Dodd-Frank Wall Street Reform and Consumer Protection Act's
(``Dodd-Frank Act's'') \3\ private fund adviser registration
requirements.\4\ Today, we are proposing a more limited set of
amendments to Part 1A of Form ADV in three areas: Revisions to fill
certain data gaps and to enhance current reporting requirements;
amendments to incorporate ``umbrella registration'' for private fund
advisers; and clarifying, technical and other amendments to existing
items and instructions.\5\
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    \3\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
    \4\ See Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. 3221 (June 22,
2011), [76 FR 42950 (July 19, 2011)] (``Implementing Release'').
    \5\ In general, this release discusses the Commission's proposed
rule and form amendments that would affect advisers registered with
the Commission. We understand that the state securities authorities
intend to consider similar changes that affect advisers registered
with the states, who are also required to complete Form ADV Part 1B
as part of their state registrations. We will accept any comments
and forward them to the North American Securities Administrators
Association (``NASAA'') for consideration by the state securities
authorities. We request that you clearly indicate in your comment
letter which of your comments relate to these items. Commenters
alternatively may send comments relating to these items directly to
NASAA at the following email address<EMAIL_ADDRESS>---------------------------------------------------------------------------

    Several of the proposed amendments to Form ADV relate to separately
managed accounts. Investment advisers manage assets of pooled
investment vehicles, including registered and unregistered funds.
Advisers also manage assets of other clients, such as pension plans,
endowments, foundations, other institutional clients and retail
clients, through separately managed accounts. We currently collect
detailed information about pooled investment vehicles,\6\ but little
specific information regarding separately managed accounts. The
proposed amendments to Form ADV would require an adviser to provide
certain aggregate information on separately managed accounts it
advises, including information on regulatory assets under management,
investments and use of derivatives and borrowings.\7\ Other examples of
information we propose to collect from advisers include information on
the use of social media and information on an adviser's other
offices.\8\ These items, and others discussed below, are designed to
improve the depth and quality of the information we collect on
investment advisers and to facilitate our risk monitoring initiatives.
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    \6\ See, e.g., Form ADV, Part 1A, Section 7.B.(1) of Schedule D;
and Form PF [17 CFR 279.9].
    \7\ Proposed Form ADV, Part 1A, Item 5.K.(1)-(4) and Section
5.K.(1)-(3) of Schedule D.
    \8\ Proposed Form ADV, Part 1A, Items 1.I. and 1.F and Sections
1.I. and 1.F of Schedule D.
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    We also are proposing amendments to Part 1A that would establish a
more efficient method for the registration of multiple private fund
adviser entities operating a single advisory business on one Form ADV
(``umbrella registration''). Form ADV was designed to accommodate the
typical registration of an investment adviser that is a single legal
entity. Advisers of private funds frequently are organized using
multiple legal entities, and the staff has provided guidance to private
fund advisers regarding umbrella registration within the confines of
the current form.\9\ The proposed amendments to incorporate umbrella
registration into Form ADV would make the availability of umbrella
registration more widely known to advisers. Uniform filing requirements
for umbrella registration in Form ADV also would provide more
consistent data about, and create a clearer picture of, groups of
advisers that operate as a single business by grouping Form ADV data
for each legal entity registered under the umbrella. Uniform filing
requirements also would allow for greater comparability across private
fund advisers.
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    \9\ See American Bar Association, Business Law Section, SEC
Staff Letter (Jan. 18, 2012), available at http://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm (the ``2012 ABA
Letter'').
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    The last group of amendments we are proposing to Part 1A are
clarifying, technical, and other amendments that are informed by our
staff's experience with the form and responding to inquiries by
advisers and their service providers. Among other things, these
amendments should assist filers and their service providers by making
the form easier to understand and complete.
    We also are proposing several amendments to Advisers Act rules
unrelated to the revisions to Form ADV described above. First, we are
proposing amendments to the books and records rule, rule 204-2, that
would require advisers to make and keep supporting documentation that
demonstrates performance calculations or rates of return in any written
communications that the adviser circulates or distributes, directly or
indirectly, to any person. The proposed amendments also would require
advisers to maintain originals of all written communications received
and copies of written communications sent by an investment adviser
related to the performance or rate of return of any or all managed
accounts or securities recommendations.\10\ As discussed more fully
below, we believe that these proposed amendments would better protect
investors from fraudulent performance claims. Finally, we are proposing
several technical amendments to rules under the Advisers Act to remove
transition provisions that were adopted in conjunction with previous
rulemaking initiatives, but that are no longer necessary.
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    \10\ Rule 204-2 under the Advisers Act.
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    We note that in December 2014, the Financial Stability Oversight
Council (``FSOC'') issued a notice requesting comment on aspects of the
asset management industry, which includes, among other entities,
registered investment advisers. Although this rulemaking proposal is
independent of FSOC, the notice included requests for comment on
additional data or information that would be helpful to regulators and
market participants. In response to the notice, several commenters
discussed issues concerning data that are relevant to this proposal,
including data regarding separately managed accounts and are cited in
the discussion below.\11\
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    \11\ See Notice Seeking Comment on Asset Management Products and
Activities, 79 FR 77488 (Dec. 24, 2014) (``FSOC Request for
Comment'').
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II. Discussion

A. Proposed Amendments to Form ADV

1. Information Regarding Separately Managed Accounts
    Several of the amendments to Form ADV that we are proposing today
are designed to collect more specific information about advisers'
separately managed accounts.\12\ For purposes of reporting on Form ADV,
we consider advisory accounts other than those that are pooled
investment vehicles (i.e., registered investment companies, business
development companies, and pooled investment vehicles that are not
investment companies (i.e., private

funds)) to be separately managed accounts. We currently collect
detailed information about pooled investment vehicles that advisers
manage, but little specific information regarding separately managed
accounts.\13\ The proposed amendments are designed to enhance our
staff's ability to effectively carry out our risk-based examination
program and other risk assessment and monitoring activities with
respect to these separately managed accounts and their investment
advisers.
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    \12\ In response to the FSOC Request for Comment, supra note 11,
some commenters expressed support for collecting additional
information regarding separately managed accounts. See, e.g.,
Comment Letter of Americans for Financial Reform (March 27, 2015);
Comment Letter of State Street Corporation (March 25, 2015); and
Comment Letter of The Systemic Risk Council (March 25, 2015). Other
commenters did not support additional reporting regarding separately
managed accounts. See, e.g., Comment Letter of Money Management
Institute (March 25, 2015) and Comment Letter of Wellington
Management Group LLP (March 25, 2015).
    \13\ Registered investment companies and business development
companies report information about their portfolio holdings and
investment strategies on reports filed with the Commission,
including in their registration statements and shareholder reports.
Today, in a contemporaneous release, we are proposing rule and form
amendments for registered investment companies that are designed to
modernize the reporting of information to the Commission. See
Investment Company Reporting Modernization, Investment Company Act
Release No. 31610, May 20, 2015. Investment advisers to private
funds file reports with the Commission on Form PF. Form PF also
collects information about private fund parallel managed accounts.
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    The proposed amendments regarding separately managed accounts would
require more detailed information than we currently receive in response
to Item 5 of Part 1A and Section 5 of Schedule D.\14\ Item 5 and
Section 5 currently require advisers to provide information about their
advisory business including percentages of types of clients and assets
managed for those clients. We propose to collect information
specifically about separately managed accounts, including types of
assets held, and the use of derivatives and borrowings in the accounts.
Advisers that report that they have regulatory assets under management
attributable to separately managed accounts in response to Item 5.K.(1)
would be required to complete several questions in Sections 5.K.(1),
5.K.(2) and 5.K.(3) of Schedule D regarding those accounts.
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    \14\ See section II.A.2. for a discussion of other proposed
amendments to Item 5 of Part 1A.
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    First, we propose to require advisers to report the approximate
percentage of separately managed account regulatory assets under
management invested in ten broad asset categories, such as exchange-
traded equity securities and U.S. government/agency bonds.\15\ These
categories are designed to collect general information about the broad
categories of assets held in separately managed accounts. We believe
that collecting information about the types of assets held in these
accounts would allow us to better monitor this segment of the
investment advisory industry by, for instance, allowing us to identify
advisers that specialize in certain asset classes. Advisers would
report this information annually. For advisers with at least $10
billion in regulatory assets under management attributable to
separately managed accounts, we propose to collect both mid-year and
year-end data on an annual basis.
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    \15\ Proposed Form ADV, Part 1A, Schedule D, Section 5.K.(1)(a)-
(b). The Glossary to Proposed Form ADV includes ``Sovereign Bonds,''
``Investment Grade'' and ``Non-Investment Grade,'' which are terms
used in the list of asset categories. The definitions are consistent
with those in Form PF.
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    Second, we propose to require advisers with at least $150 million
in regulatory assets under management attributable to separately
managed accounts to report information on the use of borrowings and
derivatives in those accounts.\16\ For advisers with at least $150
million but less than $10 billion in regulatory assets under management
attributable to separately managed accounts, we propose reporting of
the number of accounts that correspond to certain categories of gross
notional exposure, and the weighted average amount of borrowings (as a
percentage of net asset value) in those accounts.\17\ For purposes of
this proposed item, gross notional exposure is the percentage obtained
by dividing (i) the sum of (a) the dollar amount of any borrowings and
(b) the gross notional value of all derivatives, by (ii) the net asset
value of the account. Reporting on the use of borrowings and
derivatives would only be required with respect to separately managed
accounts with a net asset value of at least $10 million. Advisers with
at least $10 billion in regulatory assets under management attributable
to separately managed accounts would have to report the gross notional
exposure and borrowing information described above, as well as the
weighted average gross notional value of derivatives (as a percentage
of the net asset value) in each of six different categories of
derivatives.\18\ We are proposing to collect information about gross
notional exposure, borrowings, and gross notional value of derivatives
because we believe it is important for us to better understand the use
of derivatives and borrowings by advisers in separately managed
accounts.\19\ We are proposing to use these measures because they are
commonly used metrics in assessing the use of derivatives and are
comparable to information collected on Form PF regarding private funds.
This reporting would be required for advisers managing at least $150
million in regulatory assets under management attributable to
separately managed accounts, but all advisers to separately managed
accounts would be required to report in Section 5.K.(1) the percentage
of separately managed account assets held in derivatives.
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    \16\ The $150 million threshold is consistent with Form PF,
which requires investment advisers registered with the Commission
that advise one or more private funds and have at least $150 million
in private fund assets under management to file Form PF.
    \17\ The Glossary to Proposed Form ADV includes ``gross notional
value'', ``borrowings'' and ``net asset value.'' The Glossary to
Proposed Form ADV defines ``borrowings'' as ``[S]ecured borrowings
and unsecured borrowings, collectively. Secured borrowings are
obligations for borrowed money in respect of which the borrower has
posted collateral or other credit support and should include any
reverse repos (i.e., any sale of securities coupled with an
agreement to repurchase the same (or similar) securities at a later
date at an agreed price). Unsecured borrowings are obligations for
borrowed money in respect of which the borrower has not posted
collateral or other credit support.'' The Glossary to Proposed Form
ADV defines ``gross notional value'' as ``The gross nominal or
notional value of all transactions that have been entered into but
not yet settled as of the reporting date. For contracts with
variable nominal or notional principal amounts, the basis for
reporting is the nominal or notional principal amounts as of the
reporting date. For options, use delta adjusted notional value.''
The Glossary to Proposed Form ADV defines ``net asset value'' as
``With respect to any client, the gross assets of the client's
accounts minus any outstanding indebtedness or other accrued but
unpaid liabilities.'' These definitions are consistent with those in
Form PF.
    \18\ Proposed Form ADV, Part 1A, Schedule D, Section 5.K.(2)(a).
    \19\ In response to the FSOC Request for Comment, supra note 11,
several commenters discussed a variety of measures for reporting
leverage (which includes derivatives and borrowings). See, e.g.,
Comment Letter of the Asset Management Group of the Securities
Industry and Financial Markets Association and the Investment
Adviser Association (March 25, 2015); Comment Letter of BlackRock,
Inc. (March 25, 2015); Comment Letter of Fidelity Investments (March
25, 2015); and Comment Letter of Managed Funds Association (March
25, 2015).
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    Advisers would be required to update the derivatives and borrowings
information annually when filing their annual updating amendment to
Form ADV, which is consistent with the requirement for updating other
information in Item 5 of Form ADV. In addition, advisers with at least
$10 billion in separately managed account regulatory assets under
management would be required to report both mid-year and year-end
information as part of their annual filing.\20\ Note that we are not
proposing that advisers file information semi-annually. Rather, when
filing an annual amendment, the adviser would be required to provide
information as of each semi-annual period. Requiring less detailed
reporting for advisers that manage less than $10 billion in separately
managed account assets, and requiring reporting on borrowings and
derivatives only with respect to separately managed accounts with a net
asset value of at least $10

million, are designed to balance our regulatory need for this
information while seeking to minimize the reporting burden on smaller
advisers where appropriate. Our staff estimates that approximately six
percent of advisers that manage separately managed accounts would be
required to provide the more detailed semi-annual information.\21\ The
proposed amendments are designed to provide mid-year and end of year
data points to assist our staff in identifying the use of borrowings
and derivative exposures in large separately managed accounts as part
of the staff's risk assessment and monitoring programs, and to allow
Commission staff to identify and monitor trends in borrowings and
derivatives transactions in separately managed accounts.
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    \20\ Proposed Form ADV, Part 1A, Schedule D, Section 5.K.(2)(a).
    \21\ We propose to focus the proposed semi-annual reporting
requirements on the top five to ten percent of registered investment
advisers to separately managed accounts. Based on IARD data as of
April 1, 2015, of the 8,500 registered investment advisers that
reported regulatory assets under management from clients other than
registered investment companies, business development companies and
pooled investment vehicles (indicating that they have assets under
management attributable to separately managed accounts)
approximately 535 (approximately 6.3%) reported at least $10 billion
in regulatory assets under management attributable to separately
managed account clients. Having additional information about these
larger advisers assists the staff in risk assessment.
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    Finally, we propose to require advisers to identify any custodians
that account for at least ten percent of separately managed account
regulatory assets under management, and the amount of the adviser's
regulatory assets under management attributable to separately managed
accounts held at the custodian.\22\ Information about assets held,
custodians and the use of borrowings and derivatives in separately
managed accounts is similar to information collected about pooled
investment vehicles, and it would significantly improve our
understanding of this segment of advisers' accounts. This information
would allow examination staff to identify advisers whose clients use
the same custodian in the event, for example, a concern is raised about
a particular custodian.\23\ Advisers frequently have client accounts at
many custodians as a result of client requirements. Accordingly, we are
proposing a ten percent threshold in order to focus the proposed
reporting requirements on the identification of custodians that serve a
significant number of advisers' separately managed account clients.
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    \22\ Proposed Form ADV, Part 1A, Item 5.K.(4) and Schedule D,
Section 5.K.(3). We acknowledge that advisers that have custody (or
whose related persons have custody) of client assets also currently
report the number of persons who act as qualified custodians for
their clients in connection with advisory services provided to
clients in response to Part 1A, Item 9.F. The proposed item would
provide the Commission with more detailed information about
custodians by requiring advisers to separately managed accounts to
identify all custodians, not just qualified custodians, that service
ten percent or greater of separately managed account client assets,
and would require a response whether or not the adviser or the
adviser's related person has custody of assets in separately managed
accounts.
    \23\ Information about custodians of separately managed accounts
also would complement similar information that we obtain for pooled
investment vehicles. See Form ADV, Part 1A, Schedule D, Section
7.B.(1), Question 25. Registered investment companies are required
to identify their custodians, see, e.g., Form N-1A, Item 19(h)(3)
[17 CFR 274.11A].
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    We request comment on the changes we propose to make to Form ADV
regarding separately managed accounts.
     Advisers would be required to update separately managed
account information annually. Should we require more frequent
reporting, such as quarterly reporting? Should an adviser be required
to update information on separately managed accounts any time the
adviser files an other-than-annual amendment to Form ADV? Is it
appropriate to require semi-annual data in annual reporting instead of
semi-annual reporting for advisers that manage at least $10 billion in
separately managed accounts? Why or why not?
     In order to better understand the use of derivatives in
separately managed accounts, would we need more data points from each
adviser than the annual and semi-annual proposed data points? Why or
why not?
     Are the $10 million, $150 million and $10 billion
thresholds appropriate? Why or why not? Should we require advisers that
manage less than $150 million in assets under management attributable
to separately managed accounts to report additional information about
those accounts or report semi-annual information?
     Should we ask about the investment strategies used in
separately managed accounts as opposed or in addition to asset types?
If so, how should we define the investment strategies so that
information reported to us is meaningful? Should we use some or all of
the investment strategies listed in Form PF for private funds? \24\ Is
there other information about separately managed accounts that we
should consider instead?
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    \24\ See, e.g., Form PF, Section 1c, Item B., Question 20.
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     Is there any overlap among the proposed asset types? If
so, which particular types? Are there any additional asset types that
should be included?
     Would disclosure of aggregate holdings, derivatives and
borrowings in separately managed accounts raise concerns, in light of
Section 210(c) of the Advisers Act, regarding the identity,
investments, or affairs of any clients owning those accounts when
clients are not identified? If so, please explain, and address whether
there are ways in which the Commission could address these concerns and
still request comparable information.
     Would the disclosure of information about separately
managed accounts in the aggregate be useful for risk monitoring and
data analysis purposes? Why or why not?
     Are the proposed definitions related to Schedule D,
Section 5.K.(1) and (2) sufficiently clear to allow advisers to provide
the requested information? If not, please explain why and provide
alternative definitions or suggestions. Would a definition of
``derivatives'' improve the reporting requirements? If so, how should
that term be defined? For instance, should it be defined broadly to
include instruments whose price is dependent on or derives from one or
more underlying assets? Alternatively, should it be defined to mean
futures and forward contracts, options, swaps, security-based swaps,
combinations of the foregoing, or any similar instruments, or should it
be defined in some other manner? If, so, how?
     Are gross notional exposures and gross notional values
appropriate measures of the use of derivatives? Are there alternative
or additional measures that we should consider?
     Would the disclosure of information about separately
managed accounts affect or influence business or other decisions by
advisers?
     Is ten percent an appropriate threshold for information on
custodians that serve a significant number of separately managed
accounts? Should it be higher or lower? If so, why?
     Should we require advisers to report information about the
use of securities lending and repurchase agreements in separately
managed accounts? If so, is there specific information we should
collect, and should we require information only from advisers that
manage a large amount of separately managed account assets? Are
securities lending arrangements and repurchase agreements used by
separately managed accounts to such an extent that we should require
all advisers that manage separately managed accounts to report this
information?
     Is there additional information we should collect that
would assist us in

learning more about separately managed accounts?
     Is the information required to answer these proposed
questions readily available to advisers? If not, why?
2. Additional Information Regarding Investment Advisers
    In addition to the proposals outlined above regarding separately
managed accounts, we are proposing to add several new questions and
amend existing questions on Form ADV regarding identifying information,
an adviser's advisory business, and affiliations. These items,
developed through our staff's experience in examining and monitoring
investment advisers, are designed to enhance our understanding and
oversight of investment advisers and to assist our staff in its risk-
based examination program.
Additional Identifying Information
    We propose several amendments to Item 1 of Part 1A of Form ADV to
improve certain identifying information that we obtain. Item 1
currently requires an adviser to provide a Central Index Key number
(``CIK Number'') in Item 1.N only if the adviser is a public reporting
company under Sections 12 or 15(d) of the Securities Exchange Act of
1934.\25\ We propose to remove this question from Item 1.N. and add a
question to Item 1.D. that would require an adviser to provide all of
its CIK Numbers if it has one or more such numbers assigned,\26\
regardless of public reporting company status.\27\ Requiring
registrants to provide all of their assigned CIK numbers, if any, would
improve our staff's ability to use and coordinate Form ADV information
with information from other sources to investigate relationships
relating to investment advisers.
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    \25\ Form ADV, Part 1A, Item 1.N.
    \26\ The SEC assigns CIK numbers in EDGAR not only to identify
entities as public reporting companies, but also when an entity is
registered with the SEC in another capacity, such as a transfer
agent.
    \27\ Proposed Form ADV, Part 1A, Item 1.D.(3).
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    Item 1.I of Part 1A of Form ADV currently asks whether an adviser
has one or more Web sites, and Section 1.I. of Schedule D requests the
Web site address. We propose to amend Item 1.I. to ask whether the
adviser has one or more Web sites or Web sites for social media
platforms, such as Twitter, Facebook and LinkedIn, and request the
social media addresses in addition to the adviser's Web site address in
Section 1.I. of Schedule D.\28\ Along with Web sites, advisers
increasingly utilize social media to communicate and it would be useful
for this information to be available to us and the general public. Our
staff could use this information to help prepare for examinations of
investment advisers and compare information that advisers disseminate
across different social media platforms as well as identifying and
monitoring new platforms. Current and prospective clients could use
this information to learn more about advisers and make more informed
decisions regarding the selection of advisers.
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    \28\ Proposed Form ADV, Part 1A, Item 1.I. and Section 1.I. of
Schedule D.
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    We propose amending Item 1.F of Part 1A of Form ADV and Section
1.F. of Schedule D to expand the information provided about an
adviser's offices other than its principal office and place of
business. We currently require an adviser to provide contact and other
information about its principal office and place of business, and, if
an adviser conducts advisory activities from more than one location,
about its largest five offices in terms of number of employees.\29\ In
order to assist Commission examination staff to learn more about an
investment adviser's business and identify locations to conduct
examinations, we are now proposing that advisers provide us with the
total number of offices at which they conduct investment advisory
business and provide information in Schedule D about their 25 largest
offices in terms of number of employees.\30\ We propose 25 offices as
the number to be reported because it would provide a complete listing
of offices for the vast majority of investment advisers, and provide
valuable information about the main business locations for the few
advisers that have a very large number of offices.\31\
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    \29\ Form ADV, Part 1A, Item 1.F. and Section 1.F. of Schedule
D.
    \30\ Proposed Form ADV, Part 1A, Item 1.F. and Section 1.F. of
Schedule D.
    \31\ IAPD Investment Adviser Registered Representative State
Data as of April 1, 2015 shows that a majority of SEC-registered
advisers (approximately 98%) have 25 or fewer offices, but that many
of the remaining two percent have many multiples of 25 offices.
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    In addition to providing contact information for the 25 largest
offices, we propose to amend Section 1.F. of Schedule D to require
advisers to report each office's CRD branch number (if applicable) and
the number of employees who performed advisory functions from each
office, identify from a list of securities-related activities the
business activities conducted from each office, and describe any other
investment-related business conducted from each office. This
information would help our staff assess risk, because it provides a
better understanding of an investment adviser's operations and the
nature of activities conducted in its top 25 offices. In addition, if
the staff wanted to focus on offices that conducted a combination of
activities, such as those that engaged in municipal advisory activities
as well as investment advisory activities, it would have that
information readily available.
    Item 1.J. of Form ADV currently requires each adviser to provide
the name and contact information for the adviser's chief compliance
officer. We propose to amend Item 1.J. to require an adviser to report
whether its chief compliance officer is compensated or employed by any
person other than the adviser (or a related person of the adviser) for
providing chief compliance officer services, and, if so, to report the
name and IRS Employer Identification Number (if any) of that other
person. Our examination staff has observed a wide spectrum of both
quality and effectiveness of outsourced chief compliance officers and
firms. Identifying information for these third-party service providers,
like others on Form ADV,\32\ would allow us to identify all advisers
relying on a particular service provider and could be used to improve
our ability to assess potential risks.
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    \32\ For example, advisers provide the names and addresses of
independent public accountants that perform audits or surprise
examinations and that prepare internal control reports on Form ADV,
Part 1A, Schedule D, Section 9.C.
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    We propose to amend Item 1.O. to require advisers to report their
own assets within a range.\33\ We added this item in 2011, and it
currently requires an adviser to check a box to indicate if it has
assets of $1 billion or more, in connection with the Dodd-Frank Act's
requirements concerning certain incentive-based compensation
arrangements.\34\ Requiring advisers to report assets within a given
range would provide more accurate data for use in Commission rulemaking
arising from ongoing Dodd-Frank Act implementation.\35\
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    \33\ Proposed Form ADV, Part 1A, Item 1.O.
    \34\ See Implementing Release, supra note 4; Section 956 of the
Dodd-Frank Act. We also propose to move the instruction for how to
report ``assets'' for the purpose of Item 1.O. from the Instructions
for Part 1A to Form ADV to Item 1.O. in order to emphasize this
instruction.
    \35\ See, e.g., Section 165(i) of the Dodd-Frank Act, which
requires the Commission and other financial regulators to establish
methodologies for the conduct of stress tests required by section
165 of the Act.
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    We request comment on the proposed changes to Item 1 of Part 1A and
Section 1 of Schedule D.

     Are there concerns with providing all CIK numbers assigned
to an adviser? If so, please explain those concerns.
     Are there concerns with providing social media information
for advisers? If so, please explain those concerns. Are there ways that
we could address these concerns and still request comparable
information?
     Would the proposed social media information be useful to
investors? Why or why not?
     Is there additional social media information that we
should collect? Should we ask advisers whether they permit employees to
have social media accounts associated with the advisers' business? And,
if so, should we ask advisers to identify the number or percentage of
employees that have those accounts? How burdensome would it be for
advisers to report that information?
     As proposed, information would be required regarding an
adviser's 25 largest offices. We selected 25 in order to balance the
burden to investment advisers with providing this information with our
need for information about additional offices. If instead we were to
require all offices to be reported, would the burden on advisers be
significant? Should we decrease the number of offices or provide
another standard to identify the offices that should be reported?
     Would additional information about an adviser's offices be
helpful to investors? Why or why not?
     Are there concerns related to disclosure of information
regarding outsourced chief compliance officers? If so, please explain
those concerns.
     In addition to the identification of outsourced chief
compliance officers, should we also request information about advisers'
use of third-party compliance auditors? If so, what information should
we request?
     Are there any concerns related to disclosing the range of
an adviser's own assets? If so, please explain those concerns. Should
the ranges be different than proposed? Why or why not?
     Are the proposed requirements clearly stated?
     Do advisers readily have access to the data and
information requested by these proposed changes?
Additional Information About Advisory Business
    In addition to the proposed amendments to Item 5 regarding
separately managed accounts discussed above, we are proposing a number
of other amendments to Item 5. Item 5 currently requires an adviser to
provide approximate ranges for three important data points concerning
the adviser's business--the number of advisory clients, the types of
advisory clients, and regulatory assets under management attributable
to client types.\36\ We propose to amend these items to require an
adviser to report the number of clients and amount of regulatory assets
under management attributable to each category of clients as of the
date the adviser determines its regulatory assets under management.\37\
Replacing ranges with more precise information would provide more
accurate information about investment advisers and would significantly
enhance our ability to analyze data across investment advisers because
providing actual numbers of clients and regulatory assets under
management allows us to see the scale and concentration of assets by
client type. It will also allow us to determine the regulatory assets
under management attributable to separately managed accounts. We
believe that the information needed for providing the number of clients
and amount of regulatory assets under management should be readily
available to advisers because, among other reasons, advisers are
producing this data to answer the current iterations of these questions
on Form ADV, and advisers typically base their advisory fees on client
assets under management. We also propose to require reporting on the
number of clients for whom an adviser provided advisory services but
does not have regulatory assets under management in order to obtain a
more complete understanding of the adviser's advisory business.\38\
This information also would assist in our risk assessment process and
increase the effectiveness of our examinations.
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    \36\ Form ADV, Part 1A, Item 5.C.(1), Item 5.D.(1)-(2).
    \37\ Proposed Form ADV, Part 1A, Item 5.D.(1)-(2). The
categories of clients are the same as those in Item 5.D. of the
current Form ADV, except that we propose adding ``sovereign wealth
funds and foreign official institutions'' as a client category, and
specifying that state or municipal government entities include
government pension plans, and that government pension plans should
not be counted as pension and profit sharing plans.
    \38\ Proposed Form ADV, Part 1A, Item 5.C.(1). An example of a
situation where an adviser provides investment advice but does not
have regulatory assets under management is a nondiscretionary
account or a one-time financial plan, depending on the facts and
circumstances.
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    We are proposing several targeted additions to Item 5 and Section 5
of Schedule D to inform our risk-based exam program and other risk
monitoring initiatives. An adviser that elects to report client assets
in Part 2A of Form ADV differently from the regulatory assets under
management it reported in Part 1A of Form ADV would be required to
check a box noting that election.\39\ This information would allow our
examination staff to review across advisers the extent to which
advisers report assets under management in Part 2A that differ from the
regulatory assets under management reported in Part 1A of Form ADV.
Having this information would allow our staff to better understand the
situations in which the calculations differ, and assist us in analyzing
whether those differences require a regulatory response. In addition,
we propose to add a question asking the approximate amount of an
adviser's regulatory assets under management that is attributable to
non-U.S. clients \40\ to complement the current requirement that each
adviser report the percentage of its clients that are non-U.S. persons,
which, based on our experience, is not always a reliable indicator of
an adviser's relationships with non-U.S. clients.\41\ Our examination
staff could use this information to better understand the extent of
investment advice provided to non-U.S. clients which would assist us in
our risk assessment process.
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    \39\ Proposed Form ADV, Part 1A, Item 5.J.(2). Form ADV, Part
2A, Item 4.E. requires an investment adviser to disclose the amount
of client assets it manages on a discretionary basis and on a non-
discretionary basis. The method used by an adviser to compute the
amount of client assets it manages can be different from the method
used to compute regulatory assets under management required for Item
5.F. in Part 1A. As discussed in the proposing release for Part 2,
the regulatory assets under management calculation for Part 1A is
designed for a particular purpose (i.e., for making a bright line
determination about whether an adviser should register with the
Commission or with the states) and permitting a different
calculation for Part 2 disclosure may be appropriate to enable
advisers to make disclosure that is more indicative to clients about
the nature of their business. See Amendments to Form ADV, Investment
Advisers Act Release No. 2711 (March 3, 2008) [73 FR 13958 (March.
14, 2008)].
    \40\ Proposed Form ADV, Part 1A, Item 5.F.(3).
    \41\ Form ADV, Part 1A, Item 5.C.(2). For example, an adviser
may report a significant percentage of clients that are non-U.S.
persons, but the regulatory assets under management attributable to
those clients is a small percentage of the adviser's regulatory
assets under management.
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    Section 5.G.(3) of Schedule D currently requires the SEC File
Number for registered investment companies and business development
companies advised by the adviser. We propose adding to Section 5.G.(3)
a requirement that advisers report the regulatory assets under
management of all parallel managed accounts related to a registered
investment company or business development company that is advised by
the adviser.\42\ This information

would be helpful because it would permit our staff to assess the
accounts and consider how an adviser manages conflicts of interest
between parallel managed accounts and registered investment companies
or business development companies advised by the adviser. This
information also would show the extent of any shift in assets between
parallel managed accounts and registered investment companies or
business development companies.
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    \42\ Proposed Form ADV, Part 1A, Section 5.G.(3) of Schedule D.
The Glossary to Proposed Form ADV includes ``parallel managed
account,'' which would be defined as: ``With respect to any
registered investment company or business development company, a
parallel managed account is any managed account or other pool of
assets that you advise and that pursues substantially the same
investment objective and strategy and invests side by side in
substantially the same positions as the identified investment
company or business development company that you advise.''
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    Finally, we propose to amend Item 5 to obtain additional
information concerning wrap fee programs.\43\ Item 5.I. of Part 1A
currently requires an adviser to indicate whether it serves as a
sponsor of or portfolio manager for a wrap fee program. We propose to
amend Item 5.I. to require an adviser to report the total amount of
regulatory assets under management attributable to acting as a sponsor
and/or portfolio manager of a wrap fee program.\44\ Section 5.I.(2) of
Schedule D currently requires advisers to list the name and sponsor of
each wrap fee program for which the adviser serves as portfolio
manager. We propose amending Section 5.I.(2) to add questions that
would require an adviser to provide any SEC File Number and CRD Number
for sponsors to those wrap fee programs.\45\ This information would
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. Wrap fee
accounts are held by a large number of retail clients, and we believe
additional information about the capacity in which advisers serve these
accounts would help us better protect investors.
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    \43\ Form ADV, Glossary defines a wrap fee program as ``[a]ny
advisory program under which a specified fee or fees not based
directly upon transactions in a client's account is charged for
investment advisory services (which may include portfolio management
or advice concerning the selection of other investment advisers) and
the execution of client transactions.'' We are not proposing any
change to this definition.
    \44\ Proposed Form ADV, Part 1A, Item 5.I.
    \45\ Proposed Form ADV, Part 1A, Section 5.I.(2) of Schedule D.
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    We request comment on the additional changes we propose to make to
Item 5 and related sections of Schedule D.
     Please describe any benefits or concerns with using more
precise numbers in Item 5, rather than ranges.
     Is there any overlap among the categories of clients, and
if so, among which particular categories? How could we address any
overlaps?
     Please describe any concerns with providing information
on: (a) The number of clients for whom investment advisers provide
advisory services but do not have regulatory assets under management;
(b) the regulatory assets under management attributable to non-U.S.
clients; or (c) parallel managed accounts. Are there other types of
information advisers could report that would meet our goals?
     Would the additional information on wrap fee programs be
helpful to investors and other market participants? Should any
additional information be required?
     Would advisers readily have access to the data requested?
     Are the proposed requirements clearly stated?
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 proposing amendments to Sections 7.A. and 7.B.(1) of
Schedule D that would require advisers to provide identifying numbers
(e.g., Public Company Accounting Oversight Board (``PCAOB'')
registration numbers \46\ and CIK numbers \47\) in several questions to
allow us to better compare information across data sets and understand
relationships of advisers to other financial service providers. We are
also proposing a new question that would require advisers to report the
percentage of a private fund owned by qualified clients, as defined in
rule 205-3 under the Advisers Act.\48\ This information would help us
better understand the nature of investors in private funds.
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    \46\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23(e).
    \47\ Proposed Form ADV, Part 1A, Section 7.A of Schedule D,
Question 4(b).
    \48\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 15(b).
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    We request comment on the proposed changes to Sections 7.A. and
7.B.(1) of Schedule D.
     Would advisers readily have access to the data requested?
     Please describe any concerns with providing: (a)
Identifying numbers; or (b) the percentage of a private fund owned by
qualified clients.
     Are the requirements clearly stated?
3. Umbrella Registration
    The Dodd-Frank Act, among other things, repealed the private
adviser exemption that used to be in section 203(b)(3) of the Advisers
Act.\49\ As a result, many previously unregistered advisers to private
funds,\50\ including hedge funds and private equity funds, were
required to register under the Advisers Act. Today, about 4,364
registered investment advisers provide advice on approximately $10.1
trillion in assets to approximately 28,532 private funds clients.\51\
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    \49\ 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.
    \50\ 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.''
    \51\ Based on IARD data as of April 1, 2015.
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    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,\52\ Form ADV is designed to accommodate the registration
request of an adviser structured as a single legal entity. As a result,
a private fund adviser organized as a group of related advisers could
have to file multiple registration forms 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.
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    \52\ We will 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 (July 6, 2011)]
(``Exemptions Release''); see also In the Matter of TL Ventures
Inc., Investment Advisers Act Release No. 3859 (June 20, 2014)
(settled action).
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    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.\53\ The guidance
provided conditions under which the staff believed one adviser (the
``filing adviser'') may file a single Form ADV on behalf of itself and
other advisers that are controlled by or under common control with the
filing adviser (each, a ``relying adviser''), provided that they
conduct a single advisory business (collectively an ``umbrella
registration''). We believe that the staff's position has been
successful in addressing the registration concerns that can arise from
the legal structures of private fund advisers. Most advisers that can
rely on umbrella registration are doing so, with approximately 750
filing advisers and approximately 2,500 relying advisers filing
umbrella registrations.\54\
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    \53\ See 2012 ABA Letter. 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), Question G1, available at
http://www.sec.gov/divisions/investment/noaction/aba120805.htm (the
``2005 ABA Letter'').
    \54\ Based on IARD data as of April 1, 2015.
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    The method outlined in the staff guidance for filing Form ADV on
behalf of multiple entities is limited, however, by the form being
designed for a single legal entity, and in some cases complicates data
collection and analysis on umbrella registrants and can confuse filers
and the public.\55\ The amendments to Part 1A that we propose would
yield additional and more consistent data about, and create a clearer
picture of, groups of private fund advisers that operate as a single
business, while codifying the concept of umbrella registration and
simplifying the process of registration for such advisers. The
amendments also would allow for greater comparability across private
fund advisers.
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    \55\ Under the guidance provided by the staff, for example,
umbrella registration is appropriate where a relying adviser is not
prohibited from registering with the Commission by section 203A of
the Advisers Act. See 2012 ABA Letter, supra note 9. However, a
relying adviser does not currently have a way to answer Item 2
regarding the basis on which it is eligible for SEC registration. In
addition, relying advisers often must list owners and executive
officers in a confusing manner in Schedules A and B which were not
designed to accommodate multiple advisers and do not always provide
the Commission staff with useful information on the owners of each
relying adviser. Also, the filing adviser currently discloses its
reliance on the 2012 ABA Letter in the Miscellaneous Section of
Schedule D.
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    Under the amendments we are proposing, umbrella registration would
be available where a filing adviser and one or more relying advisers
conduct a single private fund advisory business and each relying
adviser is controlled by or under common control with the filing
adviser. As proposed, umbrella registration would only be available in
the scenario of a private fund adviser operating as a single business
through multiple legal entities. At this time, we do not believe
umbrella registration would be 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.\56\ In addition, providing for disparate businesses to
register on a single Form ADV as it is designed today would limit
investors' ability to assess information on investment advisers
because, based on our experience, reporting information about multiple
advisers' businesses together on a single form would make Part 1A
difficult to understand.
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    \56\ The filing of a single Form ADV for exempt reporting
advisers in a manner similar to the filing of an umbrella
registration for registered advisers also would not be available as
the conditions of a single advisory business are designed, in part,
to reflect requirements that only apply to registered advisers,
including the requirement for compliance policies and procedures
pursuant to rule 206(4)-7 under the Advisers Act and for a code of
ethics pursuant to rule 204A-1 under the Advisers Act. 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.
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    Accordingly, we are proposing amendments to Form ADV's General
Instructions that would establish conditions for an adviser to assess
whether umbrella registration is available. The conditions, which are
indicia of a single advisory business, include the following:
    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; \57\
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    \57\ As we have previously stated, we do not apply most of the
substantive provisions of the Advisers Act to the non-U.S. clients
of a non-U.S. adviser registered with the Commission. See Exemptions
Release, supra note 52, at section II.D. 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.\58\
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    \58\ Under this approach, 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 drawn from our experience with examining
investment advisers and are designed to capture advisers to private
funds that operate as a single business through commonality of the
application of the Advisers Act and rules to all entities,
implementation of compliance requirements, and advisory services. They
are designed to include advisers to private funds (as discussed in
condition 1) that operate as a single business. Conditions 2 and 4
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
address the requirement that the filing and relying advisers operate as
a single business. Advisers that operate under common supervision and
control and have a single set of compliance policies and procedures and
code of ethics are likely to operate as a

single business. Finally, the conditions are the same as those 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 proposal).\59\
---------------------------------------------------------------------------

    \59\ See 2012 ABA Letter, supra note 9, Question 4.
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    In addition, we propose to amend the General Instructions 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.\60\
To satisfy the requirements of Form ADV while using umbrella
registration, the filing adviser would be 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 proposed revisions to the form's
Instructions and Form ADV would 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).\61\ Additionally, we propose amending the Glossary
to add the following three terms: (i) ``Filing adviser;'' \62\ (ii)
``relying adviser;'' \63\ and (iii) ``umbrella registration.'' \64\
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    \60\ See Proposed Form ADV General Instruction 5.
    \61\ See, e.g., statements added to Proposed Form ADV,
Instructions and Part 1A, Items 1, 2, 3, 7, 10 and 11.
    \62\ ``Filing Adviser'' would mean: ``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 Proposed Form ADV Glossary.
    \63\ ``Relying Adviser'' would mean: ``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
Proposed Form ADV Glossary.
    \64\ ``Umbrella Registration'' would mean: ``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 Proposed
Form ADV Glossary.
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    We also are proposing a new schedule to Part 1A--Schedule R--that
would have to be filed for each relying adviser.\65\ Schedule R would
require identifying information, basis for SEC registration, and
ownership information about each relying adviser, some of which is
already filed by an adviser relying on the staff guidance.\66\ This new
schedule would consolidate in one location important information for
each relying adviser and address 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.\67\ Finally, we
propose to add a new question to Schedule D that would require advisers
to identify the filing advisers and relying advisers that manage or
sponsor private funds reported on Form ADV. This information would
allow us to identify the specific adviser managing the private fund
reported on Form ADV if it is part of an umbrella registration.\68\
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    \65\ Advisers that choose to file an umbrella registration would
be directed by Item 1.B. to complete a new Schedule R for each
relying adviser. Proposed Form ADV, Part 1A, Item 1.B.(2).
    \66\ Schedule R would require 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 do not include categories that would make the relying adviser
ineligible for umbrella registration, such as serving as an adviser
to a registered investment company.
    \67\ Under the staff's guidance in the 2012 ABA Letter, an
adviser reports in its Form ADV (Miscellaneous Section of Schedule
D) that it and its relying advisers are together filing a single
Form ADV in reliance on the position expressed in the letter and
identifies each relying adviser by completing a separate Section
1.B., Schedule D, of Form ADV for each relying adviser and
identifying it as such by including the notation ``(relying
adviser).'' See 2012 ABA Letter, supra note 9, Question 4.
    \68\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 3(b).
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    Advisers registering in reliance on the staff's umbrella
registration approach outlined in the 2012 ABA Letter do not provide
information about each relying adviser's address, CRD, unique
identifier numbers, basis for registration or form of organization. Our
proposal would require this information to be reported. We believe that
certain information that we propose requiring as part of umbrella
registration (such as mailing address and basis for registration) would
be the same for nearly all relying advisers, and the filing adviser
could check a box indicating that the mailing address of the relying
advisers is the same as that of the filing adviser. Advisers relying on
the 2012 ABA Letter do not currently identify the filing adviser or
relying adviser that advises private funds reported on Section 7.B.(1)
of Schedule D, and our proposal would require this information to be
reported. We believe that this information would help us better
understand the management of private funds, would provide information
to contact relying advisers, and would help us better understand the
relationship between relying advisers and filing advisers.
    We request comment on the changes we propose to make to Form ADV
regarding umbrella registration.
     Should we amend Form ADV to accommodate umbrella
registration? Why or why not?
     Would these amendments be helpful for private fund
advisers and investors?
     Is umbrella registration appropriate or should we require
separate registration by each adviser?
     Would umbrella registration provide more consistent and
clear information about groups of private fund advisers that operate as
a single business? Why or why not?
     Are there additional or different conditions we should
consider for umbrella registration?
     Should we require that the availability of umbrella
registration be expanded to include advisers with clients that are not
primarily private funds, and if so, what are the legal structures that
it should accommodate and are the proposed conditions sufficient to
capture only single advisory businesses?
     We are not proposing to make filing an umbrella
registration mandatory, because we believe it is appropriate to permit
advisers to file a separate Form ADV for each relying adviser if they
choose to do so.\69\ Should umbrella registration be required? Should
firms indicate if they could, but chose not to, rely on umbrella
registration?
---------------------------------------------------------------------------

    \69\ Under the proposed amendments, multiple private advisers
operating a single advisory business may elect to apply separately
for registration.
---------------------------------------------------------------------------

     Are the proposed amendments to the instructions and Form
ADV sufficient to implement umbrella registration? If not, what
amendments are necessary?
     Should we require more, less or different information on
proposed Schedule R? What information should be added or deleted?
4. Proposed Clarifying, Technical and Other Amendments to Form ADV
    We are proposing several amendments to Form ADV that are designed
to clarify the form and its instructions. We believe these proposed
amendments to Form ADV would 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 would improve our
staff's ability to interpret, understand, and place in context the
information provided by advisers, and also would allow our staff to
make comparisons across investment advisers, and improve the risk
assessment and examination program. Many of these proposed amendments
are derived from questions frequently received by our staff.
Proposed 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.\70\ Section 2.A.(9) of Schedule D. is entitled ``Newly Formed
Adviser'' and requests the adviser to make certain representations. 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 we propose
to delete the phrase ``newly formed adviser'' from Item 2.A.(9) and
Section 2.A.(9) of Schedule D. Section 2.A.(9) would be renamed
``Investment Advisers Expecting to be Eligible for Commission
Registration within 120 Days.'' \71\
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    \70\ Form ADV, Part 1A, Item 2.A.(9) and Section 2.A.(9) of
Schedule D.
    \71\ Proposed Form ADV, Part 1A, Item 2.A.(9); see rule 203A-
2(c) under the Advisers Act.
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Proposed 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). Our staff frequently receives
questions from investment advisers regarding this item and we propose
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).\72\
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    \72\ Proposed Form ADV, Part 1A, Item 4.A.
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Proposed 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 propose
several technical amendments to Item 7. We propose to revise 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 should
instead 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.\73\
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    \73\ Proposed 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
propose 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 also propose 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 currently a note informing
advisers when they should answer yes to the first question regarding
whether the private fund is a ``fund of funds.'' We propose renaming
the first question as Question 8(a), moving the note to directly after
Question 8(a), and making the second question Question 8(b).\74\ We
believe these proposed changes would assist filers in answering
Question 8.
---------------------------------------------------------------------------

    \74\ Proposed 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. We propose to delete 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.\75\ 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 propose to add text to
Question 19 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.\76\ 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 propose a clarifying revision to
Question 21 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.\77\ 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.\78\
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    \75\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 10. See General Instruction 7 to Form PF.
    \76\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 19.
    \77\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 21.
---------------------------------------------------------------------------

    We propose a revision to Question 23(a)(2). 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'').\79\ We
propose to add 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.\80\ This revision will clarify when an
adviser is actually required to answer Question 23(a)(2). We also
propose to

revise Question 23(g). The question currently asks whether the private
fund's audited financial statements are distributed to private fund
investors. We propose adding ``for the most recent fiscal year'' to
clarify the question. In addition, we propose to revise Question 23(h).
This question currently asks whether the report prepared by the
auditing firm contains an unqualified opinion.\81\ This question has
prompted questions from advisers regarding which report and what
timeframe the question refers to. We propose to clarify the question to
ask whether all of the reports prepared by the auditing firm since the
date the adviser last filed its annual updating amendment contain
unqualified opinions.\82\ Finally, we propose adding Question 25(g),
which would request 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. This information would
help our examination staff more readily identify the use of particular
custodians by private funds.
---------------------------------------------------------------------------

    \78\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
21.
    \79\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
23(a)(2).
    \80\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23(a)(2).
    \81\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
23(h).
    \82\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23(h).
---------------------------------------------------------------------------

Proposed Amendments to Item 8
    In order to address a frequent question from filers, we propose to
clarify that advisers should answer Item 8 based on the types of
participation and interest the adviser expects to engage in during the
next year. Item 8.B.(2) of Part 1A of Form ADV currently asks whether
the adviser or any related person of the adviser recommended 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.\83\ The current wording has
caused confusion regarding the treatment of purchaser representatives.
We are proposing to reword 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.
This proposed 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, general or managing partner.\84\
---------------------------------------------------------------------------

    \83\ Form ADV, Part 1A, Item 8.B.(2).
    \84\ Proposed 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 proposing revisions to Item 8.H. to
break the question into two parts to increase our understanding of
compensation for client referrals. Proposed Item 8.H.(1) would cover
compensation to persons other than employees for client referrals.\85\
Proposed Item 8.H.(2) would cover compensation to employees, in
addition to employees' regular salaries, for obtaining clients for the
firm.\86\ Item 8.I. asks whether the adviser or any related person of
the adviser directly or indirectly receives compensation from any
person for client referrals. We have also proposed wording to clarify
that Item 8.I. is not designed to include the regular salary that the
adviser pays to an employee.\87\ We have proposed these edits to better
understand how advisers compensate both their staff and third parties
for client referrals. The proposed revisions to this item do not change
the scope of the information collected, but instead provide more
precise information about compensation for client referrals.
---------------------------------------------------------------------------

    \85\ Proposed Form ADV, Part 1A, Item 8.H.(1).
    \86\ Proposed Form ADV, Part 1A, Item 8.H.(2).
    \87\ Proposed Form ADV, Part 1A, Item 8.I.
---------------------------------------------------------------------------

Proposed 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 propose two
changes to Section 9.C. of Schedule D. First, we propose to add text
requiring an adviser to provide the PCAOB registration number of the
adviser's independent public accountant to improve our staff's ability
to cross-reference information submitted through other systems and
monitor compliance with the custody rule.\88\ 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
propose to amend 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 would 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.\89\
---------------------------------------------------------------------------

    \88\ Proposed Form ADV, Part 1A, Section 9.C.(3) of Schedule D.
    \89\ Proposed Form ADV, Part 1A, Section 9.C.(6) of Schedule D.
---------------------------------------------------------------------------

Proposed 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.'' \90\ We propose 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.\91\ This proposal would make disciplinary reporting
uniform across registered and exempt reporting advisers, consistent
with requiring exempt reporting advisers to report disciplinary events
on Form ADV.
---------------------------------------------------------------------------

    \80\ Form ADV, Part 1.A., Criminal, Regulatory Action and Civil
Judicial Action Disclosure Reporting Pages.
    \91\ Proposed Form ADV, Part 1A, Criminal, Regulatory Action and
Civil Judicial Action Disclosure Reporting Pages.
---------------------------------------------------------------------------

Proposed Amendments to Instructions and Glossary
    Together with the proposed amendments to Part 1A, we are also
proposing conforming amendments to the General Instructions and the
Glossary for Form ADV. As discussed above, we propose to amend the
General Instructions to include instructions regarding umbrella
registration. We also propose to remove 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 propose to update the definition of ``Legal Entity
Identifier'' to reflect recent advancements in this protocol.\92\
---------------------------------------------------------------------------

    \92\ The proposed definition of Legal Entity Identifier is: A
``legal entity identifier'' assigned or recognized by the Global LEI
Regulatory Oversight Committee (ROC) or the Global LEI Foundation
(GLEIF). See Proposed Form ADV: Glossary. In Item 1, we propose
removing outdated text referring to the ``legal entity identifier''
as being ``in development'' in the first half of 2011.

---------------------------------------------------------------------------

    Where applicable, we propose to make technical revisions to specify
that an adviser must ``apply for registration'' (rather than simply
``register'') to more accurately reflect the rule text. We also propose
to delete text in the instructions related to Item 1.O. because this
text is proposed to appear directly in the corresponding section of
Part 1 of Form ADV. We propose to add 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 request comment on our proposed clarifying, technical and other
amendments.
     Are the proposed amendments necessary? Should we consider
different or additional amendments? If so, please specify.
     Are there any ambiguities or concerns that we should
address in the form, instructions or glossary?
     Should we ask additional questions in Section 7.B.(1) of
Schedule D regarding an adviser's reliance on Regulation D? If so, what
additional information should we request?
     Are the proposed amendments regarding payment for client
referrals in Item 8 clear? Why or why not?

B. Proposed Amendments to Investment Advisers Act Rules

1. Proposed Amendments to Books and Records Rule
    We are proposing two amendments to the Advisers Act books and
records rule, rule 204-2, that would require investment 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.\93\ Although 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, the books and records rule requires such records
only when the communication is distributed to ten or more persons. We
are proposing to amend rule 204-2(a)(16) by removing the ten or more
persons condition and replacing it with ``any person.'' Accordingly,
advisers would 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. 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.
---------------------------------------------------------------------------

    \93\ 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.''
---------------------------------------------------------------------------

    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.\94\ We are proposing to amend 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. We believe these
records would be useful in examining and evaluating adviser performance
claims. 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.\95\
---------------------------------------------------------------------------

    \94\ 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.''
    \95\ 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).
---------------------------------------------------------------------------

    Based on our staff's experience, we believe that most advisers
already maintain this information as part of their compliance with rule
206(4)-1 under the Advisers Act, which regulates advertisements by
investment advisers. The proposed amendments would provide our
examination staff with additional information to review an adviser's
compliance with rule 206(4)-1 and would assist us in enforcing rule
206(4)-1 in cases of fraudulent advertising. Investors would benefit to
the extent that the proposed amendments reduce the incidence of
misleading or fraudulent advertising.
    We request comment on the proposed amendments to rule 204-2.
     Do investment advisers currently maintain these records?
If so, are there concerns with making these required records?
     Are there alternate means that would be sufficient to
collect performance information and client communications regarding
performance?
     Are there exceptions that we should consider?
2. Proposed Technical Amendments to Advisers Act Rules
    We are proposing technical amendments to several rules under the
Advisers Act and the withdrawal of transition rule 203A-5 under the
Advisers Act. The proposed amendments would remove 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 provisions were added when we amended Form ADV and
several Advisers Act rules to require advisers to electronically file
their brochures with the Commission.
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.\96\ Rule 203A-5 provided a temporary exemption from the
prohibition on registration for mid-sized advisers to facilitate their
transition to state registration.\97\ We propose withdrawing rule 203A-
5 because the transition of mid-sized advisers from SEC to state
registration was completed in June 2012.
---------------------------------------------------------------------------

    \96\ See Section 410 of the Dodd-Frank Act.
    \97\ See Implementing Release, supra note 4.
---------------------------------------------------------------------------

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 \98\ 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.\99\ We propose 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.
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    \98\ Family Offices, Investment Advisers Act Release No. 3220
(June 22, 2011) [76 FR 37983 (June 29, 2011)].
    \99\ Section 203(b)(3) of the Advisers Act as in effect before
July 21, 2011, repealed by section 403 of the Dodd-Frank Act.
---------------------------------------------------------------------------

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 \100\ to remain
exempt from registration until March 30, 2012 under certain
conditions.\101\ We propose removing paragraph (e) from Rule 203-1
because the transition for private advisers is now complete.
---------------------------------------------------------------------------

    \100\ Id.
    \101\ See Implementing Release, supra note 4. 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.
---------------------------------------------------------------------------

Rule 203-1(b) and Rule 204-1(c)
    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'').\102\ 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.\103\ 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. We propose removing
paragraph (b) from rule 203-1 and paragraph (c) from rule 204-1 because
the transition to electronic filing is now complete.\104\
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    \102\ Amendments to Form ADV, Investment Advisers Act Release
No. 3060 (July 28, 2010) [75 FR 49233 (Aug. 12, 2010)].
    \103\ The continuing hardship exemption under rule 203-3 will
not be withdrawn by these technical amendments.
    \104\ We propose redesignating current paragraphs (c) and (d) of
Rule 203-1 as (b) and (c) and redesignating current paragraphs (d)
and (e) of Rule 204-1 as (c) and (d).
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    We request comment on these proposed changes.
     Is there any benefit to keeping any of these provisions?

III. Economic Analysis

A. Introduction

    The Commission is sensitive to the benefits and costs of its rules.
The following economic analysis identifies and considers the benefits
and costs--including the effects on efficiency, competition, and
capital formation--that would result from the proposed amendments to
Form ADV and the proposed amendments to and rescission of certain rules
under the Investment Advisers Act. The economic effects of the proposed
amendments are discussed below and have informed the policy choices
described in this release.
    We are proposing 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 proposing the following amendments to Form
ADV and Advisers Act rules:
     Amendments to Form ADV that are 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 that
would 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.
    We rely on information reported by investment advisers to us on
Form ADV to monitor trends, assess emerging risks, inform policy
choices and rulemaking, and assist Commission staff in examination and
enforcement efforts. We believe that the proposed amendments to Form
ADV would improve the information provided by investment advisers to
the Commission, clients and prospective clients and would improve
investor protection by informing policy choices and focusing
examination activities. We also believe that the proposed amendments to
the Advisers Act books and records rule would improve investor
protections by providing useful information to evaluate advisers'
performance claims.
    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 proposed amendments are discussed. The baseline includes the
current requirement for investment advisers to file Form ADV, the staff
guidance that permits filing advisers to file a single Form ADV on
behalf of itself and each relying adviser,\105\ the current
requirements for investment advisers to maintain books and records, and
other current rules under the Advisers Act. The parties that would be
affected by the proposed 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.
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    \105\ See 2012 ABA Letter, supra note 9.
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    Based on IARD system data as of April 2015, approximately 11,600
investment advisers are registered with the Commission, and 2,914
exempt reporting advisers file reports with the Commission.
Approximately 8,500 investment advisers registered with us (73%)
reported assets under management attributable to separately managed
account clients. Of those 8,500 advisers, approximately 5,366 advisers
reported regulatory assets under management attributable to separately
managed account clients of at least $150 million but less than $10
billion and approximately 535 advisers reported regulatory assets under
management attributable to separately managed account clients of at
least $10 billion.\106\

Advisers with at least $10 billion in regulatory assets under
management attributable to separately managed accounts would be subject
to proposed additional reporting on separately managed accounts on Form
ADV. Approximately 750 registered advisers to private funds currently
submit a single Form ADV on behalf of themselves and 2,500 relying
advisers, relying on the 2012 ABA Letter. All investment advisers
registered or required to be registered with us are subject to the
Advisers Act books and records rule.
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    \106\ Based on IARD data as of April 1, 2015. 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. Proposed Item 5.D.(1)-(2)
would 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.
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    We have sought, where possible, to quantify the costs, benefits,
and effects on efficiency, competition, and capital formation expected
to result from the proposed amendments to Form ADV and Investment
Advisers Act rules, and reasonable alternatives. As discussed below, in
certain cases, we are unable to quantify the economic effects because
we lack the information necessary to provide reasonable estimates. The
economic effects of the proposal also depend upon a number of factors
some of which we cannot estimate, such as the extent to which investor
protection and our ability to oversee investment advisers will improve,
and the extent to which investors would utilize the information in Form
ADV to choose or retain an investment adviser. Therefore, some of the
discussion below is qualitative in nature. We request comment on all
aspects of the economic effects of the amendments that we are
proposing, such as the costs and benefits, effects on efficiency,
competition and capital formation, and reasonable alternatives to the
proposed amendments. We request that commenters identify sources of
data and information as well as provide data and information to assist
us in analyzing the economic consequences of the proposed rulemaking.

B. Proposed Amendments to Form ADV

    Some of the proposed amendments to Form ADV are designed to address
certain gaps in information, such as information about advisers'
separately managed accounts. We are also proposing to collect
additional information on Form ADV on topics such as social media,
offices, foreign clients, and wrap fee accounts. These items are
designed to improve the depth and quality of information that we
collect on investment advisers, which would be important for oversight
activities. We are also proposing amendments to Form ADV to establish a
more efficient method for advisers to private funds that are organized
as multiple legal entities to register with us using a single Form ADV
(``umbrella registration''). Finally, we are proposing a number of
clarifying, technical and other amendments to Form ADV.
1. Economic Baseline and Affected Market Participants
    As noted above, 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 proposed amendments to Form ADV are discussed. Form
ADV is used by investment advisers to register with the SEC 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 end,
and more frequently if required by the instructions to Form ADV.\107\
Form ADV is also used by exempt reporting advisers to submit, and
periodically update, reports to us by completing a limited subset of
items on Form ADV. Information filed on Form ADV is publicly available
through the IAPD Web site.\108\ The parties that would be directly
affected by the proposed 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.
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    \107\ See Rule 204-1(a) under the Advisers Act.
    \108\ Certain personal identifying information is not made
public.
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2. Benefits
    As discussed in section II. above, the proposed amendments to Form
ADV would improve our ability to oversee investment advisers and
identify potential risks by increasing the amount, usefulness,
consistency, and reliability of the information disclosed by investment
advisers, which would enhance our staff's ability to effectively carry
out the risk-based examination program and other risk monitoring
activities, and could improve investor protection by informing policy
choices and focusing examination activities. The enhanced reporting
requirements should also improve the ability of clients and potential
clients of investment advisers to make more informed decisions about
the selection and retention of investment advisers.
    We are proposing that advisers report additional information on
Form ADV regarding separately managed accounts, which are clients other
than registered investment companies, business development companies
and other pooled investment vehicles, such as private funds, and are
designed to meet the needs of institutional and individual investors.
Based on IARD data, more than 73% of investment advisers registered
with us indicate that they manage assets of separately managed
accounts.\109\ We do not currently collect additional information
specific to separately managed accounts managed by investment advisers.
We currently collect detailed information about registered investment
companies and private funds, but only limited information regarding the
management of separately managed accounts. The absence of information
about separately managed accounts, such as information about
investments, compared to the information we receive describing
registered investment companies and private funds, limits our ability
to understand, monitor and oversee the investment advisers that advise
these accounts, and recognize the potential risks relating to these
accounts.\110\
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    \109\ Based on IARD data as of April 1, 2015.
    \110\ See, e.g., Form N-1A for investment companies and Form PF
for private funds.
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    The proposed amendments are intended to enhance our ability to
effectively carry out our risk-based examination program and other
risk-monitoring activities in relation to advisers of separately
managed accounts. The additional information regarding separately
managed accounts would assist us in addressing regulatory issues,
anticipating the implications of various regulatory actions that we may
consider, and identifying areas for additional examination and
enforcement activities. The proposed amendments are also intended to
improve our ability to monitor risks related to those advisers that
manage greater amounts of regulatory assets under management in
separately managed accounts, while reducing the potential reporting
burden for those advisers that manage lesser amounts of regulatory
assets under management in these accounts.
    In addition to information regarding separately managed accounts,
the proposed amendments to Form ADV include requests for additional
information that we believe would be useful to our risk assessment,
examination and oversight of

investment advisers. For example, we propose requesting information
regarding social media platforms used by investment advisers. This
information would assist our staff with examinations and provide them
with better awareness of an adviser's social media activities and how
advisers use social media to communicate with their clients and
prospective clients. We also are proposing to request additional
information about an adviser's participation in and assets under
management attributable to wrap fee programs. These programs are widely
used by individual retail clients, and we believe it would be useful
for us and the public to learn more about an adviser's participation in
these programs. For example, if our staff identifies an issue with a
particular wrap fee program, then this information also would assist
the staff in identifying other advisers associated with the program.
Other proposed items that would assist our examination activities
include replacing ranges with more precise information about the number
of advisory clients and related assets under management, the total
number of offices that conduct investment advisory business, and
information regarding each adviser's top 25 largest offices in terms of
employees.
    For several items, we are proposing additional identifying
information, such as the CIK numbers for all advisers that have
obtained one or more of them, PCAOB registration numbers for auditing
firms, and the SEC file number and the CRD number for sponsors of wrap
fee programs. The identifiers will improve our ability and that of
other current and future users of Form ADV information to cross-
reference information from Form ADV with information from other sources
to investigate and obtain a more complete understanding of the business
and relationships of investment advisers.
    The proposed amendments to Form ADV that would incorporate the
concept of umbrella registration and establish a method on Form ADV for
certain private fund advisers to use umbrella registration would
clarify, simplify, and therefore make more efficient the filing
procedures for these advisers and provide greater certainty about the
availability of umbrella registration. The proposed amendments also
would 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. As of April 1, 2015, approximately 750 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.
    The proposed clarifying, technical and other amendments to Form ADV
would 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 would 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
proposed clarifying and technical amendments would make Form ADV easier
to understand and complete, the proposed amendments would decrease
future costs, especially for those investment advisers registering with
us for the first time.
    As discussed above, an improvement in our ability to oversee the
business and assess the risks of investment advisers would benefit
clients and prospective clients of investment advisers. To the extent
that these proposed amendments would allow our staff to identify
potential risks at investment advisers before any clients are
disadvantaged, clients and potential clients would benefit. In
addition, an increase in the amount, consistency and usefulness of
information disclosed by investment advisers would allow advisory
clients and potential advisory clients to make more informed decisions
about the selection and retention of investment advisers. For example,
these proposed amendments should allow prospective clients to review,
either directly from Form ADV or through third-party information
providers, additional or more precise information about the number of
clients and amount of regulatory assets under management attributable
to various client types which may provide useful information about an
adviser's experience and business practices. As another example, the
proposed amendments should allow clients and potential clients to
identify the social media platforms of an investment adviser from which
additional information about the adviser may be available. An increase
in the ability of clients and potential clients to differentiate
investment advisers could result in a limited increase in competition
among investment advisers for clients. The proposed amendments would
likely not have a significant effect on capital formation or on the
ability of investors to efficiently allocate capital across investments
because the proposed amendments do not directly relate to the amount of
capital investors allocate to investments or their ability to allocate
capital across investments.
3. Costs
    The proposed amendments to Form ADV would require investment
advisers to provide additional information about certain aspects of
their business, including separately managed accounts, social media
platforms, wrap fee programs and offices. Reporting this additional
information would impose additional costs on investment advisers, but
we believe that much of the information we propose requesting on Form
ADV would be readily available because, based on our experience, we
understand that it is information used by advisers to conduct their
business.
    Costs would vary across advisers, depending on the nature of an
adviser's business and its business model. For example, advisers that
manage a limited number of separately managed accounts or that manage
smaller amounts of assets under management in those accounts would have
fewer reporting requirements than advisers that manage a large number
of or assets in such accounts. In addition, advisers with a large
number of offices would be required to report more information on a
greater number of offices than what is currently required in Form ADV.
To the extent possible, we have attempted to quantify these costs. As
discussed in section IV., for purposes of the increased Paperwork
Reduction Act burden for Form ADV, we estimate that each adviser would