Document ID: SEC-2016-1557-0001
Agency: sec
Document Type: Rule
Title: Form ADV and Investment Advisers Act
Posted Date: 2016-09-01T04:00Z

[Federal Register Volume 81, Number 170 (Thursday, September 1, 2016)]
[Rules and Regulations]
[Pages 60417-60575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20832]

[[Page 60417]]

Vol. 81

Thursday,

No. 170

September 1, 2016

Part II

Securities and Exchange Commission

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17 CFR Parts 275 and 279

Form ADV and Investment Advisers Act Rules; Final Rule

  Federal Register / Vol. 81 , No. 170 / Thursday, September 1, 2016 / 
Rules and Regulations  

[[Page 60418]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-4509; File No. S7-09-15]
RIN 3235-AL75

Form ADV and Investment Advisers Act Rules

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'' or 
``SEC'') is adopting 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 adopting 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: Effective October 31, 2016.
    Compliance Date: See Section III of this final rule.

FOR FURTHER INFORMATION CONTACT: Bridget D. Farrell, Senior Counsel, 
Jennifer Songer, Senior Counsel, Betselot Zeleke, Attorney-Adviser, or 
Sara Cortes, Assistant Director at (202) 551-6787 or IArules@sec.gov, 
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 adopting amendments to 
rules 202(a)(11)(G)-1 [17 CFR 275.202(a)(11)(G)-1], 203-1 [17 CFR 
275.203-1], 204-1 [17 CFR 275.204-1], 204-2 [17 CFR 275.204-2], and 
204-3 [17 CFR 275.204-3] 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 
rescinding rule 203A-5 [17 CFR 275.203A-5] under the Advisers Act.
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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 part 275], in which 
these rules are published.
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Table of Contents

I. Background
II. Discussion
    A. Amendments to Form ADV
    1. Information Regarding Separately Managed Accounts
    a. Amendments to Item 5 of Part 1A and Section 5 of Schedule D
    b. Section 5.K.(1) of Schedule D
    c. Section 5.K.(2) of Schedule D
    d. Section 5.K.(3) of Schedule D
    e. Public Disclosure of Separately Managed Account Information
    f. Additional Comments About Reporting of Separately Managed 
Accounts
    2. Additional Information Regarding Investment Advisers
    a. Additional Identifying Information
    b. Additional Information About Advisory Business
    c. Additional Information About Financial Industry Affiliations 
and Private Fund Reporting
    3. Umbrella Registration
    4. Clarifying, Technical and Other Amendments to Form ADV
    a. Amendments to Item 2
    b. Amendments to Item 4
    c. Amendments to Item 7
    d. Amendments to Item 8
    e. Amendments to Section 9.C. of Schedule D
    f. Amendments to Disclosure Reporting Pages
    g. Amendments to Instructions and Glossary
    B. Amendments to Investment Advisers Act Rules
    1. Amendments to Books and Records Rule
    2. Technical Amendments to Advisers Act Rules
    a. Rule 203A-5
    b. Rule 202(a)(11)(G)-1(e)
    c. Rule 203-1(e)
    d. Rule 203-1(b), Rule 204-1(c) and Rule 204-3(g)
III. Effective and Compliance Dates
    A. Effective Date
    B. Compliance Dates
IV. Economic Analysis
    A. Introduction
    B. Amendments to Form ADV
    1. Economic Baseline and Affected Market Participants
    2. Analysis of the Amendments to Form ADV and Alternatives
    a. Information Regarding Separately Managed Accounts
    b. Additional Information Regarding Investment Advisers
    c. Costs Applicable to Reporting Information Regarding 
Separately Managed Accounts and Additional Information on Form ADV
    d. Umbrella Registration
    e. Clarifying, Technical and Other Amendments to Form ADV
    f. Exempt Reporting Advisers
    C. Amendments to Investment Advisers Act Rules
    1. Economic Baseline and Affected Market Participants
    2. Analysis of the Effects of the Amendments to the Advisers Act 
Books and Records Rule
V. Paperwork Reduction Act Analysis
    A. Form ADV
    1. Changes in Average Burden Estimates
    a. Estimated Change in Burden Related to Part 1A Amendments (Not 
Including Private Fund Reporting)
    i. Amendments Related to Reporting of Separately Managed Account 
Information
    ii. Other Additional Information Regarding Investment Advisers
    iii. Clarifying, Technical and Other Amendments
    b. Estimated Changes in Burden Related to Private Fund Reporting 
Requirements
    c. Estimated Changes in Burden Related to Exempt Reporting 
Adviser Reporting Requirements
    2. Annual Burden Estimates
    a. Estimated Annual Burden Applicable to All Registered 
Investment Advisers
    i. Estimated Initial Hour Burden (Not Including Burden 
Applicable to Private Funds) for First Year Adviser To Complete Form 
ADV (Part 1 and Part 2)
    ii. Estimated Initial Burden Applicable to Registered Advisers 
to Private Funds
    iii. Estimated Annual Hour Burden Associated With Amendments, 
New Brochure Supplements, and Delivery Obligations
    iv. Estimated Annual Cost Burden
    b. Estimated Annual Burden Applicable to Exempt Reporting 
Advisers
    i. Estimated Initial Hour Burden
    ii. Estimated Annual Burden Associated With Amendments and Final 
Filings
    3. Total Revised Burden
    B. Rule 204-2
VI. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Rule and Rule Amendments
    D. Projected Reporting Recordkeeping, and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Authority
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.\2\ The information collected on Form 
ADV serves a vital role in our regulatory program and our ability to 
protect

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investors. On May 20, 2015,\3\ we proposed amendments to Part 1A of 
Form ADV in three areas: Revisions to fill certain data gaps and to 
provide additional information about investment advisers, including 
their separately managed account business; amendments to incorporate a 
method for private fund adviser entities operating a single advisory 
business to register with us using a single Form ADV; and clarifying, 
technical and other amendments to existing items and instructions.\4\
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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.
    \3\ See Amendments to Form ADV and Investment Advisers Act 
Rules, Investment Advisers Act Release No. 4091 (May 20, 2015) [80 
FR 33718 (June 12, 2015)] (``Proposing Release'').
    \4\ In general, this Release discusses the Commission's rule and 
form amendments that will 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 Part 1B of Form 
ADV as part of their state registrations.
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    Several of the amendments to Form ADV relate to separately managed 
accounts. These amendments will require advisers to provide certain 
aggregate information about separately managed accounts that they 
advise. Other amendments to Form ADV that we are adopting are designed 
to improve the depth and quality of information that we collect on 
investment advisers, facilitate our risk monitoring initiatives and 
assist our staff in its risk-based examination program. Moreover, 
because Form ADV is available to the public on our Web site, these 
amendments also are intended to provide advisory clients and the public 
additional information regarding registered investment advisers.
    We are also adopting amendments to Part 1A that will provide a more 
efficient method for the registration on one Form ADV of multiple 
private fund adviser entities operating a single advisory business 
(``umbrella registration''). The staff has provided guidance to private 
fund advisers regarding umbrella registration,\5\ and the amendments to 
incorporate umbrella registration into Form ADV will make the 
availability of umbrella registration more widely known to advisers. 
Uniform filing requirements for umbrella registration in Form ADV will 
provide more consistent data about, and create a clearer picture of, 
groups of private fund advisers that operate as a single business.
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    \5\ 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 (``2012 ABA 
Letter'').
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    The last set of amendments to Part 1A of Form ADV includes 
clarifying, technical and other amendments that are based on our 
staff's experience with the form and responding to inquiries from 
advisers and their service providers. These amendments should make it 
easier for advisers to understand and complete the form.
    Separate from Form ADV, we are adopting amendments to several 
Advisers Act rules. First, we are adopting amendments to the books and 
records rule, rule 204-2, to 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. 
Advisers also will be required to maintain originals of all written 
communications received and copies of written communications sent by 
them related to the performance or rate of return of any or all managed 
accounts or securities recommendations. As discussed in the Proposing 
Release, we believe that these amendments will better protect investors 
from fraudulent performance claims.\6\ Finally, we are adopting 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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    \6\ See Proposing Release, supra footnote 3 at Section I.
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    We received 50 comment letters on our proposals, most of which were 
from investment advisers, trade or professional organizations, law 
firms and consultants.\7\ Commenters generally supported the goals of 
the proposal. The majority of comments focused on reporting of 
separately managed accounts and umbrella registration. Several 
commenters supported collection of information on separately managed 
account clients, but many raised concerns about the public availability 
of the information and reporting on derivatives and borrowings. A 
diverse group of commenters supported umbrella registration. Commenters 
also generally supported the amendments to certain Advisers Act rules. 
We are adopting the proposed amendments with several modifications to 
address commenters' concerns. We discuss these modifications and 
concerns below.
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    \7\ Comment letters submitted in File No. S7-09-15 are available 
on the Commission's Web site at http://www.sec.gov/comments/s7-09-15/s70915.shtml. We also considered those comments submitted in File 
No. S7-08-15 (Investment Company Reporting Modernization, Investment 
Company Act Release No. 9776 (May 20, 2015) [80 FR 33589 (June 12, 
2015)]) that addressed the amendments adopted in this Release. Those 
comments are available on the Commission's Web site at http://www.sec.gov/comments/s7-08-15/s70815.shtml. We also 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 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 rulemaking, including data regarding separately managed 
accounts that was cited and considered as part of the Proposing 
Release.
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II. Discussion

A. Amendments to Form ADV

1. Information Regarding Separately Managed Accounts
    Several of the amendments to Form ADV that we are adopting are 
designed to collect more specific information about advisers' 
separately managed accounts. 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 registered 
(including, but not limited to, private funds)) to be separately 
managed accounts. As we discussed in the Proposing Release, we 
currently collect detailed information about pooled investment vehicles 
that advisers manage, but little specific information about separately 
managed accounts.\8\ We believe that collecting additional information 
about separately managed accounts will enhance our staff's ability to 
effectively carry out our risk-based examination program and other risk 
assessment and monitoring activities. We discuss below the specific 
separate account reporting requirements. Commenters stated that they 
generally understood our interest in collecting additional data on 
separately managed accounts,\9\ but many raised concerns

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regarding separately managed account reporting as proposed, and we 
discuss those concerns below.
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    \8\ See Proposing Release, supra footnote 3 at Section II.A.1.
    \9\ See, e.g., Comment Letter of Blackrock, Inc. (Aug. 11, 2015) 
(``BlackRock Letter''); Comment Letter of Dechert LLP (Aug. 11, 
2015) (``Dechert Letter''); Comment Letter of Investment Adviser 
Association (Aug. 11, 2015) (``IAA Letter''); Comment Letter of 
Investment Company Institute (Aug. 11, 2015) (``ICI Letter''); 
Comment Letter of Invesco Advisers, Inc. (Aug. 11, 2015) (``Invesco 
Letter''); Comment Letter of LPL Financial LLC (Aug. 11, 2015) 
(``LPL Letter''); Comment Letter of Managed Funds Association (Aug. 
11, 2015) (``MFA Letter''); Comment Letter of Money Management 
Institute (Aug. 11, 2015) (``MMI Letter''); Comment Letter of 
Morningstar, Inc. (Aug. 12, 2015) (``Morningstar Letter''); Comment 
Letter of North American Securities Administrators Association, Inc. 
(Aug. 11, 2015) (``NASAA Letter''); Comment Letter of National 
Regulatory Services (Aug. 11, 2015) (``NRS Letter''); Comment Letter 
of OppenheimerFunds, Inc. (Aug. 10, 2015) (``Oppenheimer Letter''); 
Comment Letter of Charles Schwab & Co., Inc. (Aug. 11, 2015) 
(``Schwab & Co. Letter''); Comment Letter of Securities Industry and 
Financial Markets Association, Asset Management Group and Asset 
Managers Forum (Aug. 11, 2015) (``SIFMA Letter''); Comment Letter of 
the Systemic Risk Council (Aug. 7, 2015) (``SRC Letter''); Comment 
Letter of T. Rowe Price Associates, Inc. (Aug. 11, 2015) (``T. Rowe 
Price Letter''). However, certain commenters expressed their 
disapproval of the collection this data. See Comment Letter of The 
Alternative Investment Management Association Limited (Aug. 6, 2015) 
(``AIMA Letter'') (stating that this data should not be collected 
unless kept confidential).
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a. Amendments to Item 5 of Part 1A and Section 5 of Schedule D
    Item 5 of Part 1A and Section 5 of Schedule D currently require 
advisers to provide information about their advisory business including 
percentages of types of clients and assets managed for those clients. 
We had proposed to collect information specifically about separately 
managed accounts, including types of assets held, and the use of 
derivatives and borrowings in the accounts.\10\ We are adopting the 
amendments to Item 5 of Part 1A and Section 5 of Schedule D largely as 
proposed, with some modifications in response to comments we received, 
as discussed below. We are amending Item 5 of Part 1A and Section 5 of 
Schedule D to require advisers to provide information on an aggregate 
level regarding separately managed accounts that they manage.\11\ 
Advisers will be required to report information about the types of 
assets held and the use of derivatives and borrowings in separately 
managed accounts. Advisers that report that they have regulatory assets 
under management attributable to separately managed accounts in 
response to new Item 5.K.(1) of Part 1A will be required to complete 
new Section 5.K.(1) of Schedule D, and may be required to complete new 
Sections 5.K.(2) and 5.K.(3) of Schedule D regarding those accounts.
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    \10\ See Proposing Release, supra footnote 3 at Section II.A.1.
    \11\ See infra Section II.A.2.b. for a discussion of other 
amendments to Item 5 of Part 1A.
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b. Section 5.K.(1) of Schedule D
    In Section 5.K.(1) of Schedule D advisers will be required to 
report the approximate percentage of separately managed account 
regulatory assets under management that are invested in twelve broad 
asset categories, modified from the ten that were proposed in response 
to comments received and discussed below. As proposed, advisers with at 
least $10 billion in regulatory assets under management attributable to 
separately managed accounts will report, on an annual basis, both mid-
year and end of year \12\ percentages while advisers with less than $10 
billion in regulatory assets under management attributable to 
separately managed accounts will report only end of year percentages. 
As we stated in the Proposing Release, we believe this information will 
allow us to better monitor this segment of the investment advisory 
industry and identify advisers that specialize in particular asset 
classes.\13\ We are adopting the amendments to Section 5.K.(1) of 
Schedule D largely as proposed, with some minor modifications in 
response to comments we received, as discussed below.
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    \12\ As stated in Amended Form ADV, Part 1A, Schedule D, Section 
5.K.(1), end of year refers to the date used by the adviser to 
calculate its regulatory assets under management, and mid-year is 
the date six months before the end of year date.
    \13\ See Proposing Release, supra footnote 3 at Section II.A.1.
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    While some commenters generally supported the collection of this 
information,\14\ others suggested requiring a minimum regulatory assets 
under management or number of account threshold for reporting on this 
section to minimize burdens on small and mid-sized advisers.\15\ We 
recognize that this reporting will impose some burden on all advisers, 
including smaller advisers, but we believe that gathering this 
information for all registered advisers is important for us to gain a 
full understanding of assets held in separately managed accounts 
managed by investment advisers of different sizes. This section 
requires advisers, on an annual basis, to report aggregate separate 
account investments across twelve categories of investments. We believe 
that requiring all advisers to separately managed accounts to report 
this information will enable us to gain a more fulsome picture of 
assets held in separately managed accounts. We have also tailored and 
limited the scope of information to be reported and the frequency of 
such reporting.
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    \14\ See Schwab & Co. Letter (``We support the SEC's efforts to 
collect additional data seeking to minimize as much as possible the 
burden on regulated entities and the investors they service while 
helping the SEC to enhance their ability to conduct risk-based 
examinations of advisers.''); BlackRock Letter (``We believe this 
information will help the Commission identify which managers 
specialize in SMAs that invest in certain asset classes.'').
    \15\ Comment Letter of Advisor Solutions Group, Inc. (Aug. 11, 
2015) (``ASG Letter''); AIMA Letter (suggesting that advisers with a 
small number of separately managed account clients or a small amount 
of separately managed account assets under management be exempt from 
reporting on separately managed accounts).
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    With respect to the categories of investments listed in Section 
5.K.(1), we proposed to require advisers to report the approximate 
percentage of separately managed account regulatory assets under 
management invested in ten broad asset categories.\16\ Several 
commenters sought clarification on how to classify assets in certain 
categories \17\ Another commenter suggested new categories, such as 
``private real estate'' and ``structured products.'' \18\ In response 
to that commenter's suggestion \19\ we have included a new category for 
``Cash and Cash Equivalents.'' \20\ We also believe that additional 
delineation of equity securities would be helpful for our staff and the 
public, and accordingly, we have added a ``Non-Exchange-Traded Equity 
Securities'' category in addition to the ``Exchange-Traded Equity 
Securities'' category, to clarify where to report equities that are not 
listed on a regulated securities exchange. This information will assist 
our examination staff in monitoring risks associated with advisers 
managing separately managed account assets in securities that are not 
exchange traded.
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    \16\ Proposing Release, supra footnote 3 at Section II.A.1.
    \17\ LPL Letter; MMI Letter. See also Dechert Letter (stating 
that advisers may not maintain systems that permit them to 
efficiently categorize assets based on asset types in the proposed 
amendments); IAA Letter.
    \18\ BlackRock Letter. BlackRock also suggested removing 
``derivatives'' as a category, because derivatives information for 
some advisers will be collected in Section 5.K.(2). We have not 
removed ``derivatives'' as a category, because are collecting 
different information in Section 5.K.(2) than in Section 5.K.(1).
    \19\ BlackRock Letter; MMI Letter.
    \20\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(1)(a)-
(b). The text proceeding Section 5.K.(1) gives examples of cash and 
cash equivalents, including bank deposits, certificates of deposit, 
bankers' acceptances, and similar bank instruments. We also added an 
instruction to the text preceding Section 5.K.(1)(a) stating that 
advisers should round to the nearest percent when reporting this 
information.
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    Some commenters also sought clarification about how to report 
assets that may be classified into multiple categories.\21\ Commenters 
also suggested that advisers be permitted to use reasonable and 
documented systems and methodologies for determining

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appropriate asset categories.\22\ We acknowledge that some assets may 
be classified into more than one category or require advisers to apply 
discretion about which category applies to a particular asset, and 
agree that advisers should be permitted to use reasonable methodologies 
in selecting a category in which to report such an asset, but should 
not double count assets. Accordingly, in response to these comments, we 
are adding an instruction to Item 5.K.1 that advisers may use their own 
internal methodologies and the conventions of their service providers 
in determining how to categorize assets, so long as their methodologies 
are consistently applied and consistent with information the advisers 
report internally and to current and prospective clients, but should 
not double count assets. We believe that providing this flexibility, 
which we modeled after an instruction in Form PF, acknowledges that 
advisers may categorize the same or similar assets differently based on 
different methodologies.
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    \21\ Comment Letter of Anonymous (Aug. 11, 2015) (``Anonymous 
Letter'') (``derivatives'' category may overlap with others); 
Comment Letter of JAG Capital Management LLC (June 24, 2015) (``JAG 
Letter'') (convertible bonds, TIPS and ETFs); MMI Letter 
(convertible bonds, fixed income securities, preferred securities); 
Comment Letter of Professional Compliance Assistance, Inc. (Aug. 11, 
2015) (``PCA Letter'') (balanced mutual funds). See also IAA Letter 
(U.S. government agency, corporate bonds, other).
    \22\ Dechert Letter; IAA Letter.
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    Some commenters expressed concerns about the proposed reporting of 
``Corporate Bonds--Investment Grade'' and ``Corporate Bonds--Non-
Investment Grade,'' based on the proposed definitions of such terms, as 
they believed that this would require advisers to make subjective 
decisions about how to classify assets and could result in inconsistent 
reporting. These commenters requested that the Commission eliminate the 
reporting requirement, or either provide a more objective definition or 
permit an adviser to follow and rely on the classifications made by 
another investment adviser.\23\ Another commenter noted the reference 
to ``liquidity'' in the definition and requested that the Commission 
seek a consistent approach to liquidity-related concepts across 
reporting regimes.\24\
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    \23\ LPL Letter; MMI Letter.
    \24\ IAA Letter.
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    In response to these comments, we are removing the proposed 
definitions of these terms from Form ADV. Given the instruction we have 
added permitting advisers to use their own consistently applied 
methodologies to select asset categories, we believe that the 
definitions are no longer necessary. We recognize that an adviser might 
reasonably categorize the same or similar assets differently from 
another adviser. Even with such differences, we believe that this 
categorization will provide useful information, particularly given the 
Commission's intended purpose for requiring such reporting, which is to 
better understand how assets in separately managed accounts are 
invested across that industry, rather than to impose a standard of 
creditworthiness for such assets.
    Other commenters suggested we provide instructions as to whether 
advisers need to look through investments in funds or ETFs, for 
example, and report the underlying asset type.\25\ With respect to 
looking through an account's investments in funds, advisers should not 
do so and we have clarified this in the form.\26\ Advisers should not 
look through investments in funds because we want to understand the 
extent to which separately managed account assets are invested in funds 
as well as other types of investments.
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    \25\ ASG Letter; MMI Letter; NRS Letter; Schwab & Co. Letter.
    \26\ We have added the following sentence to the text preceding 
Schedule D, Section 5.K.(1)(a): ``Investments in derivatives, 
registered investment companies, business development companies, and 
pooled investment vehicles should be reported in those categories. 
Do not report those investments based on related or underlying 
portfolio assets.''
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c. Section 5.K.(2) of Schedule D
    We are also adopting amendments to add Section 5.K.(2) of Schedule 
D to Form ADV to require advisers to separately managed accounts to 
report information regarding the use of borrowings and derivatives in 
those accounts with modifications from the proposal in response to 
commenters. These amendments are designed to provide data to assist our 
staff in identifying and monitoring the use of borrowings and 
derivatives exposures in separately managed accounts as part of the 
staff's risk assessment and monitoring programs. Some commenters 
supported our proposal for the collection of that data.\27\ However, as 
discussed below, several other commenters expressed concern about the 
proposed reporting thresholds, the public disclosure of certain 
information,\28\ the use of gross notional metrics and the burden 
associated with reporting this information. The specific gross notional 
metrics used in Section 5.K.(2) are ``gross notional value'' and 
``gross notional exposure,'' as proposed. The calculation of gross 
notional exposure includes borrowings and the gross notional value of 
derivatives. The definition of ``gross notional value'' specifies how 
derivatives are measured when determining an account's gross notional 
exposure.\29\
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    \27\ NASAA Letter; SRC Letter.
    \28\ We discuss public disclosure of separately managed account 
information in Section II.A.1.e.
    \29\ Gross notional exposure of an account 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 regulatory assets under management of the account.'' 
Amended Form ADV, Part 1A, Schedule D, Item 5.K.(2). Gross notional 
value is defined in the Glossary to Form ADV 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.''
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    One commenter suggested requiring reporting on derivatives only if 
there is a minimum gross notional amount of derivatives.\30\ Another 
commenter suggested as an alternative requiring derivatives reporting 
only if the adviser uses leverage as part of its investment 
strategy.\31\ We disagree with these approaches as they would give us 
information only about a segment of the separately managed account 
industry that uses derivatives or borrowings, and because the line 
between advisers that use derivatives and borrowings strategically and 
those that do not can be fluid and difficult to define. While we are 
adopting Section 5.K.(2) largely as proposed, we have modified it in 
certain places in response to commenters' concerns, as discussed below.
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    \30\ Anonymous Letter.
    \31\ JAG Letter.
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    As proposed, advisers with at least $150 million but less than $10 
billion in regulatory assets under management attributable to 
separately managed accounts would have been required to annually report 
in Section 5.K.(2)(b) the number of accounts and average borrowings 
that corresponded to ranges of net asset values and gross notional 
exposures, as of the date the adviser used to calculate its regulatory 
assets under management for purposes of the adviser's annual updating 
amendment. Advisers with at least $10 billion in regulatory assets 
under management attributable to separately managed accounts would have 
been required to annually report in Section 5.K.(2)(a) the number of 
accounts, average borrowings, and average derivatives exposures across 
six categories of derivatives, based on the same ranges of net asset 
values and gross notional exposures in Section 5.K.(2)(b), as of the 
date used by the adviser to calculate its regulatory assets under 
management for purposes of its annual updating amendment, and six 
months before that date.
    We received a diversity of views about whether the proposed 
reporting thresholds of at least $150 million in regulatory assets 
under management attributable to separately managed

[[Page 60422]]

accounts, and at least $10 billion in regulatory assets under 
management attributable to separately managed accounts for additional 
reporting, were appropriate, and if not, what these thresholds should 
be.\32\ Certain commenters suggested thresholds based on number of 
accounts or the size of individual separately managed accounts. 
However, we believe establishing thresholds based on regulatory assets 
under management attributable to separately managed accounts better 
provides us with comparability across advisers and appropriately 
advances our regulatory goal of gaining a more complete understanding 
of advisers' separately managed account business as compared to the 
alternatives suggested by commenters. Several commenters recommended 
that we increase the $150 million threshold to $500 million on the 
basis that such a change would allow the Commission to collect 95% of 
the data that it would using the $150 million threshold, while 
relieving approximately 3,000 advisers from having to report 
derivatives and borrowings information.\33\ On balance, and based on 
our staff's experience with small advisers, we agree with commenters 
that this is a sensible accommodation that would allow us to meet our 
regulatory objectives while alleviating reporting burdens on smaller 
advisers. As a result, we have raised the minimum reporting threshold 
to $500 million. Advisers with at least $500 million but less than $10 
billion in separately managed account regulatory assets under 
management will be required to report on Section 5.K.(2)(b) the amount 
of separately managed account regulatory assets under management and 
the dollar amount (rather than the proposed average amount) of 
borrowings attributable to those assets that correspond to three levels 
of gross notional exposures rather than four levels as proposed. 
Advisers with at least $10 billion in separately managed account 
regulatory assets under management will be required to report on 
Section 5.K.(2)(a) the information required in Section 5.K.(2)(b) as 
well as the derivative exposures across the same six derivatives 
categories that were proposed. Also as proposed, advisers may limit 
their reporting for both (a) and (b) to individual accounts of at least 
$10 million.\34\
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    \32\ ASG agreed with the $150 million threshold. Oppenheimer 
agreed with the thresholds, but also suggested a threshold based on 
number of accounts, below which the adviser would not be required to 
respond to Section 5.K.(2), and permitting advisers to round number 
of accounts to the nearest five in a particular range. IAA 
recommended increasing the $150 million threshold to $500 million 
but supported the $10 billion threshold. SIFMA also agreed with the 
thresholds, but suggested changing the account-level reporting 
thresholds to minimize confidentiality concerns and permitting 
advisers to round to the nearest 5 accounts in a particular range. 
AIMA noted that the proposed thresholds at the adviser level and at 
the individual separately managed account level are low for advisers 
with institutional clients and recommended not requiring advisers 
with less than $150 million in separately managed account assets to 
report any separately managed account information, including in 
Sections 5.K.(1) and 5.K.(3). Anonymous suggested that the reporting 
threshold should be based on a minimum gross notional amount in 
relation to the adviser's total regulatory assets under management. 
BlackRock suggested that reporting thresholds should not be tied to 
aggregate adviser separately managed account regulatory assets under 
management, but rather only to individual separately managed account 
regulatory assets under management.
    \33\ IAA Letter; Comment Letter of the New York State Bar 
Association, Business Law Section, Securities Regulation Committee, 
Private Investment Funds Subcommittee (Aug. 12, 2015) (``NYSBA 
Committee Letter''); PCA Letter; Schwab & Co. Letter. IAA estimated 
that if the minimum threshold were $150 million, the Commission 
would collect data on approximately $37.8 trillion in separately 
managed account assets under management from 7,257 advisers. 
However, it estimated that if the threshold were raised to $500 
million, the Commission would collect data on approximately $36.8 
trillion in separately managed account assets under management from 
approximately 3,700 advisers. A recent analysis of Form ADV by 
Commission staff filings shows that over 2,800 advisers will be 
relieved from the filing requirement and we will receive information 
on 98% of the assets for which we would have received reporting 
under the proposed $150 million threshold. IARD system data as of 
May 16, 2016.
    \34\ Some commenters suggested making the exclusion of 
individual accounts under $10 million optional because excluding 
those accounts might, in some cases, be more costly to firms. See 
Dechert Letter; IAA Letter; NYSBA Committee Letter. We have revised 
the text in Section 5.K.(2) to read, ``You may, but are not required 
to, complete the table with respect to any separately managed 
account with regulatory assets under management of less than 
$10,000,000.''
---------------------------------------------------------------------------

    Another change we are making to Section 5.K.(2) in response to 
commenters is to base the reporting of borrowings and derivatives on 
regulatory assets under management in separately managed accounts, 
rather than net asset value as proposed. One commenter noted that 
advisers do not currently characterize their individual client accounts 
according to net asset values.\35\ We agree, and accordingly advisers 
will be required to report both the amount of regulatory assets under 
management and borrowings in their separately managed accounts that 
correspond to ranges of gross notional exposure of those accounts. 
Regulatory assets under management is already used throughout Form ADV, 
and should be available to advisers for purposes of Section 5.K.(2). 
Similarly, the reporting of borrowings in Section 5.K.(2) has been 
revised to require information about the total dollar amount of 
borrowings that correspond to different ranges of gross notional 
exposure, and not the weighted average amount (which is based on a 
percentage of net asset value).\36\ We believe these changes will 
reduce burdens for advisers completing this section, while providing 
our staff with additional information regarding borrowings and 
derivatives exposures in separately managed accounts.
---------------------------------------------------------------------------

    \35\ IAA Letter.
    \36\ One commenter suggested that reporting of borrowing is 
duplicative of reporting of margin by broker-dealer custodians to 
FINRA. JAG Letter. While we recognize that broker-dealers report 
this information, we note that parties other than broker-dealers may 
serve as custodians to separately managed accounts.
---------------------------------------------------------------------------

    Commenters presented a range of concerns and suggestions about the 
use of gross notional metrics in reporting on Section 5.K.(2). Some 
commenters supported the use of gross notional metrics for assessing 
the use of derivatives and borrowings in separately managed 
accounts,\37\ while others raised issues concerning the utility of 
gross notional metrics.\38\ Several commenters stated that gross 
notional metrics are not accurate measures of leverage or risk and 
argued that they provide little value without context, and they could 
be misleading or misunderstood.\39\ Some commenters suggested reporting 
derivatives and borrowings in Form ADV similar to how leverage is 
reported in Form PF or in the AIFMD framework.\40\ For example, one

[[Page 60423]]

commenter suggested reporting long and short dollar amounts, similar to 
Form PF.\41\ We acknowledge these commenters' concerns and recognize 
that gross notional metrics may not always reflect the way in which 
derivatives are used in a separately managed account and are not a risk 
measure.\42\ We also recognize that there are other measures or 
additional data points that could be used to evaluate the use of 
derivatives in a separately managed account, which may depend on 
various considerations, such as investment strategy, types of 
investments, and the specific risks that are being considered. The 
calculations of gross notional exposure and gross notional value that 
we proposed and are adopting today rely on measures common to all 
advisers: regulatory assets under management of an account; total 
amount of borrowings in an account; and the notional value of 
derivatives. As we noted in the Proposing Release, gross notional 
metrics are commonly used metrics and are comparable to the information 
collected on Form PF regarding private funds. On balance, therefore, we 
continue to believe that, for most types of derivatives the gross 
notional metrics generally provide a measure that is sufficient for 
this regulatory purpose, which is to collect information about the 
scale of an account's derivatives activities, rather than to collect 
specific risk metrics or more granular information regarding the ways 
in which derivatives are used in a separate account. Section 5.K.(2) 
also provides advisers the option of including a narrative description 
of the strategies and/or manner in which borrowings and derivatives are 
used in the management of separately managed accounts. To the extent 
that advisers are concerned that disclosure of gross notional metrics 
would be misleading, they could provide in the space provided in 
Section 5.K.(2) an additional narrative description regarding their use 
of derivatives in these accounts.
---------------------------------------------------------------------------

    \37\ Comment Letter of CFA Institute (Aug. 10, 2015) (``CFA 
Letter'') (observing that notional exposure metrics are valuable in 
conducting investment and operational analyses, but provide less 
value for risk management); NASAA Letter (stating that the proposal 
contemplates collecting commonly used metrics on the use of 
derivatives and borrowings, consistent with Form PF); and SRC Letter 
(suggesting that the collection of data relating to gross notional 
exposure, borrowings and gross notional value of derivatives would 
provide the Commission with ``invaluable insight into the use of 
derivatives and borrowings by advisers in separately managed 
accounts.'').
    \38\ See, e.g. NYSBA Committee Letter (stating that publicly 
reporting gross notional exposures without also reflecting actual 
exposure on the form would be misleading and potentially alarming to 
investors) and MFA Letter (asserting that gross notional disclosures 
provide an inaccurate representation of economic or market exposures 
and would not provide meaningful information, and thus should not be 
required).
    \39\ BlackRock Letter; Dechert Letter; IAA Letter; Invesco 
Letter.
    \40\ Dechert Letter (suggesting allowing additional data points, 
such as the ones required in Form PF, to better provide the 
Commission a more comprehensive understanding of the extent to which 
derivatives are used in separately managed accounts and the relevant 
risks associated with them); Blackrock Letter (providing an appendix 
containing a comprehensive framework for calculating leverage, 
similar to AIFMD's commitment leverage approach, under which 
derivatives used for hedging positions and offsetting long and short 
positions do not create leverage).
    \41\ AIMA Letter.
    \42\ For example, different derivatives transactions having the 
same notional amount but different underlying reference assets--for 
example, an interest rate swap and a credit default swap having the 
same notional amount--may expose a separately managed account to 
very different potential investment risks and potential payment 
obligations.
---------------------------------------------------------------------------

    Many commenters requested that the term ``derivatives'' be defined 
as part of this rulemaking.\43\ Several of these commenters suggested 
the Commission adopt a definition that provides flexibility to adapt to 
changing financial markets and instruments, such as the characteristic-
based definition of derivatives in FASB ASC 815.\44\ Another commenter, 
however, suggested that we should not define derivatives, similar to 
Form PF.\45\ We believe that Form ADV, which collects aggregate 
portfolio information, is similar to Form PF. Thus, consistent with 
adviser reporting on Form PF and the proposal, we have decided not to 
define the term at this time. Several commenters requested 
clarification on whether interest rate derivatives should be presented 
in terms of 10-year bond equivalents, consistent with Form PF.\46\ We 
have added a sentence to the definition of ``interest rate derivative'' 
in the Glossary that interest rate derivative information should be 
presented in terms of 10-year bond equivalents. Regarding the term 
``equity derivative,'' one commenter requested confirmation that the 
term ``listed'' as used in Form ADV has the same meaning as in Form PF. 
We confirm that the term ``listed equity derivatives'' refers to 
exposures to derivatives for which the underlying asset is listed 
equities.\47\
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    \43\ ASG Letter; Oppenheimer Letter; PCA Letter; SIFMA Letter; 
T. Rowe Price Letter.
    \44\ Oppenheimer Letter; SIFMA Letter; T. Rowe Price Letter.
    \45\ IAA Letter.
    \46\ AIMA Letter; IAA Letter; MFA Letter.
    \47\ We note that current staff guidance regarding this term in 
Form PF takes a similar approach. See Form PF, Frequently Asked 
Questions, Question 26.1.
---------------------------------------------------------------------------

    Finally, we are also revising the proposal in ways that should both 
alleviate concerns about confidentiality, which we discuss more fully 
below, and simplify reporting of separately managed account 
information. First, we reduced the number of categories of gross 
notional exposure that we proposed in the charts. As proposed, Section 
5.K.(2) included four categories of gross notional exposure by which 
accounts and borrowings were reported. This has been reduced to three 
categories of gross notional exposure: less than 10%, 10--149% and 150% 
or more. In addition to reducing the number of categories from four to 
three, we changed the highest threshold from 200% or more to 150% or 
more. After consideration of comments received regarding the potential 
burdens of providing this information, we believe that the use of three 
categories instead of four and changing the highest threshold from 200% 
or more to 150% or more will reduce the reporting burden on advisers 
while providing us with sufficient information regarding the use of 
derivatives and borrowings by investment advisers in separately managed 
accounts. In addition, we believe that these modifications provide less 
granular information than proposed, thereby mitigating some concerns 
commenters raised regarding confidentiality. We also modified Section 
5.K.(2) to remove reporting of the number of separately managed 
accounts. As proposed, Section 5.K.(2) would have required advisers to 
report the number of accounts that corresponded to the accounts' net 
asset value and gross notional exposure. Section 5.K.(2)(a) and (b) now 
require reporting of regulatory assets under management based on ranges 
of gross notional exposure of accounts.\48\
---------------------------------------------------------------------------

    \48\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(2).
---------------------------------------------------------------------------

d. Section 5.K.(3) of Schedule D
    As proposed, we are amending Form ADV 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.\49\ This 
information will allow our examination staff to identify advisers whose 
clients use the same custodian in the event, for example, a concern is 
raised about a particular custodian. As we discussed in the Proposing 
Release, similar disclosures are required for custodians to pooled 
investment vehicles \50\ and registered investment companies.\51\
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    \49\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(3). We 
added ``aggregate'' before ``separately managed account regulatory 
assets under management'' to the text preceding the section for 
clarity.
    \50\ Amended Form ADV, Part 1A, Schedule D, Section 7.B.(1), 
Question 25.
    \51\ Form N-1A, Item 19(h)(3).
---------------------------------------------------------------------------

    We received several comments on this aspect of the proposal. For 
example, a commenter suggested that we obtain this information from 
other parties, including custodians.\52\ However, we do not directly 
regulate all separately managed account custodians and we believe this 
information is available to advisers because advisers interact with 
custodians when placing trades on behalf of separately managed account 
clients. Some commenters agreed with the ten percent of regulatory 
assets under management threshold for reporting custodians of the 
adviser's separately managed account client

[[Page 60424]]

assets.\53\ Other commenters recommended that the Commission modify the 
threshold, and raised concerns about this reporting for smaller 
advisers.\54\ We agree with the commenters who believe that the ten 
percent threshold is appropriate. We recognize that this reporting will 
impose some burdens on all advisers, including smaller advisers. 
However, we are adopting the ten percent threshold as proposed because 
we continue to believe it, rather than a higher threshold, most 
appropriately advances our regulatory goal of identifying and obtaining 
a more complete picture regarding the custodians serving a significant 
proportion of an adviser's separately managed account clients. 
Moreover, we believe we have appropriately tailored and limited the 
scope of information to be reported since this requirement at most will 
require advisers to identify ten custodians.
---------------------------------------------------------------------------

    \52\ BlackRock Letter. See also Comment Letter of Financial 
Engines Advisors, LLC (Aug. 11, 2015) (``Financial Engines Letter'') 
(suggesting identification of recordkeeper, rather than custodian, 
where advised assets are associated with a 401(k) plan).
    \53\ Anonymous Letter; CFA Letter; PCA Letter.
    \54\ AIMA Letter (suggested a twenty percent threshold); 
BlackRock Letter; IAA Letter; MMI Letter; NRS Letter (suggested a 
minimum separately managed account regulatory assets under 
management threshold in lieu of or in addition to the ten percent 
threshold).
---------------------------------------------------------------------------

    In addition, some commenters recommended deleting or clarifying the 
requirement to identify the location of the custodian's office.\55\ 
These commenters reasoned that because of the electronic nature of 
custodian records, and the current advisers' practice of not 
maintaining this physical location information as a matter of course, 
disclosure of the identity of the custodian, rather than the location 
of the office, would be of primary benefit to the Commission. This 
information is consistent with similar questions we ask about 
custodians in Schedule D, Section 7.B.(1), Question 25 of Form ADV. 
Location information allows us to identify the appropriate contacts 
when a custodian is part of a large organization with multiple 
offices.\56\ Therefore, we are adopting these requirements as proposed.
---------------------------------------------------------------------------

    \55\ ASG Letter; IAA Letter; MMI Letter; Oppenheimer Letter; PCA 
Letter; SIFMA Letter.
    \56\ One commenter also sought clarification about reporting 
custodians who have multiple legal entities. IAA Letter. Advisers do 
not have to determine affiliations of related custodians for 
purposes of this item, but rather should report the particular legal 
entity that is custodian for the adviser's separately managed 
account assets.
---------------------------------------------------------------------------

e. Public Disclosure of Separately Managed Account Information
    While commenters understood our reasons for collecting information 
on separately managed accounts, many expressed concerns that the new 
reporting would lead to disclosure of client-identifying information or 
confidential or proprietary information about investment strategy.\57\ 
Commenters also expressed concern that public disclosure of separately 
managed account information could put advisers with a small number of 
separately managed account clients at a competitive disadvantage if 
clients were concerned about the reporting on Form ADV being linked or 
attributable to their separately managed accounts.\58\ We address these 
concerns below.
---------------------------------------------------------------------------

    \57\ Comment Letter of the American Bar Association, Section of 
Business Law, Federal Regulation of Securities Committee (Sept. 3, 
2015) (``ABA Committee Letter''); AIMA Letter; Anonymous Letter; ASG 
Letter; BlackRock Letter; Dechert Letter; IAA Letter; Invesco 
Letter; MFA Letter; NYSBA Committee Letter; Oppenheimer Letter; 
Comment Letter of Schulte Roth & Zabel LLP (Aug. 11, 2015) 
(``Schulte Letter''); Comment Letter of Shearman & Sterling LLP 
(Aug. 11, 2015) (``Shearman Letter''); SIFMA Letter; Comment Letter 
of Securities Industry and Financial Markets Association Asset 
Management Group and Asset Managers Forum (Jan. 13, 2016) (``SIFMA 
II Letter''). See also Comment Letter of Private Equity Growth 
Capital Council (Aug. 11, 2015) (``PEGCC Letter'').
    \58\ ABA Committee Letter; AIMA Letter; Anonymous Letter; 
BlackRock Letter; Dechert Letter; IAA Letter; MFA Letter; NYSBA 
Committee Letter; Oppenheimer Letter; Schulte Letter; Shearman 
Letter; SIFMA Letter; SIFMA II Letter.
---------------------------------------------------------------------------

    Section 210(a) of the Advisers Act requires information in Form ADV 
to be publicly disclosed, unless we find that public disclosure is 
neither necessary nor appropriate in the public interest or for the 
protection of investors.\59\ As discussed in the Proposing Release, we 
believe these amendments will enhance our staff's risk assessment and 
monitoring activities, which also serve to benefit investors.\60\ We 
also believe that aggregate information about separately managed 
accounts may assist the public in better understanding advisers' 
management of separately managed account clients.\61\ This information 
may directly improve the ability of clients and potential clients of 
investment advisers to make more informed decisions about the selection 
and retention of investment advisers, which, in turn, may also benefit 
the public by increasing competition among investment advisers for 
clients. For these reasons, we continue to believe that public 
disclosure of information about separately managed accounts on Form ADV 
is appropriate in the public interest as well as for the protection of 
investors. We have, however, made several modifications to our 
proposal, discussed below, in response to commenters.
---------------------------------------------------------------------------

    \59\ Advisers Act section 210(a). Certain commenters suggested 
that this information be filed in a nonpublic manner, similar to 
Form PF. See ABA Committee Letter; PEGCC Letter. We note that Form 
PF is filed on a confidential basis under Advisers Act section 
204(b), which prohibits the Commission from disclosing Form PF 
information unless those disclosures are made to Congress, other 
Federal agencies, or courts under certain conditions. Advisers Act 
section 204(b)(8).
    \60\ Proposing Release, supra footnote 3 at Section II.A.1.
    \61\ C.f., NASAA Letter (``These amendments would provide 
additional necessary information to the SEC and state regulators, as 
well as members of the public, far outweighing any regulatory burden 
the proposal creates.'').
---------------------------------------------------------------------------

    Some commenters also expressed broader concerns that public 
disclosure of separately managed account holdings or borrowings and 
derivatives information would reveal proprietary investment 
strategies.\62\ We do not believe that public disclosure of aggregate 
information in Schedule D, Sections 5.K.(1) or (2) would lead to the 
revelation of proprietary investment strategies. This information would 
be reported for one or two data points per year,\63\ depending on the 
amount of regulatory assets under management attributable to separately 
managed accounts, ninety days after the end of the adviser's fiscal 
year,\64\ and only on an aggregate basis for all the separately managed 
account clients that an adviser manages. Given the limited number of 
data points that advisers to separately managed accounts must report 
on, the fact that the information is reported both in aggregate and in 
broad categories across an adviser's separately managed accounts, and 
the time lag between those data points and any public reporting, we 
disagree that this reporting could compromise trading

[[Page 60425]]

strategies. In addition, as discussed above, we reduced the number of 
categories of gross notional exposures in Section 5.K.(2), which means 
advisers will be required to report less granular information.\65\
---------------------------------------------------------------------------

    \62\ See, e.g., ABA Committee Letter (``While individual types 
of securities would not be disclosed, the percentage of the 
portfolio in ten different asset categories would be subject to 
unprecedented public scrutiny, as would be detailed breakdowns of 
derivatives exposures and borrowings.''); BlackRock Letter; Dechert 
Letter; MFA Letter.
    \63\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(1) and 
(2). Although two commenters recommended against larger advisers 
providing both mid-year and end of year separately managed account 
information, we believe this information is important to 
understanding advisers to the largest separately managed accounts. 
LPL Letter; NRS Letter.
    \64\ Advisers are 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. Advisers with at 
least $10 billion in separately managed account regulatory assets 
under management would be required to report both mid-year and end 
of year information as part of their annual filing. Many commenters 
supported the annual reporting and recommended against more frequent 
reporting. Anonymous Letter; ASG Letter; CFA Letter; Comment Letter 
of Capital Research and Management Company (Aug. 11, 2015) 
(``Capital Research Letter''); MMI Letter; Morningstar Letter; NRS 
Letter; PCA Letter; Shearman Letter. Form ADV is required to be 
amended at least annually, within 90 days of the end of the 
adviser's fiscal year. See rule 204-1.
    \65\ Supra Section II.A.1.c.
---------------------------------------------------------------------------

    We are mindful of commenters' concerns regarding disclosure of 
client-specific information and related competition concerns.\66\ 
Accordingly, we revised Item 5.D., which lists the number of advisory 
clients in categories, to include a ``fewer than 5 clients'' 
column.\67\ We also have modified Section 5.K.(2) to remove reporting 
of the number of accounts. As proposed, Section 5.K.(2) would have 
required reporting of the number of accounts that correspond to the 
accounts' net asset value and gross notional exposure. As adopted, 
Section 5.K.(2)(a) and (b) will require reporting solely by ranges of 
gross notional exposure of accounts.\68\ We believe that these changes 
mitigate the risk of any client-specific information being disclosed in 
Item 5.D. and Sections 5.K.(1) and (2).
---------------------------------------------------------------------------

    \66\ See, e.g., ABA Committee Letter; AIMA Letter; BlackRock 
Letter (``For a particular adviser, there may be only one or two 
accounts in a particular category, potentially making this client 
identifiable and its RAUM with an adviser public information.''); 
Dechert Letter; IAA Letter; MFA Letter (``[A] fund manager may need 
to report data of a single SMA client, which is not suitable for 
public disclosure.''); NYSBA Committee Letter (``In addition, if an 
adviser has a small number of accounts, the disclosure of any of the 
information would be particularly problematic as others may be in a 
position to determine the identity of the clients in any such 
account.''); Oppenheimer Letter; SIFMA Letter.
    \67\ Several commenters suggested limiting reporting for five or 
fewer clients, or rounding to the nearest five clients. IAA Letter; 
NYSBA Committee Letter; Oppenheimer Letter; SIFMA Letter. Other 
commenters suggested that advisers with a small number of separately 
managed account clients be excluded from reporting on separately 
managed accounts. See, e.g., AIMA Letter; SIFMA Letter. However, a 
small number of accounts could still include a large amount of 
assets or significant use of borrowings and derivatives. For that 
reason, reporting will be required on these accounts. We believe 
that the modifications in Item 5.D. and Schedule D, Section 5.K.(2) 
will address confidentiality concerns related to those accounts.
    \68\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(2).
---------------------------------------------------------------------------

f. Additional Comments About Reporting of Separately Managed Accounts
    Additional comments regarding separately managed account reporting 
in Schedule D included comments about the definition of separately 
managed account, the treatment of subadvisers, and the reporting 
requirements when both the registered investment adviser and the 
separately managed account owner are not United States persons.
    First, several commenters sought clarification of the definition of 
the term ``separately managed account'' as used in Form ADV.\69\ We do 
not believe that a formal definition of this term is required because 
we have included instructions in the text preceding Sections 5.K.(1) 
and (2) to clarify that any regulatory assets under management reported 
in Item 5.D.(3)(d) (investment companies), (e) (business development 
companies), and (f) (other pooled investment vehicles) should not be 
reported in Schedule D, Sections 5.K.(1) or (2). Thus, regulatory 
assets under management reported for those types of clients in Item 
5.D.(3) should not be considered separately managed account assets and 
should not be reported in Sections 5.K.(1) or (2).
---------------------------------------------------------------------------

    \69\ See, e.g., IAA Letter (noting the term has not been defined 
in the Advisers Act); Financial Engines Letter (seeking the 
exclusion of assets within defined contribution plans from 
separately managed accounts); MMI Letter (seeking clarification for 
sponsors, overlay managers, portfolio managers and model providers). 
Commenters also sought clarification of the treatment of pooled 
investment vehicles that are not private funds. See PEGCC Letter. 
See also IAA Letter. Pooled investment vehicles include, but are not 
limited to, private funds.
---------------------------------------------------------------------------

    Second, several commenters requested clarification about how to 
treat subadviser relationships in reporting separately managed account 
information, including suggestions that only advisers with 
discretionary authority report information in these sections.\70\ In 
response to these concerns, we are clarifying the instructions in the 
text preceding Section 5.K.(1)(a) to expressly state, as they already 
do for Section 5.K.(2), that a subadviser to a separately managed 
account should provide information only about the portion of the 
account that it subadvises.\71\ We recognize that these instructions 
may require both advisers and subadvisers to report on the same 
regulatory assets under management (i.e., the assets that they both 
manage in an account) in Sections 5.K.(1) and (2) of their separate 
Form ADVs, which is consistent with the current reporting structure of 
regulatory assets under management in Form ADV.
---------------------------------------------------------------------------

    \70\ Comment Letter of JG Advisory Services LLC (Jul. 22, 2015) 
(``JGAS Letter''); LPL Letter; MMI Letter; NYSBA Committee Letter; 
SIFMA Letter. See also Dechert Letter; IAA Letter.
    \71\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(1) and 
(2).
---------------------------------------------------------------------------

    Further, in response to suggestions that only advisers with 
discretionary authority should be required to report information in 
Sections 5.K.(1) and (2), we note that these sections both require 
responses based on the regulatory assets under management an adviser 
reports in Item 5.F. Per the instructions to Item 5.F., advisers are 
already required to consider the role of discretionary authority when 
calculating regulatory assets under management. Those instructions 
require that the calculation include only assets over which advisers 
provide continuous and regular supervisory or management service.\72\ 
The instructions further state that an adviser ``provide[s] continuous 
and regular supervisory or management services with respect to an 
account'' if: (a) The adviser has discretionary authority over and 
provides ongoing supervisory or management services with respect to the 
account; or (b) the adviser does not have discretionary authority over 
the account, but has ongoing responsibility to select or make 
recommendations, based upon the needs of the client, as to specific 
securities or other investments the account may purchase or sell and, 
if such recommendations are accepted by the client, the adviser is 
responsible for arranging or effecting the purchase or sale.\73\ Thus, 
if an adviser does not provide continuous and regular supervisory or 
management services with respect to an account, those account's assets 
should not be reported as regulatory assets under management in Item 
5.F, and would not be reported in Sections 5.K.(1) and (2).
---------------------------------------------------------------------------

    \72\ See Form ADV, Instructions to Part 1A, Item 5.F.
    \73\ Id.
---------------------------------------------------------------------------

    A final suggestion from commenters was to exclude from the 
reporting requirements any separately managed account held by a non-
United States person and managed by an investment adviser whose 
principal office and place of business is outside the United 
States.\74\ As proposed, and consistent with the reporting of 
regulatory assets under management generally, we are requiring each 
adviser whose principal office and place of business is outside the 
United States to report information regarding separately managed 
accounts for all of their clients, including clients who are not United 
States persons.\75\ We believe that the consistent reporting of 
information in Item 5 will be valuable in our and the public's 
understanding of the new separately managed account items as they are a 
subset of the regulatory assets under management

[[Page 60426]]

already being reported by registered investment advisers.
---------------------------------------------------------------------------

    \74\ AIMA Letter; PEGCC Letter; Shearman Letter. ``United States 
person'' is defined in the Glossary to Form ADV.
    \75\ The Form ADV Instructions to Part 1A, Item 5 that specify 
how regulatory assets under management must be calculated provides 
that accounts of clients who are not United States persons are 
accounts that must be included in the adviser's securities 
portfolios.
---------------------------------------------------------------------------

    Commenters suggested that we not require reporting of accounts 
beneficially owned by those who are not United States persons and 
managed by advisers whose principal offices and places of business are 
outside the United States. These commenters noted Item 7.B. of Form ADV 
and Form PF generally allow advisers whose principal offices and places 
of business are outside the United States to exclude reporting on funds 
that are not United States persons, are not offered in the United 
States, and are not beneficially owned by any United States 
persons.\76\ As noted above, there is not a similar exclusion in Item 5 
regarding funds that are not United States persons advised by any 
advisers, and advisers must include those clients in response to Item 
5, including their regulatory assets under management and client types. 
An exception like the one suggested by commenters would hamper the 
utility of the data collection in Item 5, which collects aggregate, 
census-type information regarding the adviser's total business. We are 
collecting this information to better inform Commission staff and the 
public about this segment of the investment adviser industry.\77\
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    \76\ AIMA Letter; PEGCC Letter; Shearman Letter.
    \77\ See infra Section II.A.3 for a discussion of the 
application of the Advisers Act to non-U.S. advisers.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on whether to 
require advisers to report on securities lending and repurchase 
agreements in separately managed accounts.\78\ While some commenters 
supported collection of this information,\79\ others noted that 
advisers may not be aware of or directly involved in securities lending 
activity in separately managed accounts,\80\ and several commenters 
objected to the disclosure.\81\ In response to the comments we 
received, we are not requiring disclosure regarding securities lending 
or repurchase agreements at this time.
---------------------------------------------------------------------------

    \78\ Proposing Release, supra footnote 3 at Section II.A.1.
    \79\ CFA Letter; SRC Letter.
    \80\ JAG Letter; NRS Letter; Comment Letter of The Risk 
Management Association, Committee on Securities Lending (Aug. 10, 
2015) (``RMA Committee Letter''); Comment Letter of State Street 
Corporation (Aug. 11, 2015) (``State Street Letter'').
    \81\ MFA Letter: PCA Letter. See also ASG Letter.
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2. Additional Information Regarding Investment Advisers
    In addition to the amendments outlined above regarding separately 
managed accounts, we are adopting, largely as proposed, several new 
questions and amending existing questions on Form ADV regarding 
identifying information, an adviser's advisory business, and 
affiliations. As discussed in the Proposing Release, these items were 
developed through our staff's experience in examining and monitoring 
investment advisers, and are designed to enhance our understanding and 
oversight of investment advisers and to assist our staff in its risk-
based examination program.
a. Additional Identifying Information
    We are adopting several amendments to Item 1 of Part 1A of Form ADV 
as proposed to improve certain identifying information that we obtain 
about advisers. 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.\82\ We are removing this question from 
Item 1.N. and adding a question to Item 1.D. that requires an adviser 
to provide all of its CIK Numbers if it has one or more such numbers 
assigned,\83\ regardless of public reporting company status.\84\ As we 
explained in the Proposing Release, requiring registrants to provide 
all of their assigned CIK Numbers, if any, will improve our staff's 
ability to use and coordinate Form ADV information with information 
from other sources.\85\ The commenter who weighed in on the reporting 
of CIK Numbers did not object to this amendment, which we are adopting 
as proposed.
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    \82\ Form ADV, Part 1A, Item 1.N.
    \83\ 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 certain other capacities, such as a 
transfer agent.
    \84\ Amended Form ADV, Part 1A, Item 1.D.(3).
    \85\ Proposing Release, supra footnote 3 at Section II.A.2.
---------------------------------------------------------------------------

    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 
addresses of each Web site. We are amending Item 1.I. largely as 
proposed to also ask whether the adviser has one or more accounts on 
social media platforms, such as Twitter, Facebook or LinkedIn, and 
requesting the address of each of the adviser's social media pages in 
addition to the address of each of the adviser's Web sites in Section 
1.I. of Schedule D.\86\ As discussed in the Proposing Release, our 
staff may 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 to identify and 
monitor new platforms. Current and prospective clients may use this 
information to learn more about advisers and make more informed 
decisions regarding the selection of advisers.\87\
---------------------------------------------------------------------------

    \86\ Amended Form ADV, Part 1A, Item 1.I. and Section 1.I. of 
Schedule D.
    \87\ Proposing Release, supra footnote 3 at Section II.A.2.
---------------------------------------------------------------------------

    Several commenters were generally supportive of our proposed 
approach to social media reporting,\88\ but some commenters were 
concerned that it would be too burdensome for advisers and not useful 
to investors.\89\ Several commenters requested clarification on the 
types of social media platforms that trigger the reporting 
requirement,\90\ and some commenters recommended that we limit required 
reporting to accounts on social media platforms where the adviser 
controls the content.\91\ These commenters pointed out that there may 
be social media platforms that reference an adviser over which the 
adviser has no control and of which the adviser may not even be 
aware.\92\ We agree, and we have revised Item 1.I. of Part 1A and 
Section 1.I. of Schedule D to note that the required reporting is 
limited to accounts on social media platforms where the adviser 
controls the content.\93\ Commenters generally agreed with the 
proposal's approach of not requiring information about the social media 
accounts of an adviser's employees.\94\
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    \88\ CFA Letter; IAA Letter; LPL Letter; Morningstar Letter; 
NASAA Letter. See also BlackRock Letter (understood our rationale 
for requesting this information).
    \89\ Comment Letter of TMorgan Advisers, LLC (June 28, 2015) 
(``Morgan Letter''); NRS Letter; NYSBA Committee Letter; Oppenheimer 
Letter.
    \90\ ASG Letter; IAA Letter; MMI Letter; SIFMA Letter.
    \91\ ASG Letter; MMI Letter; SIFMA Letter.
    \92\ MMI Letter. See also ASG Letter.
    \93\ An adviser may control its social media content, 
notwithstanding the fact that a social media platform has a policy 
to edit or remove content (such as offensive content) across the 
platform.
    \94\ ASG Letter; MFA Letter; MMI Letter; Morgan Letter; 
Morningstar Letter; NRS Letter; NYSBA Committee Letter.
---------------------------------------------------------------------------

    A commenter requested that we limit required reporting to accounts 
on public-facing social media platforms used to promote the adviser's 
business.\95\ We did not intend to require reporting on information 
posted on an adviser's internal social media platform or information 
not intended to promote the adviser's business to potential clients 
(e.g., information posted on a job board intended to attract job 
applicants). We have revised the text preceding Item 1.I. of Part 1A 
and Section 1.I. of

[[Page 60427]]

Schedule D to clarify that the required reporting is limited to 
accounts on publicly available social media platforms.
---------------------------------------------------------------------------

    \95\ IAA Letter.
---------------------------------------------------------------------------

    Another commenter requested that we limit required reporting to 
accounts on social media platforms that promote the adviser's business 
in the United States or are targeted towards the adviser's U.S. 
clients.\96\ The commenter pointed out that there are circumstances in 
which an adviser might have additional accounts on social media 
platforms that are not used to promote the adviser's business in the 
United States or are targeted towards the adviser's non-U.S. clients 
and that reporting on such accounts would provide little value to the 
Commission and could be confusing to clients or potential clients 
seeking information about an adviser.\97\ We believe that, to the 
extent an account on a social media platform is used to promote the 
business of an adviser registered with the Commission, the account 
should be disclosed in order to better inform our staff about the 
adviser's use of social media. However, if an account on a social media 
platform is used solely to promote the business of an affiliate or 
affiliates that are not advisers registered with the Commission, the 
account does not need to be disclosed on Form ADV.
---------------------------------------------------------------------------

    \96\ SIFMA Letter.
    \97\ Id. The commenter also mentioned that a large advisory 
complex that includes multiple affiliated advisers may maintain an 
account on a social media platform on behalf of a parent company or 
another affiliate that is not designed to promote the reporting 
adviser's services and/or is targeted towards non-U.S. clients, 
perhaps in a language other than English.
---------------------------------------------------------------------------

    A few commenters were concerned that the burden on advisers of 
updating social media information on Form ADV promptly if the 
information becomes inaccurate in any way would be great, given the 
frequency of changes in social media platforms and accounts.\98\ We 
believe that, by limiting the social media information required on Form 
ADV to an adviser's accounts on publicly available social media 
platforms where the adviser controls the content, the burden associated 
with reporting and updating that information should be limited. Because 
the social media environment is rapidly evolving, we think it will be 
useful to the Commission and investors to have current information on 
an adviser's use of social media on Form ADV. Additionally, this 
approach to updating social media reporting is consistent with our 
current approach to updating the other information required in Item 1 
of Part 1A, including information on advisers' Web sites.
---------------------------------------------------------------------------

    \98\ BlackRock Letter; Oppenheimer Letter; SIFMA Letter.
---------------------------------------------------------------------------

    Several commenters questioned the utility for investors of social 
media reporting in Part 1A of Form ADV.\99\ Commenters stated that 
investors who are interested in an adviser's social media presence will 
most likely look to the adviser's Web site or conduct an internet 
search to find the adviser's accounts on various social media 
platforms.\100\ We recognize that this is most likely the case. 
However, we believe that having current information on an adviser's 
social media presence collected in one place on Form ADV may be helpful 
to investors. Two commenters stated that investors generally do not 
read Part 1A of Form ADV and recommended that we consider including 
social media reporting in Part 2A of Form ADV instead.\101\ We 
recognize that investors may not look to Form ADV for information on an 
adviser's social media presence, but if they do, they will likely look 
to Item 1.I. of Part 1A and Section 1.I. of Schedule D because those 
are where we currently collect identifying information about an 
adviser, including information on an adviser's Web site or Web sites. 
In addition, a primary purpose of this item is to provide the 
Commission and our staff with information that may be used in our 
examination program and for other regulatory purposes. Accordingly, we 
believe it will be useful to the Commission to have information on an 
adviser's use of social media on Form ADV, and this placement in the 
form is an efficient and readily identifiable location for such 
information that appropriately serves our regulatory purposes.
---------------------------------------------------------------------------

    \99\ Comment Letter of the Association for Corporate Growth 
(Aug. 11, 2015) (``ACG Letter''); ASG Letter; JAG Letter; 
Morningstar Letter; PCA Letter.
    \100\ ASG Letter; JAG Letter; Morningstar Letter; Oppenheimer 
Letter; PCA Letter.
    \101\ Morningstar Letter; PCA Letter. See also Comment Letter of 
Jeff J. Diercks (May 22, 2015) (``Diercks Letter'').
---------------------------------------------------------------------------

    We are amending Item 1.F. of Part 1A of Form ADV and Section 1.F. 
of Schedule D largely as proposed 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.\102\ In 
order to help Commission examination staff learn more about an 
investment adviser's business and identify locations to conduct 
examinations, we are now requiring 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.\103\ As discussed in the 
Proposing Release, we chose 25 offices as the number to be reported 
because it will 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.\104\
---------------------------------------------------------------------------

    \102\ Form ADV, Part 1A, Item 1.F. and Section 1.F. of Schedule 
D.
    \103\ Amended Form ADV, Part 1A, Item 1.F. and Section 1.F. of 
Schedule D.
    \104\ See Proposing Release, supra footnote 3 at Section II.A.2. 
IAPD Investment Adviser Registered Representative State Data as of 
May 2, 2016 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.
---------------------------------------------------------------------------

    In addition to providing contact information for the 25 largest 
offices in terms of number of employees, we are amending Section 1.F. 
of Schedule D as proposed to require advisers to report each office's 
CRD branch number (if applicable) and the number of employees who 
perform 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 will 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. This information also will assist our staff in assessing 
offices that conduct a combination of activities.
    Two commenters provided general support for our proposed enhanced 
reporting of adviser offices.\105\ However, several commenters 
expressed concern that our approach would impose a significant burden 
on advisers with little or no benefit to either the Commission or 
investors.\106\ Another commenter noted the substantial burden on 
advisers required to report additional offices, but acknowledged that 
burden would ease after the initial reporting period.\107\ We recognize 
that the burden on some large advisers might be significant, especially 
in the initial reporting cycle when they are required to report their 
additional offices for the

[[Page 60428]]

first time. However, we believe that the burden will decrease after the 
initial filing because in subsequent filings, advisers will only be 
reporting changes to their previously reported additional office 
information. Two commenters requested clarification on how often the 
additional office information should be updated.\108\ One commenter 
felt that annual updating of office locations would not be unduly 
burdensome but more frequent than annual updates would be 
burdensome.\109\ We agree and are requiring that Section 1.F. of 
Schedule D be updated as part of an adviser's annual updating amendment 
and not more frequently.\110\
---------------------------------------------------------------------------

    \105\ LPL Letter; NASAA Letter.
    \106\ ACG Letter; CFA Letter; Morningstar Letter; NRS Letter; 
NYSBA Committee Letter.
    \107\ Morningstar Letter.
    \108\ ASG Letter; Morningstar Letter.
    \109\ ASG Letter.
    \110\ Amended Form ADV, General Instruction 4.
---------------------------------------------------------------------------

    One commenter expressed concern about our proposal's impact on 
smaller advisers and suggested that, as an alternative, we require 
advisers to (a) continue to provide information about their five 
largest additional offices, (b) report their total number of additional 
offices, and (c) report additional information only for their 
additional offices that meet a certain threshold of regulatory assets 
under management or that engage in certain enumerated practices of 
interest to the Commission.\111\ We currently require advisers to track 
their additional offices based upon number of employees.\112\ We 
understand that many advisers do not currently track their additional 
offices based upon the amount of regulatory assets under management 
attributable to each office and we believe that requiring them to do so 
would place an additional burden on advisers. For this reason, we are 
not changing our approach to additional office reporting.
---------------------------------------------------------------------------

    \111\ NRS Letter.
    \112\ Form ADV, Part 1A, Item 1.F. and Section 1.F. of Schedule 
D.
---------------------------------------------------------------------------

    One commenter requested that we simplify the reporting of 
information about additional offices for firms that are dually 
registered as investment advisers with the Commission and as broker-
dealers with FINRA by allowing them to cross-reference to information 
submitted on their Uniform Branch Office Registration Form filed with 
FINRA.\113\ We agree and we are updating the IAPD system so that by 
entering a branch's CRD number, the address, phone number, and 
facsimile number of all additional offices will automatically populate 
on Section 1.F. of Schedule D.
---------------------------------------------------------------------------

    \113\ MMI Letter.
---------------------------------------------------------------------------

    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 proposed amending 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 to the adviser, and if so, 
to report the name and IRS Employer Identification Number (if any) of 
that other person. We are adopting the amendments to Item 1.J. largely 
as proposed, but in addition to related persons of the adviser, as 
discussed below, advisers will not be required to disclose the identity 
of the other person compensating or employing the chief compliance 
officer if that other person is an investment company registered under 
the Investment Company Act of 1940 advised by the adviser.\114\
---------------------------------------------------------------------------

    \114\ Amended Form ADV, Part 1A, Item 1.J.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, our examination staff has 
observed a wide spectrum of both quality and effectiveness of 
outsourced chief compliance officers and firms.\115\ Identifying 
information for these third-party service providers, like others on 
Form ADV,\116\ will allow us to identify all advisers relying on a 
particular service provider and could be used to improve our ability to 
assess potential risks.
---------------------------------------------------------------------------

    \115\ Proposing Release, supra footnote 3 at Section II.A.2.
    \116\ 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.
---------------------------------------------------------------------------

    Two commenters expressed general support for our proposal to 
identify if chief compliance officers are compensated or employed by 
other parties for providing chief compliance officer services,\117\ and 
others expressed concern that the requirement would be unduly 
burdensome on advisers or that the information would be of little or no 
use to the Commission or investors.\118\ We are not persuaded that this 
requirement would be unduly burdensome because the adviser should have 
or be able to easily obtain the necessary information, and we continue 
to believe that this information will be valuable for the reasons 
discussed above.
---------------------------------------------------------------------------

    \117\ CFA Letter; NASAA Letter.
    \118\ ACG Letter; Comment Letter of L.A. Schnase (Jul. 2, 2015) 
(``Schnase Letter'') (would be duplicative of already reported 
information, raises privacy concerns with the chief compliance 
officer's other clients, would become inaccurate or out-of-date 
quickly, and would miss the situation of firms hiring comprehensive 
external compliance support with an in-house chief compliance 
officer in name only). See also NRS Letter (adviser may not have 
access to this information).
---------------------------------------------------------------------------

    One commenter felt that our inquiry should focus not on the chief 
compliance officer's other employment and/or compensation, but rather 
on the details of the compliance program and resources committed to 
address compliance risk (e.g., the chief compliance officer's education 
and professional designations, the number of other compliance 
employees, the estimated total hours spent on compliance, and the other 
duties of the chief compliance officer).\119\ We agree with the 
commenter's suggestion that evaluating the overall effectiveness of an 
adviser's compliance program relies heavily on the facts and 
circumstances specific to that adviser.\120\ However, we are adopting 
the amendments to Item 1.J. largely as proposed, because we believe 
that they meet our regulatory objective of identifying all advisers 
relying on particular service providers and may improve our ability to 
assess potential risks related to outsourced chief compliance officers 
and firms.
---------------------------------------------------------------------------

    \119\ Morgan Letter.
    \120\ Id.
---------------------------------------------------------------------------

    One commenter expressed concern that identifying outsourced chief 
compliance officers would invite additional scrutiny about an adviser's 
judgment in hiring externally versus internally.\121\ While we 
understand the commenter's concerns, we continue to believe that 
identifying information for these third-party service providers, like 
others on Form ADV, will allow us to identify all advisers relying on a 
particular service provider and to address potential risks associated 
with that service provider.
---------------------------------------------------------------------------

    \121\ Shearman Letter.
---------------------------------------------------------------------------

    Two commenters agreed with our proposal to specifically exclude 
situations where the chief compliance officer is paid or employed by a 
related person of the adviser.\122\ Two other commenters recommended 
that we specify that a related person includes a registered investment 
company advised by the adviser.\123\ These commenters noted that in 
many instances an individual may serve as the chief compliance officer 
of both an adviser and a registered investment company advised by the 
adviser and receive compensation from both the adviser and the 
registered investment company.\124\ These commenters stated that 
requiring advisers to disclose these arrangements does not further our 
objective of assessing the use of third party service

[[Page 60429]]

providers.\125\ We agree and we have updated Item 1.J.(2) to exclude 
chief compliance officers compensated or employed by an investment 
company registered under the Investment Company Act of 1940 advised by 
the adviser.
---------------------------------------------------------------------------

    \122\ MMI Letter; Morningstar Letter.
    \123\ Dechert Letter; IAA Letter.
    \124\ Id.
    \125\ Id.
---------------------------------------------------------------------------

    In the Proposing Release, we asked whether we should require 
information about an adviser's use of third-party compliance auditors. 
Two commenters supported such disclosure,\126\ but several commenters 
felt the disclosure would either not be useful or lead to incorrect 
inferences about the decision to use, or not use, external compliance 
support.\127\ Several commenters expressed concern that, due to the 
diversity of services provided by third-party compliance auditors, 
requiring an adviser to state whether or not it uses them would not be 
useful to the Commission from a risk monitoring perspective.\128\ 
Commenters also expressed concern that requiring an adviser to report 
on its use of third-party compliance auditors could lead to incorrect 
inferences about the adviser's compliance program. For example, 
advisers hiring third-party compliance auditors might be viewed as 
signaling a compliance issue, whereas advisers not hiring them might be 
viewed as not sufficiently focused on compliance.\129\ Two commenters 
expressed concern about confidentiality issues implicated by third-
party compliance auditor reporting.\130\ We are not requiring advisers 
to report information on Form ADV regarding third-party compliance 
auditors at this time.
---------------------------------------------------------------------------

    \126\ Comment Letter of Brown & Associates LLC (Aug. 10, 2015) 
(``Brown Letter''); NASAA Letter.
    \127\ ASG Letter; IAA Letter; MFA Letter; MMI Letter; NRS 
Letter; NYSBA Committee Letter; PEGCC Letter.
    \128\ IAA Letter; MFA Letter; NRS Letter; PEGCC Letter. See also 
ASG Letter (requested that we more clearly define ``auditor''); JGAS 
Letter; MMI Letter.
    \129\ IAA Letter; NYSBA Committee Letter; PEGCC Letter.
    \130\ Anonymous Letter; MMI Letter (these relationships are 
often confidential, such as where law firms are involved).
---------------------------------------------------------------------------

    We are amending Item 1.O. as proposed to require advisers with 
assets of $1 billion or more to report their assets within three 
ranges: (1) $1 billion to less than $10 billion; (2) $10 billion to 
less than $50 billion; and (3) $50 billion or more.\131\ We added Item 
1.O. in 2011 in connection with the Dodd-Frank Act's \132\ requirements 
concerning certain incentive-based compensation arrangements.\133\ 
Advisers are currently required to check a box to indicate if they have 
assets of $1 billion or more. Requiring advisers to report their assets 
within one of the three specified ranges will provide more precise data 
for use in Commission rulemaking arising from ongoing Dodd-Frank Act 
implementation.\134\
---------------------------------------------------------------------------

    \131\ Amended Form ADV, Part 1A, Item 1.O.
    \132\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \133\ See Rules Implementing Amendments to the Investment 
Advisers Act of 1940, Investment Advisers Act Release No. 3221 (June 
22, 2011) [76 FR 42950 (Jul. 19, 2011)] (``Implementing Release'') 
at Section II.C.6; section 956 of the Dodd-Frank Act. We are also 
moving 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.
    \134\ See, e.g., section 165(i) of the Dodd-Frank Act (requires 
the Commission and other financial regulators to establish 
methodologies for the conduct of stress tests by financial companies 
with consolidated assets of over $10 billion); Incentive-based 
Compensation Arrangements, Exchange Act Release No. 34-77776 (May 6, 
2016) (identifies three categories of covered institutions based on 
average total consolidated assets, ranging from $1 billion to $250 
billion) (re-proposal of Exchange Act Release No. 34-64140); 
Incentive-Based Compensation Arrangements, Exchange Act Release No. 
34-64140 (Mar. 29, 2011) [76 FR 21170 (Apr. 14, 2011)].
---------------------------------------------------------------------------

    Two commenters expressed general support for our proposal to 
require advisers to report their own assets within specified 
ranges.\135\ Two commenters did not believe that the information would 
be useful.\136\ However, we continue to believe that requiring advisers 
to report their assets as described above will provide more accurate 
data for use in Commission rulemaking arising from ongoing Dodd-Frank 
Act implementation. Another commenter felt our proposal raised privacy 
issues for investors in an adviser where the adviser is privately 
held.\137\ While we are sensitive to privacy concerns, we believe that 
we have narrowly tailored our proposal to address these concerns. We 
are only requiring that advisers with significant assets (at least $1 
billion) report them and even then only within one of the three 
specified ranges. One commenter asked for clarification on the timing 
of the calculation of assets.\138\ The item, as proposed and adopted 
today, specifies that an adviser should use the total assets shown on 
the adviser's balance sheet for the most recent fiscal year end.\139\ 
We did not receive comments on the specific asset ranges.
---------------------------------------------------------------------------

    \135\ CFA Letter; PCA Letter.
    \136\ NRS Letter; NYSBA Committee Letter.
    \137\ Anonymous Letter.
    \138\ PEGCC Letter.
    \139\ Amended Form ADV, Part 1A, Item 1.O.
---------------------------------------------------------------------------

b. Additional Information About Advisory Business
    In addition to the amendments to Item 5 regarding separately 
managed accounts discussed above, we are adopting a number of other 
amendments to Item 5. Item 5 currently requires an adviser to provide 
approximate ranges for three 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.\140\ As proposed, we are amending these items to require an 
adviser to report the number of clients \141\ 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.\142\ As we discussed in the Proposing Release, replacing 
ranges with more precise information will provide more accurate 
information about investment advisers and will significantly enhance 
our ability to analyze data across investment advisers because 
providing actual numbers of clients and regulatory assets under 
management will allow us to see the scale and concentration of assets 
by client type.\143\ 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 by client type should 
be readily available to advisers because 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.
---------------------------------------------------------------------------

    \140\ Form ADV, Part 1A, Item 5.C.(1), Item 5.D.(1)-(2).
    \141\ Amended Form ADV, Part 1A, Item 5.D.(1)-(2). Advisers with 
fewer than five clients in a particular category (other than 
investment companies, business development companies and other 
pooled investment vehicles) may check Item 5.D.(2) indicating that 
fact rather than report the actual number of clients in the 
particular category in Item 5.D.(1).
    \142\ Amended Form ADV, Part 1A, Item 5.D.(3). The categories of 
clients are the same as those in Item 5.D. of the current Form ADV, 
except that we are 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.
    \143\ Proposing Release, supra footnote 3 at Section II.A.2.
---------------------------------------------------------------------------

    We also are adding to Item 5 as proposed a requirement for advisers 
to report the number of clients for whom they provided advisory 
services but do not have regulatory assets under management in order to 
obtain a more complete understanding of each

[[Page 60430]]

adviser's advisory business.\144\ As we explained in the Proposing 
Release, this information will assist in our risk assessment process 
and increase the effectiveness of our examinations.\145\
---------------------------------------------------------------------------

    \144\ Amended 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.
    \145\ Proposing Release, supra footnote 3 at Section II.A.2.
---------------------------------------------------------------------------

    Some commenters were generally supportive of our proposal to 
replace ranges with more precise information.\146\ Several commenters 
stated that advisers would need to update computer systems to obtain 
this data, and raised concerns about the increased burden that our 
proposal would place on advisers.\147\ One commenter felt that removing 
an adviser's ability to rely on estimates of the amount of regulatory 
assets under management would increase the time required to prepare 
Item 5.D.\148\ We are not convinced that the burden placed on advisers 
by the requirement to report precise information will be significant. 
We continue to believe that the required information should be readily 
available to advisers because 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.
---------------------------------------------------------------------------

    \146\ NRS Letter; PCA Letter; CFA Letter (generally supportive 
but questions the usefulness of actual numbers rather than ranges); 
NASAA Letter (supports reporting the number of clients for whom an 
adviser provides advisory services but does not have regulatory 
assets under management).
    \147\ ASG Letter; MMI Letter. See LPL Letter.
    \148\ ASG Letter.
---------------------------------------------------------------------------

    Some commenters suggested that our proposal to replace ranges with 
more precise information would heighten the risk of inaccurate 
reporting on Form ADV.\149\ Commenters suggested that instead of 
requiring more precise information, we require advisers to report only 
an approximate number of clients and regulatory assets under management 
so as not to penalize advisers for ``minor or inadvertent 
inaccuracies'' \150\ and one commenter suggested using narrower 
ranges.\151\ Our goal in collecting more precise information is not to 
penalize advisers for minor inaccuracies but to enhance our ability to 
analyze data across investment advisers and allow us to see the scale 
and concentration of assets by client type. We collect numerical data 
throughout Form ADV, and we believe that advisers have access to the 
information required to accurately complete Item 5.
---------------------------------------------------------------------------

    \149\ ASG Letter; LPL Letter; MMI Letter.
    \150\ LPL Letter. See also IAA Letter.
    \151\ MMI Letter.
---------------------------------------------------------------------------

    One commenter expressed skepticism that the amendments would 
provide new, meaningful information to investors.\152\ However, we 
believe that investors potentially will benefit from having a more 
complete understanding of an investment adviser's business. In 
addition, we believe that investors will indirectly benefit from our 
enhanced ability to analyze data across investment advisers, including 
the scale and concentration of assets by client type.
---------------------------------------------------------------------------

    \152\ ACG Letter.
---------------------------------------------------------------------------

    One commenter expressed concern that the reporting of precise 
numbers might reveal confidential client relationships or the amount of 
regulatory assets under management attributable to specific 
clients.\153\ We are sensitive to these privacy concerns, and, as noted 
above, we are revising Form ADV, Part 1A, Item 5.D. to allow advisers 
with fewer than five clients in a particular category (other than 
investment companies, business development companies and other pooled 
investment vehicles) to check Item 5.D.(2) indicating that fact rather 
than report the actual number of clients in the particular category in 
Item 5.D.(1).\154\
---------------------------------------------------------------------------

    \153\ Anonymous Letter.
    \154\ Amended Form ADV, Part 1A, Item 5.D.(1)-(2).
---------------------------------------------------------------------------

    Several commenters requested clarification in situations where a 
client fits into more than one client category.\155\ Specifically, two 
commenters requested that the Commission clarify whether an adviser 
that has contracts with other advisers to sub-advise registered 
investment companies, business development companies or pooled 
investment vehicles should categorize those clients as either (1) 
``other investment advisers'' because other investment advisers hold 
the contracts, or as (2) ``investment companies,'' ``business 
development companies,'' or ``pooled investment vehicles,'' as 
applicable, because those entities hold the regulatory assets under 
management.\156\ We are updating the instructions to Item 5.D. to state 
that, to the extent that the adviser advises a registered investment 
company, business development company, or pooled investment vehicle, 
the adviser should report those sub-advised assets in categories (d), 
(e), or (f) as applicable.\157\ We also are amending the instructions 
in the text preceding Item 5.D., in response to a comment that we 
received,\158\ to state that if a client fits into more than one 
category, then the adviser should select the category that most 
accurately represents the client in order to avoid double counting 
clients and assets.\159\
---------------------------------------------------------------------------

    \155\ Anonymous Letter; ASG Letter; IAA Letter; SIFMA Letter.
    \156\ ASG Letter; IAA Letter.
    \157\ Amended Form ADV, Part 1A, Item 5.D.
    \158\ SIFMA Letter.
    \159\ Amended Form ADV, Part 1A, Item 5.D.
---------------------------------------------------------------------------

    Some commenters requested more specific definitions for the 
categories of clients.\160\ However, most of the categories have not 
changed from current Form ADV and, based upon our experience with Form 
ADV, we believe that they are sufficiently clear. At the suggestion of 
two commenters,\161\ we are moving the category labeled ``Corporations 
or other businesses not listed above'' down in the table so that it 
appears just above the category labeled ``Other.'' \162\
---------------------------------------------------------------------------

    \160\ IAA Letter (Commission should clarify whether a 
``sovereign wealth fund and foreign official institution'' includes 
the account of any government or quasi-government entity). 
Morningstar Letter (Commission should add definitions for 
categories, including ``other,'' and provide a list of common 
custodian account types and how they map to the client categories).
    \161\ IAA Letter; SIFMA Letter.
    \162\ Amended Form ADV, Part 1A, Item 5.D.
---------------------------------------------------------------------------

    We are adopting, largely as proposed, 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 reports in Part 1A of Form ADV is 
now required to check a box noting that election.\163\ As discussed in 
the Proposing Release, this information will 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.\164\ Having 
this information will allow our staff to better understand the 
situations

[[Page 60431]]

in which the calculations differ, and assist us in analyzing whether 
those differences require a regulatory response.
---------------------------------------------------------------------------

    \163\ Amended 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 (Mar. 3, 2008) [73 FR 13958 (Mar. 14, 
2008)].
    \164\ Proposing Release, supra footnote 3 at Section II.A.2.
---------------------------------------------------------------------------

    One commenter asserted that this information would not be 
meaningful to investors.\165\ Another commenter noted that advisers may 
report additional assets in Part 2A of Form ADV, rather than calculate 
regulatory assets under management differently than they do in Part 1A 
of Form ADV.\166\ We continue to believe that Item 5.J.(2) will provide 
the staff with helpful information regarding these calculations.
---------------------------------------------------------------------------

    \165\ ACG Letter.
    \166\ PCA Letter (stating that when advisers report different 
client assets in Part 2A than regulatory assets under management in 
Part 1A of Form ADV, it is frequently due to additional assets being 
included in the Part 2A calculation, such as non-discretionary 
assets that are under ``advisement,'' rather than a different method 
of calculating assets under management).
---------------------------------------------------------------------------

    In addition, largely as proposed, we are adding a question asking 
the approximate amount of an adviser's total regulatory assets under 
management that is attributable to clients that are non-United States 
persons \167\ to complement the current requirement that each adviser 
report the percentage of its clients that are non-United States 
persons, which, based on our experience, is not always a reliable 
indicator of an adviser's relationships with non-U.S. clients.\168\ As 
noted in the Proposing Release, our examination staff can use this 
information to better understand the extent of investment advice 
provided to non-U.S. clients which will assist in our risk assessment 
process.\169\ In our proposal, we used the term ``non-U.S. client'' and 
commenters sought clarification of the definition of ``non-U.S. 
client.'' \170\ In response, the amendments that we are adopting today 
use the term ``non-United States person'' in Item 5.F.(3). 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.
---------------------------------------------------------------------------

    \167\ Amended Form ADV, Part 1A, Item 5.F.(3).
    \168\ Form ADV, Part 1A, Item 5.C.(2). For example, an adviser 
may report a significant percentage of clients that are non-United 
States persons, but the regulatory assets under management 
attributable to those clients is a small percentage of the adviser's 
regulatory assets under management.
    \169\ Proposing Release, supra footnote 3 at Section II.A.2.
    \170\ Oppenheimer Letter; SIFMA Letter.
---------------------------------------------------------------------------

    Section 5.G.(3) of Schedule D currently requires advisers to report 
the SEC File Number for registered investment companies and business 
development companies that they advise. Largely as proposed, we are 
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 series thereof) or 
business development company that they advise.\171\ As described in the 
Proposing Release, this information will 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.\172\ This 
information also will show the extent of any shift in assets between 
parallel managed accounts and registered investment companies or 
business development companies.
---------------------------------------------------------------------------

    \171\ Amended Form ADV, Part 1A, Section 5.G.(3) of Schedule D. 
The Glossary to Amended Form ADV includes ``parallel managed 
account,'' which is defined as: ``With respect to any registered 
investment company or series thereof 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 series thereof or business development company that you 
advise.''
    \172\ Proposing Release, supra footnote 3 at Section II.A.2.
---------------------------------------------------------------------------

    Some commenters questioned the usefulness of collecting information 
on parallel managed accounts \173\ or thought that disclosures about 
parallel managed accounts would not produce meaningful results or could 
be misleading.\174\ We recognize that there may be different reasons 
for assets to shift between parallel managed accounts and registered 
investment companies or business development companies, but that does 
not make the additional information less useful to the staff in 
considering how advisers manage conflicts of interest and assessing the 
extent of any shift in assets for risk monitoring purposes.
---------------------------------------------------------------------------

    \173\ BlackRock Letter (suggesting that asking during 
examinations for an adviser's policies related to fair treatment of 
all accounts, and testing of compliance with those policies, would 
better achieve the objective); IAA Letter; Comment Letter of Small 
Business Investor Alliance (Aug. 11, 2015) (``SBIA Letter'') 
(opining that the proposal adds unnecessary reporting for advisers 
of business development companies and is duplicative of Form N-2). 
We believe the information to be collected in Section 5.G.(3) is 
different from the information collected on Form N-2 regarding 
closed-end funds and business development companies because the 
information collected on Form N-2 regarding management of other 
accounts focuses on individual portfolio managers, while the 
information collected on Form ADV is reported at the adviser level.
    \174\ Anonymous Letter (stating there are many reasons assets 
could shift between parallel managed accounts and registered 
investment companies or business development companies); BlackRock 
Letter.
---------------------------------------------------------------------------

    Some commenters noted that registered investment companies often 
have multiple series, each with its own portfolio manager, investment 
strategy, and holdings; and that the concept of a parallel managed 
account could only be applied in the registered investment company 
context on a series-by-series basis.\175\ In response, we have updated 
Section 5.G.(3) to clarify that parallel managed accounts related to a 
registered investment company (or a series thereof) should be reported.
---------------------------------------------------------------------------

    \175\ IAA Letter; Oppenheimer Letter; SIFMA Letter.
---------------------------------------------------------------------------

    One commenter felt that advisers would have difficulty interpreting 
the requirement that a parallel managed account pursue ``substantially 
the same investment objective and strategy'' as the relevant investment 
company or business development company.\176\ Advisers should use their 
best judgment and make a good faith determination as to whether the 
investment objectives and strategies in question are ``substantially 
the same.'' We note that many private fund advisers already make this 
determination when filling out Form PF.\177\
---------------------------------------------------------------------------

    \176\ PCA Letter.
    \177\ The definition of ``parallel managed account,'' supra 
footnote 171, is consistent with the Form PF definition of 
``parallel managed account.'' Form PF, Glossary of Terms.
---------------------------------------------------------------------------

    One commenter asked for confirmation that the value of derivatives 
held in a parallel managed account should be calculated using the 
market value of the derivatives rather than the gross notional value, 
if that is how the value of the account is reported to the account 
holder.\178\ We agree that market value should be used in such a 
case.\179\
---------------------------------------------------------------------------

    \178\ IAA Letter.
    \179\ This approach is consistent with the staff's view on how 
the value of a parallel managed account should be calculated on Form 
PF. See Form PF, Frequently Asked Questions. The staff's response to 
Question 11 on reporting value states that ``When calculating the 
value of a parallel managed account for purposes of either 
determining whether it is a dependent parallel managed account that 
is aggregated with the reporting fund or reporting its value in 
Question 11, you should use the market value of the derivatives held 
in the parallel managed account, instead of the gross notional 
value, if that is how the value of the account is reported to the 
account holder.''
---------------------------------------------------------------------------

    Finally, we are amending Item 5, largely as proposed, to obtain 
additional information concerning wrap fee programs.\180\ 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

[[Page 60432]]

program. We are amending Item 5.I. to ask whether the adviser 
participates in a wrap fee program, and if so, the total amount of 
regulatory assets under management attributable to acting as a sponsor 
to or portfolio manager for a wrap fee program.\181\ One commenter 
noted that many advisers act as both the sponsor of and a portfolio 
manager for the same wrap fee program and that this could cause those 
advisers to double count their regulatory assets under management 
attributable to wrap fee programs in Item 5.I.\182\ We agree and have 
added a question to Item 5.I. that asks for the total amount of 
regulatory assets under management attributable to the adviser acting 
as both sponsor to and portfolio manager for the same wrap fee program. 
To prevent advisers from double-counting assets, we added an 
instruction that assets reported in this new category should not be 
reported elsewhere in Item 5.I.(2).
---------------------------------------------------------------------------

    \180\ The Glossary to Form ADV 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 
amending this definition.
    \181\ Amended Form ADV, Part 1A, Item 5.I.
    \182\ MMI Letter.
---------------------------------------------------------------------------

    Section 5.I.(2) of Schedule D currently requires an adviser to list 
the name and sponsor of each wrap fee program for which the adviser 
serves as portfolio manager. We are amending Section 5.I.(2), as 
proposed, to add questions that require an adviser to provide any SEC 
File Number and CRD Number for sponsors to those wrap fee 
programs.\183\ As discussed in the Proposing Release, this information 
will help us better understand a particular adviser's business and 
assist in our risk assessment and examination process by making it 
easier for our staff to identify the extent to which the firm acts as 
sponsor or portfolio manager of wrap fee programs and collect 
information across investment advisers involved in a particular wrap 
fee program.\184\
---------------------------------------------------------------------------

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

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

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

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

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

    Two commenters were concerned that, by requiring an adviser to 
report the PCAOB-assigned number of its auditing firm (if applicable), 
we are suggesting that using a PCAOB-registered auditing firm is 
required by the Commission.\189\ This is not our intent. An auditing 
firm performing a surprise examination is not required to be registered 
with the PCAOB unless the adviser or its related person is serving as 
qualified custodian.\190\
---------------------------------------------------------------------------

    \189\ Shearman Letter. See Comment Letter of American Institute 
of Certified Public Accountants, Financial Reporting Executive 
Committee (Aug. 17, 2015) (``AICPA Letter'').
    \190\ Rules 206(4)-2(a)(4) and 206(4)-2(a)(6)(i).
---------------------------------------------------------------------------

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

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

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

[[Page 60433]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 60434]]

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

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

    The conditions are designed to limit eligibility for umbrella 
registration to groups of private fund advisers that operate as a 
single advisory business. For purposes of umbrella registration, we 
consider the following factors as indicia of a single advisory 
business: Commonality of advisory services and clients; a consistent 
application of the Advisers Act and the rules thereunder to all 
advisers in the business; and a unified compliance program. The 
conditions that we are adopting today are designed to demonstrate these 
factors. Condition 1 limits eligibility for umbrella registration to 
private fund advisers with a commonality of advisory services and 
clients. Conditions 2 and 4 are designed to provide assurance that our 
staff has access to and can readily examine the filing and relying 
advisers and that the Advisers Act and the rules thereunder fully apply 
to all advisers under the umbrella registration and clients of those 
advisers. Conditions 3 and 5 are designed to provide assurance that the 
filing and relying advisers are subject to a unified compliance 
program. Based on our experience, we believe that the conditions, when 
taken together, are a strong indication of the existence of a single 
private fund advisory business operating through the use of multiple 
legal entities.
    In addition, we are amending the General Instructions as proposed 
to provide advisers using umbrella registration directions on 
completing Form ADV for the filing adviser and each relying adviser, 
including details for filing umbrella registration requests and the 
timing of filings and amendments in connection with an umbrella 
registration.\210\ To satisfy the requirements of Form ADV while using 
umbrella registration, the filing adviser is required to file, and 
update as required, a single Form ADV (Parts 1 and 2) that relates to, 
and includes all information concerning, the filing adviser and each 
relying adviser, and must include this same information in any other 
reports or filings it must make under the Advisers Act or the rules 
thereunder (e.g., Form PF). The revisions to the form's Instructions 
and Form ADV further specify those questions that should be answered 
solely with respect to the filing adviser and those that require the 
filing adviser to answer on behalf of itself and its relying 
adviser(s).\211\ Additionally, we are amending the Glossary as proposed 
to add the following three terms: (i) ``filing adviser;'' \212\ (ii) 
``relying adviser;'' \213\ and (iii) ``umbrella registration.'' \214\
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    \210\ See Form ADV, General Instruction 5.
    \211\ See, e.g., statements added to Form ADV, Instructions and 
Part 1A, Items 1, 2, 3, 7, 10 and 11.
    \212\ ``Filing Adviser'' means: ``An investment adviser eligible 
to register with the SEC that files (and amends) a single umbrella 
registration on behalf of itself and each of its relying advisers.'' 
See Form ADV, Glossary.
    \213\ ``Relying Adviser'' means: ``An investment adviser 
eligible to register with the SEC that relies on a filing adviser to 
file (and amend) a single umbrella registration on its behalf.'' See 
Form ADV, Glossary.
    \214\ ``Umbrella Registration'' means: ``A single registration 
by a filing adviser and one or more relying advisers who 
collectively conduct a single advisory business and that meet the 
conditions set forth in General Instruction 5.'' See Form ADV, 
Glossary.
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    We also are adopting as proposed a new schedule to Part 1A--
Schedule R--that must be filed for each relying adviser.\215\ Schedule 
R requires identifying information, basis for SEC registration, and 
ownership information about each relying adviser, some of which was 
already filed by an adviser relying on the staff guidance.\216\ This 
new schedule consolidates in one location information for each relying 
adviser and addresses the problem the staff faced in its guidance that 
resulted in information regarding relying advisers being submitted in 
response to a number of different items on the Form, in ways not 
consistent across advisers, due to the fact that Form ADV was not 
designed to accommodate umbrella registration.\217\ We believe that 
certain information that we are requiring (such as mailing address and 
basis for registration) is the same for nearly all relying advisers, 
and the filing adviser can check a box indicating that the mailing 
address of the relying advisers is the same as that of the filing 
adviser. Finally, we are adding, as proposed, a new question to 
Schedule D that requires advisers to identify the filing advisers and 
relying advisers that manage or sponsor private funds reported on Form 
ADV.\218\ This information will allow us to identify the specific 
adviser managing the private fund reported on Form ADV if it is part of 
an umbrella registration. We believe that this information will help us 
better understand the management of private funds, will provide 
information to contact relying advisers, and will help us better 
understand the relationship between relying advisers and filing 
advisers.
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    \215\ Advisers that choose to file an umbrella registration are 
directed by Item 1.B. to complete a new Schedule R for each relying 
adviser. Form ADV, Part 1A, Item 1.B.(2).
    \216\ Schedule R requires the following information for each 
relying adviser: Identifying information (Section 1); basis for SEC 
registration (Section 2); form of organization (Section 3) and 
control persons (Section 4). For basis for SEC registration (Section 
2), we did not include categories that would make the relying 
adviser ineligible for umbrella registration, such as serving as an 
adviser to a registered investment company.
    \217\ Under the staff's guidance in the 2012 ABA Letter, an 
adviser reported in its Form ADV (Miscellaneous Section of Schedule 
D) that it and its relying advisers were together filing a single 
Form ADV in reliance on the position expressed in the letter and 
identified each relying adviser by completing a separate Section 
1.B., Schedule D, of Form ADV for each relying adviser and 
identified it as such by including the notation ``(relying 
adviser).'' See 2012 ABA Letter, supra footnote 5 at Question 4.
    \218\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question 
3(b).
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    We received multiple comment letters regarding our proposal to 
codify umbrella registration, the vast majority of which expressed 
support for umbrella registration.\219\ Several commenters also agreed 
that umbrella registration should not be mandatory.\220\ However, 
several commenters urged the Commission to expand the eligibility for 
umbrella registration to additional advisers including non-U.S. filing 
advisers, exempt reporting advisers, advisers to other types of 
clients, and advisers not independently eligible to register with the 
Commission.\221\
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    \219\ See, e.g., ABA Committee Letter; ACG Letter; AIMA Letter; 
ASG Letter; BlackRock Letter; CFA Letter; Dechert Letter; MFA 
Letter; NASAA Letter; NRS Letter; NYSBA Committee Letter; PCA 
Letter; PEGCC Letter; SBIA Letter; Schulte Letter; Shearman Letter; 
SIFMA Letter.
    \220\ ABA Committee Letter; ASG Letter; BlackRock Letter; 
Dechert Letter.
    \221\ One commenter suggested that advisers that can, but do not 
elect to, file an umbrella registration be required to note that on 
Form ADV. CFA Letter.
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    Many commenters encouraged us to permit umbrella registration for 
non-

[[Page 60435]]

U.S. filing advisers.\222\ However, as we previously have expressed, we 
remain concerned that, absent Condition 2 (which requires that the 
filing adviser have its principal place of business in the United 
States), a group of related advisers based inside and outside of the 
United States could designate a non-U.S. adviser as a filing adviser, 
and could assert, based on the theory of operating a single advisory 
business, that the Advisers Act's substantive provisions generally 
would not apply to the U.S.-based relying advisers' dealings with their 
non-U.S. clients.\223\ Many commenters acknowledged this concern.\224\ 
Some commenters suggested that we address the concern by requiring that 
advisers indicate on their umbrella registration that they will follow 
applicable law.\225\ We believe that Condition 2 eliminates the 
difficult determinations of the Advisers Act's application to these 
advisory relationships. The amendments we are adopting today do not 
change the Commission's statements with respect to the cross-border 
application of the Advisers Act.\226\
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    \222\ ABA Committee Letter; AIMA Letter; Dechert Letter; NYSBA 
Committee Letter; Schulte Letter. See also Shearman Letter.
    \223\ 2012 ABA Letter, supra footnote 5 at n.9; See Exemptions 
Release, supra footnote 203 at Section II.D.
    \224\ ABA Committee Letter; AIMA Letter; NYSBA Committee Letter; 
Schulte Letter; Shearman Letter.
    \225\ AIMA Letter; NYSBA Committee Letter. See also Dechert 
Letter; ABA Committee Letter (suggesting that we state on Form ADV 
that the Advisers Act applies with respect to all U.S. clients of 
every registered investment adviser, and with respect to all of the 
activities of registered investment advisers that have their 
principal place of business in the United States).
    \226\ Certain commenters discussed our cross-border application 
of the Advisers Act. ABA Committee Letter; Dechert Letter; Schulte 
Letter. Most of the substantive provisions of the Advisers Act are 
not applied to the non-U.S. clients of a non-U.S. adviser registered 
with the Commission but non-U.S. advisers registered with the 
Commission must comply with the Advisers Act and the Commission's 
rules thereunder with respect to any U.S. clients (and any 
prospective U.S. clients) they may have. See Proposing Release, 
supra footnote 3 at n.57 and Exemptions Release, supra footnote 203 
at Section II.D.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

[[Page 60436]]

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

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

    Several commenters took issue with the proposal's requirement to 
determine asset-based eligibility for umbrella registration on an 
entity-by-entity, rather than consolidated, basis.\240\ These 
commenters suggested that the goals of providing a clearer picture of 
groups of related advisers that operate as a single business and 
establishing a more efficient method for registration for separate 
legal entities that collectively conduct a single advisory business 
would be better served by allowing the group to determine asset-based 
eligibility for umbrella registration on a consolidated basis.\241\ 
Umbrella registration was intended to consolidate the multiple 
registration forms that may otherwise have been required by a single 
advisory business. It was not intended to alter or modify the 
eligibility for registration with the Commission.\242\
---------------------------------------------------------------------------

    \240\ Dechert Letter; Morgan Letter; NRS Letter; NYSBA Committee 
Letter. See MFA Letter (arguing that a registered private fund 
adviser that serves as a filing adviser should be able to add a 
relying adviser that is an exempt reporting adviser to its umbrella 
registration).
    \241\ Id.
    \242\ See Proposing Release, supra footnote 3 at Section II.A.3. 
To the extent there is concern about the eligibility of SEC 
registration for newly-formed relying advisers, rule 203A-2(c) 
provides an exemption for advisers that expect to be eligible for 
Commission registration within 120 days.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 60437]]

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

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

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

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

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

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

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

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

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

[[Page 60438]]

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

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

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

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

    Item 8.H. of Part 1A of Form ADV asks whether the adviser or any 
related person of the adviser, directly or indirectly, compensates any 
person for client referrals. We are revising Item 8.H. as proposed to 
break the question into two parts to increase our understanding of 
compensation for client referrals. Revised Item 8.H.(1) will cover 
compensation to persons other than employees for client referrals.\264\ 
Revised Item 8.H.(2) will cover compensation to employees, in addition 
to employees' regular salaries, for obtaining clients for the 
firm.\265\ Item 8.I. asks whether the adviser or any related person of 
the adviser directly or indirectly receives compensation from any 
person other than the adviser or related person of the adviser for 
client referrals. We are also adding text to Item 8.I., as proposed, to 
clarify that advisers should not include the regular salary that the 
adviser pays to an employee in responding to this item.\266\
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    \264\ Amended Form ADV, Part 1A, Item 8.H.(1).
    \265\ Amended Form ADV, Part 1A, Item 8.H.(2).
    \266\ Amended Form ADV, Part 1A, Item 8.I.
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    Two commenters thought that the proposed amendment to Item 8.H was 
highly subjective and needed additional guidance.\267\ In addition, one 
commenter suggested that Part 2B of Form ADV provided adequate 
disclosure of employee compensation.\268\ While we appreciate these 
comments, we are adopting these amendments as proposed. We continue to 
believe Item 8.H and the accompanying instructions are sufficiently 
clear and are appropriate to accommodate responses from and provide 
flexibility to varying types of advisory businesses and compensation 
arrangements. As noted in the Proposing Release, we are adopting these 
amendments to Item 8.H to better understand how advisers compensate 
both their staff and third parties for client referrals. The revisions 
to this item do not change the scope of the information collected, but 
instead provide more precise information about compensation for client 
referrals.
---------------------------------------------------------------------------

    \267\ See MMI Letter (Item 8.H.(2) should be modified to conform 
with Item 5 of Part 2B, where economic benefits for providing 
advisory services are disclosed, but not regular salaries or 
bonuses). See also PCA Letter.
    \268\ JAG Letter.
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e. Amendments to Section 9.C. of Schedule D
    Section 9.C. of Schedule D requests information about independent 
public accountants that perform surprise examinations in connection 
with the Advisers Act custody rule, rule 206(4)-2. We are adopting two 
changes to Section 9.C. of Schedule D as proposed. First, we are adding 
text requiring an adviser to provide the PCAOB-assigned number of the 
adviser's independent public accountant. This will improve our staff's 
ability to cross-reference information submitted through other systems 
and evaluate compliance with the custody rule.\269\ Section 9.C.(6) 
currently requires advisers to report whether any report prepared by an 
independent public accountant that audited a pooled investment vehicle 
or examined internal controls contained an unqualified opinion. We are 
amending Section 9.C.(6) in a manner similar to Section 7.B.(1) of 
Schedule D, Question 23.(h) as described above to provide clarity to 
filers. Accordingly, the question will now ask whether all of the 
reports prepared by the independent public accountant since the date of 
the last annual updating amendment have contained unqualified 
opinions.\270\
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    \269\ Amended Form ADV, Part 1A, Section 9.C.(3) of Schedule D.
    \270\ Amended Form ADV, Part 1A, Section 9.C.(6) of Schedule D.
---------------------------------------------------------------------------

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

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

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

[[Page 60439]]

``Special One-Time Dodd-Frank Transition Filing for SEC Registered 
Advisers'' and ``recent'' amendments to Form ADV Part 2 that are no 
longer needed. We retained one sentence from those instructions that 
specifies that every application for registration must include a 
narrative brochure prepared in accordance with the requirements of Part 
2A of Form ADV.\274\ We also added clarifying language that exempt 
reporting advisers submitting other than annual amendments should 
update corresponding sections of Schedules A, B, C and D,\275\ and 
provided updated mailing instructions for FINRA.\276\ In the glossary, 
we are updating the definition of ``Legal Entity Identifier'' to 
reflect recent advancements in this protocol.\277\
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    \274\ Amended Form ADV, General Instructions, Instruction 3.
    \275\ Amended Form ADV, General Instructions, Instruction 4.
    \276\ Amended Form ADV, General Instructions, Instruction 9.
    \277\ The definition of Legal Entity Identifier is: A ``legal 
entity identifier'' assigned by a utility endorsed by the Global LEI 
Regulatory Oversight Committee (ROC) or accredited by the Global LEI 
Foundation (GLEIF). See Amended Form ADV, Glossary. In Item 1.P., we 
are removing outdated text referring to the ``legal entity 
identifier'' as being ``in development'' in the first half of 2011.
---------------------------------------------------------------------------

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

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

B. Amendments to Investment Advisers Act Rules

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

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

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

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

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

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

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

[[Page 60440]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

d. Rule 203-1(b), Rule 204-1(c) and Rule 204-3(g)
    Rule 203-1 and Rule 204-1 were amended in 2010 to provide 
transition periods for advisers to file narrative brochures required by 
Part 2A of Form ADV electronically with the Investment Adviser 
Registration Depository (``IARD'').\296\ Rule 203-1(b), entitled 
``transition to electronic filing,'' requires investment advisers 
applying for registration after January 1, 2011 to file their brochures 
electronically unless they receive a continuing hardship 
exemption.\297\ Rule 204-1(c) requires investment advisers that are 
required to file a brochure and had a fiscal year that ended on or 
after December 31, 2010 to electronically file a Part 2A brochure as 
part of their next annual updating amendment. As proposed, we are 
removing paragraph (b) from rule 203-1 and paragraph (c) from rule 204-
1 because the transition to electronic filing is now complete.\298\ We 
also are making a technical, conforming additional change by removing 
rule 204-3(g) because it refers to the transition provision in rule 
204-1(c).\299\
---------------------------------------------------------------------------

    \296\ Amendments to Form ADV, Investment Advisers Act Release 
No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)].
    \297\ The continuing hardship exemption under rule 203-3 will 
not be withdrawn by these technical amendments.
    \298\ Current paragraphs (c) and (d) of Rule 203-1 are 
redesignated as (b) and (c) and current paragraphs (d) and (e) of 
Rule 204-1 are redesignated as (c) and (d).
    \299\ Current paragraph (h) of Rule 204-3 is redesignated as 
(g).

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[[Page 60441]]

III. Effective and Compliance Dates

A. Effective Date

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

B. Compliance Dates

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

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

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

IV. Economic Analysis

A. Introduction

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

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

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

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

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

[[Page 60442]]

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

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

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

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

B. Amendments to Form ADV

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

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

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

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

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

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

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

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

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

[[Page 60443]]

publicly available.\311\ As discussed above, we continue to believe 
that public disclosure of information about separately managed accounts 
on Form ADV is appropriate in the public interest as well as for the 
protection of investors. Commenters expressed concern relating to the 
public disclosure of the separately managed account information and its 
potential impact on competition between investment advisers. Many 
commenters opposing the public disclosure of separately managed account 
information cited the potential cost of disclosure of confidential 
information, particularly for advisers with a small number of 
separately managed account clients.\312\ In addition, other commenters 
cited the potential disclosure of proprietary investment or trading 
strategies as a potential cost of publicly releasing the separately 
managed account information.\313\
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    \311\ See supra Section II.A.1.e.
    \312\ AIMA Letter; BlackRock Letter; IAA Letter; Invesco Letter; 
NYSBA Committee Letter; Oppenheimer Letter; PEGCC Letter; Shearman 
Letter; SIFMA Letter. One commenter suggested that investors may 
instead invest in a fund structure, or forego investment 
opportunities with an investment adviser altogether, rather than 
place assets in a separately managed account and risk the disclosure 
of separately managed account information. Schulte Letter. As 
discussed above, the modifications from the proposal should reduce 
the potential for the disclosure of private or sensitive information 
relating to separately managed accounts, and should alleviate 
potential investor concerns and the effect of the disclosure on 
their investment decisions.
    \313\ ABA Committee Letter; Dechert Letter; IAA Letter; Invesco 
Letter; MFA Letter; NYSBA Committee Letter; Oppenheimer Letter; 
Schulte Letter; Shearman Letter; SIFMA Letter.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 60444]]

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

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

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

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

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

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

    Alternatives to the amendments regarding disclosure of additional 
information about advisers include the disclosure of different 
information, more information, or less information on topics such as 
social media or advisers' offices.\327\ When determining the specific 
amendments to Form ADV for adoption, we considered what information 
would be important for our oversight activities and for advisory 
clients and prospective clients to make decisions regarding the 
selection or retention of investment advisers against the costs to 
investment advisers to report this information. We believe that the 
amendments we are adopting today strike an appropriate balance of 
providing important information to the Commission, advisory clients and 
prospective clients while mitigating the burden on investment advisers 
to report the information. As noted above, however, we recognize that 
the burden on some large advisers might be significant, especially in 
the initial reporting cycle when they are required to report the 
additional information for the first time. However, we believe that the 
burden will decrease after the initial filing because in subsequent 
filings, advisers will only be reporting changes to their previously 
reported information.
---------------------------------------------------------------------------

    \327\ See supra footnote 111 and accompanying text.
---------------------------------------------------------------------------

    Another alternative to the amendments to Form ADV would be for us 
not to require investment advisers to report additional information but 
instead for us to undertake targeted examinations of investment 
advisers. We believe it is more efficient to compile information about 
advisers that can then be utilized to identify specific advisers for 
examinations. An absence of information about advisers also would 
reduce our ability to identify industry trends and assess risks.

[[Page 60445]]

c. Costs Applicable to Reporting Information Regarding Separately 
Managed Accounts and Additional Information on Form ADV
    The amendments that will require investment advisers to provide 
additional information about certain aspects of their business will 
impose additional costs, at least initially, for investment advisers to 
file Form ADV, but we believe based on our experience that much of the 
information we are requiring is readily available because it is used by 
investment advisers to conduct their business. Costs will vary across 
advisers, depending on the nature and size of an adviser's 
business.\328\ For example, advisers that manage a limited number of 
separately managed accounts or that have smaller amounts of assets 
under management in those accounts will have fewer reporting 
requirements than advisers that manage a large number of separately 
managed accounts or that have larger amounts of assets under management 
in those accounts. In addition, investment advisers with a larger 
number of offices will have greater reporting requirements than 
investment advisers with fewer offices, particularly in the case of the 
initial filing. The one-time costs to initially report the information 
on Form ADV will also be greater for those investment advisers that 
currently do not collect or maintain the information. In addition, some 
amendments to Form ADV will require information that will impose a 
fixed filing cost that is not scalable with size, and therefore will 
have a relatively greater impact on small investment advisers.
---------------------------------------------------------------------------

    \328\ Several commenters expressed concern that the proposed 
amendments would increase the costs for small advisers. See Comment 
Letter of Adrian Day Asset Management (May 21, 2015) (``Adrian Day 
Letter''); AIMA Letter; Diercks Letter; IAA Letter; SBIA Letter; 
Schwab & Co. Letter. For a discussion of these comments, please see 
the Final Regulatory Flexibility Analysis in Section V infra.
---------------------------------------------------------------------------

    To the extent possible, we have attempted to quantify the costs of 
these amendments to Form ADV. Certain commenters questioned the cost 
estimates of the amendments to Form ADV, and some commenters noted that 
advisers will have to create new systems or processes to capture the 
additional information required and that the Commission underestimated 
these costs.\329\ We believe that much of the information, such as 
regulatory assets under management, should be readily available to 
advisers, and that modifications to the proposed amendments, such as 
the reporting requirements relating to separately managed accounts, 
help mitigate the costs to investment advisers of reporting the 
additional information. As discussed in Section V., for purposes of the 
increased Paperwork Reduction Act (``PRA'') burden for Form ADV, we 
estimate that each adviser will incur average costs in connection with 
the amendments to Form ADV of approximately $1,273,\330\ for a total 
aggregate cost of $15,306,552.\331\
---------------------------------------------------------------------------

    \329\ Adrian Day Letter; Financial Engines Letter; IAA Letter; 
NRS Letter; PCA Letter; SBIA Letter. One commenter noted that it 
would require significant systems work to aggregate gross notional 
exposure calculations at the investment adviser level. SIFMA II 
Letter. Other commenters also noted that investment advisers would 
need to modify or update computer software systems. ASG Letter; MMI 
Letter.
    \330\ We estimate that each adviser will spend, on average, 3 
hours to complete the questions regarding separately managed 
accounts. We further estimate that the amendments to Part 1A that 
request other additional information will take each adviser, on 
average, 2 hours to complete. As a result, we estimate a 5 hour 
increase in the total average time burden related to the amendments 
to Form ADV. We expect that the performance of this function will 
most likely be equally allocated between a senior compliance 
examiner and a compliance manager. Data from the Securities Industry 
Financial Markets Association's Management & Professional Earnings 
in the Securities Industry 2013 (``SIFMA Management and Professional 
Earnings Report''), modified by Commission staff to account for an 
1,800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead, 
suggest that costs for a senior compliance examiner and a compliance 
manager are $221 and $288 per hour, respectively. [2.5 hours x $221 
= $553] + [2.5 hours x $288 = $720] = $1,273.
    \331\ 12,024 advisers x $1,273 = $15,306,552.
---------------------------------------------------------------------------

d. Umbrella Registration
    The amendments to Form ADV that will incorporate the concept of 
umbrella registration and establish a method on Form ADV for certain 
private fund advisers to use umbrella registration will simplify, and 
therefore make more efficient the filing procedures for these advisers 
and provide greater certainty about the availability of umbrella 
registration. The amendments will also improve the consistency and 
quality of the information that private fund advisers disclose about 
their business and provide a more complete picture of groups of private 
fund advisers that operate as a single business, thus allowing for 
greater comparability across private fund advisers that rely on 
umbrella registration.\332\ As of May 16, 2016, approximately 743 
registered advisers indicated on Form ADV that they relied on the 2012 
ABA Letter. Additional advisers may be eligible to use umbrella 
registration but do not currently do so.
---------------------------------------------------------------------------

    \332\ See supra Section II.A.3.
---------------------------------------------------------------------------

    Several commenters suggested that the Commission expand the 
eligibility for umbrella registration to even more advisers. For 
example, many commenters recommended expanding eligibility for umbrella 
registration to non-U.S. filing advisers,\333\ and other commenters 
suggested expanding eligibility for umbrella registration to exempt 
reporting advisers.\334\ Other commenters recommended that we expand 
the eligibility for umbrella registration to apply to all related 
persons of a filing adviser.\335\ Although expanding the eligibility 
for umbrella registration to all related persons might decrease the 
aggregate costs of filing Form ADV, as we discussed above, we do not 
believe umbrella registration is appropriate for advisers that are 
related but that operate separate advisory businesses as it would 
compromise data quality and complicate analyses that rely on data from 
Form ADV.
---------------------------------------------------------------------------

    \333\ ABA Committee Letter; AIMA Letter; Dechert Letter; NYSBA 
Committee Letter; Schulte Letter; Shearman Letter.
    \334\ ABA Committee Letter; ACG Letter; AIMA Letter; ASG Letter; 
MFA Letter; NYSBA Committee Letter; SBIA Letter; Schulte Letter; 
Shearman Letter.
    \335\ ACG Letter; Capital Research Letter; Dechert Letter; 
Morgan Letter; NRS Letter; NYSBA Committee Letter.
---------------------------------------------------------------------------

    For purposes of the PRA, we estimate that each adviser that files 
Schedule R will incur average costs of approximately $255,\336\ for a 
total aggregate cost of $189,465.\337\ We do not believe the amendments 
to provide for umbrella registration will impose significant costs on 
investment advisers because advisers currently relying on the 2012 ABA 
Letter are already reporting much of the information that will be 
reported on Schedule R. We believe that the additional information that 
will be reported for relying advisers on Schedule R, such as the basis 
for SEC registration and form of organization, will be readily 
available to filing advisers.\338\
---------------------------------------------------------------------------

    \336\ We estimate that for purposes of the PRA, the filing 
adviser will spend on average 1 hour completing Schedule R on behalf 
of its relying advisers. We expect that the performance of this 
function will most likely be equally allocated between a senior 
compliance examiner and a compliance manager. Data from the SIFMA 
Management and Professional Earnings Report, modified by Commission 
staff to account for an 1,800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead, suggest that costs for a senior compliance 
examiner and a compliance manager are $221 and $288 per hour, 
respectively. (.5 hours x $221 = $111) + (.5 hours x $288 = $144) = 
$255.
    \337\ 743 advisers x $255 = $189,465.
    \338\ One commenter was concerned that relying advisers would in 
effect be forced to share the details of employee compensation on a 
public filing. See Shearman Letter. The ownership information 
required of relying advisers, however, is consistent with the 
ownership information currently required of filing advisers.

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[[Page 60446]]

e. Clarifying, Technical and Other Amendments to Form ADV
    The clarifying, technical and other amendments to Form ADV will 
make the filing process clearer and therefore more efficient for 
advisers, and increase the reliability and the consistency of 
information provided by investment advisers. More reliable and 
consistent information will improve our staff's ability to interpret 
and evaluate the information provided by advisers, make comparisons 
across investment advisers, and better identify the investment advisers 
that may need additional outreach or examination. To the extent the 
clarifying and technical amendments we adopt today would make Form ADV 
easier to understand and complete, the amendments will decrease future 
filing costs, especially for those investment advisers registering with 
us for the first time.
    As proposed, we are adding questions to Form ADV that request an 
entity's legal entity identifier, if any.\339\ As discussed above, the 
legal entity identifier is a unique identifier associated with a single 
entity and is intended to provide a uniform international standard for 
identifying parties to financial transactions. This information will 
help our examination staff more readily identify the use of particular 
custodians by separately managed accounts and private funds. 
Furthermore, the reporting of legal entity identifier information on 
Form ADV facilitates the ability of investors and the Commission to 
link the data reported with data from other filings or sources that is 
reported elsewhere as legal entity identifiers become more widely used 
by regulators and the financial industry. For example, this could aid 
in the performance of market analysis studies, surveillance activities, 
and systemic risk monitoring by the Commission.\340\
---------------------------------------------------------------------------

    \339\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(3)(f) 
(requesting the LEI, if any, for a custodian of separately managed 
accounts that is not a broker-dealer or that is a broker-dealer but 
does not have an SEC registration number) and 7.B.(1), Question 25g 
(similar question for private fund custodians); Schedule R, Section 
1.G. (requesting LEI for relying adviser).
    \340\ We note that, as of May 31, 2016, approximately 6.80% of 
all registered investment advisers report a legal entity identifier 
when filing Form ADV.
---------------------------------------------------------------------------

    We do not believe that the clarifying, technical and other 
amendments to Form ADV will result in any additional costs for 
investment advisers and could result in some cost savings to the extent 
that advisers have fewer questions to research when completing the 
form. We have identified provisions of Form ADV that have caused 
confusion among filers in the past or that have resulted in 
inconsistent or unreliable information. As we discussed above, we 
believe that the clarifications and revisions to the questions and 
instructions of Form ADV will increase the efficiency of investment 
advisers to disclose information, and our ability to oversee investment 
advisers. Finally, given the nature of the clarifying, technical and 
other amendments to Form ADV that we are adopting today, we do not 
believe that these amendments will have an impact on capital formation 
or competition in the asset management industry or the markets in 
general.
f. Exempt Reporting Advisers
    We believe the amendments to Form ADV will have a limited economic 
effect on exempt reporting advisers, including on their costs.\341\ 
Exempt reporting advisers are currently required to complete only a 
limited number of items in Part 1A of Form ADV (consisting of Items 1, 
2.B., 3, 6, 7, 10, 11 and corresponding schedules). We are adopting 
limited amendments to the items that exempt reporting advisers are 
required to complete, including the amendments to Item 1 regarding the 
use of social media and the reporting of information on up to 25 
offices.\342\ We do not know the extent of social media use by exempt 
reporting advisers, and we recognize that these advisers will incur 
some costs associated with social media account reporting. We believe 
these costs will be limited based on the nature of exempt reporting 
adviser clients, which include venture capital funds and private funds. 
Approximately 15 of the approximately 3,248 exempt reporting advisers 
that file information with the Commission on Form ADV reported that 
they had five or more other offices. Thus, although exempt reporting 
advisers will incur costs to report the additional information, based 
on our staff's experience and given the nature of the clients these 
funds advise, we expect that the amendments should result in a limited 
increase in reporting costs relative to other advisers.
---------------------------------------------------------------------------

    \341\ See supra Section II.A.2.c. for a discussion of exempt 
reporting advisers and Amended Form ADV, Part 1A, Schedule D, 
Section 7.B.(1), Question 15(b).
    \342\ Exempt reporting advisers will not be eligible to file new 
Schedule R.
---------------------------------------------------------------------------

C. Amendments to Investment Advisers Act Rules

    As discussed above, we are adopting amendments to the Advisers Act 
books and records rule, and technical amendments to several other rules 
to remove transition provisions where the transition process is 
complete. The discussion below focuses on the amendments to the 
Advisers Act books and records rule, because the technical amendments 
are clarifying or ministerial in nature and therefore should have 
little, if any, economic effects.
    The amendments to rule 204-2 will require investment advisers to 
maintain additional materials related to the calculation and 
distribution of performance information. The amendments to rule 204-
2(a)(16) will require each adviser 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, rather than ten or 
more persons as currently required by the rule. The amendments to rule 
204-2(a)(7) will require each adviser to maintain originals of all 
written communications received and copies of written communications 
sent by the adviser relating to the performance or rate of return of 
any or all managed accounts or securities recommendations. We believe, 
based on our staff's experience, and several commenters agreed, that 
most investment advisers currently maintain the information that will 
be required to be maintained under amended rule 204-2.\343\ Under the 
amendments, each respondent will be required to retain records in the 
same manner and for the same period of time as currently required under 
rule 204-2.
---------------------------------------------------------------------------

    \343\ ABA Committee Letter; Morningstar Letter; PCA Letter.
---------------------------------------------------------------------------

1. Economic Baseline and Affected Market Participants
    As noted above, the regulatory regime as it exists today for 
investment advisers serves as the economic baseline against which the 
costs and benefits, as well as the impact on efficiency, competition, 
and capital formation, of the amendments to the Advisers Act books and 
records rule (rule 204-2) will be evaluated. The parties that will be 
directly affected by the amendments to rules under the Advisers Act 
include: Investment advisers registered with the Commission; the 
Commission; and current and future investment advisory clients. As 
discussed above, approximately 12,024 investment advisers are currently 
registered with the Commission.

[[Page 60447]]

2. Analysis of the Effects of the Amendments to the Advisers Act Books 
and Records Rule
    The amendments to the Advisers Act books and records rule (rule 
204-2) will benefit the clients and prospective clients of investment 
advisers by improving our ability to oversee investment advisers and 
making available to our examination staff all records necessary to 
evaluate performance information.
    The amendments to the books and records rule will provide our 
enforcement and examination staff with additional information to review 
an adviser's performance communications, regardless of the number of 
clients or prospective clients that receive performance communications. 
The rule amendments may increase investor protection by increasing the 
disincentive for misleading or fraudulent communications, which may 
reduce incidents of fraud. In addition, investors may benefit from the 
amendments to the recordkeeping rule as these records will assist our 
staff in uncovering fraudulent or misleading communications regarding 
performance.
    As we discussed in the Proposing Release, to the extent that the 
amendments to the rule reduce misleading or fraudulent communications, 
the competitive position of investment advisers could be improved 
because clients and potential clients will receive more accurate 
information regarding an adviser's performance and thus will be better 
able to differentiate among advisers.\344\ In addition, to the extent 
that the amendments to the rule improve the ability of clients and 
potential clients to differentiate among advisers, potential clients 
may be more likely to obtain investment advice from an investment 
adviser, which will increase the ability of investment advisers to 
compete for investor capital. The amendments could improve the ability 
of investors to better or more efficiently allocate capital across 
investments to the extent that the current allocation of capital is 
based on misleading or fraudulent information, which in turn could 
promote capital formation.
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    \344\ Proposing Release, supra footnote 3 at Section III.C.2.
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    An alternative suggested by several commenters would be to exclude 
from the rule one-on-one communications that are ``customized responses 
from investors or one-on-one communications with sophisticated 
investors or clients'' about their own account performance.\345\ 
Another alternative would be to require maintenance of records 
supporting performance claims in communications that are distributed or 
circulated to less than the current threshold of ten persons. As 
discussed above, we believe the veracity of performance information is 
important regardless of whether it is a personalized client 
communication or in an advertisement sent to ten or more persons, and 
the absence of such records can reduce our ability to examine and 
monitor advisers.\346\
---------------------------------------------------------------------------

    \345\ PEGCC Letter. See also Berlin Letter; LPL Letter.
    \346\ See supra Section II.B.1.
---------------------------------------------------------------------------

    Several commenters felt the proposed amendments would be 
unnecessary and a burden on investment advisers. Some raised concerns 
regarding the potential burden to comply with the amendments to rule 
204-2,\347\ and one commenter noted that while the amendments were not 
themselves burdensome, when aggregated with other recordkeeping 
obligations, could lead to overall compliance burdens for smaller 
advisers.\348\ Based on our staff's experience and our analysis of the 
comments to the Proposing Release, however, we believe that most 
advisers already maintain this information.\349\ We also believe that 
this information is useful to the examination and oversight of 
advisers.\350\
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    \347\ See ACG Letter; Anonymous Letter; ASG Letter; NRS Letter; 
PEGCC Letter; SBIA Letter.
    \348\ SBIA Letter.
    \349\ ABA Committee Letter; Morningstar Letter; PCA Letter.
    \350\ See, e.g., ABA Committee Letter; Morningstar Letter; PCA 
Letter. See also IAA Letter.
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    We estimate that, for purposes of the PRA, advisers will incur an 
aggregate cost of approximately $1,071,338 per year for the total hours 
advisory personnel will spend in complying with the amended 
recordkeeping requirements.\351\ A possible non-quantifiable cost as a 
result of the amended recordkeeping requirements will be discouraging 
advisers from creating and communicating custom performance information 
to individual clients, who will then lose the benefit of having that 
information available to them. Although we believe that such a response 
to the rule will be unlikely, a decrease in communications could reduce 
the ability of clients and potential clients to compare advisers and 
potentially decrease competition.
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    \351\ We estimate that for purposes of the PRA, the amendments 
to rule 204-2 will increase the burden by 1.5 hours per adviser 
annually. We expect that the function of recording and maintaining 
records of performance information and communications will be 
performed by a combination of compliance clerks and general clerks 
at a cost of $65 per hour and $58 per hour, respectively. We 
anticipate that compliance clerks would perform an estimated 0.3 
hours of the work created by the amendments to rule 204-2 and 
general clerks would perform the additional 1.2 hours. Therefore, 
the total cost per adviser would be (0.3 hours x $65 = $19.50) + 
(1.2 hours x $58 = $69.60) = approximately $89.10 for a total cost 
of $1,071,338 (12,024 advisers x $89.10).
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    We expect that these costs will vary among firms, depending on a 
number of factors, including the degree to which advisers already 
maintain correspondence, performance information, and the inputs and 
worksheets used to generate performance information. Compliance costs 
also will vary depending on the degree to which performance figure 
determination and the recordkeeping process is automated, and the 
amount of updating to the adviser's recordkeeping policy that will be 
required.

V. Paperwork Reduction Act Analysis

    The amendments that we are adopting today contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\352\ In the Proposing Release, we 
solicited comment on the proposed collection of information 
requirements. We also submitted the proposed collections of information 
to the Office of Management and Budget (``OMB'') for review in 
accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The titles for the 
collections of information we are amending are: (i) ``Form ADV;'' and 
(ii) ``Rule 204-2 under the Investment Advisers Act of 1940.'' An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid OMB control number.
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    \352\ 44 U.S.C. 3501-3520.
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A. Form ADV

    Form ADV (OMB Control No. 3235-0049) is the two-part investment 
adviser registration form. Part 1 of Form ADV contains information used 
primarily by Commission staff, and Part 2 is the client brochure. We 
are not adopting changes to Part 2. We use the information to determine 
eligibility for registration with us and to manage our regulatory and 
examination programs. Clients use certain of the information to 
determine whether to hire or retain an adviser. The collection of 
information is necessary to provide advisory clients, prospective 
clients, and the Commission with information about the adviser and its 
business, conflicts of interest and personnel. Rule 203-1 under the 
Advisers Act requires every person applying for investment adviser 
registration with the Commission to file Form ADV. Rule 204-4 under the

[[Page 60448]]

Advisers Act requires certain investment advisers exempt from 
registration with the Commission (``exempt reporting advisers'') to 
file reports with the Commission by completing a limited number of 
items on Form ADV. Rule 204-1 under the Advisers Act requires each 
registered and exempt reporting adviser to file amendments to Form ADV 
at least annually, and requires advisers to submit electronic filings 
through the IARD. The paperwork burdens associated with rules 203-1, 
204-1, and 204-4 are included in the approved annual burden associated 
with Form ADV and thus do not entail separate collections of 
information.
    These collections of information are found at 17 CFR 275.203-1, 
275.204-1, 275.204-4 and 275.279.1 and are mandatory. Responses are not 
kept confidential. The respondents are investment advisers registered 
with the Commission or applying for registration with the Commission 
and exempt reporting advisers. Based on IARD system data as of May 16, 
2016, approximately 12,024 investment advisers are registered with the 
Commission, and 3,248 exempt reporting advisers file reports with the 
Commission.
    The currently approved total annual aggregate burden estimate for 
all advisers completing, amending and filing Form ADV (Part 1 and Part 
2) with the Commission is 154,402 hours with a monetized cost of 
$36,670,427. This collection is based on: (i) Total annual collection 
of information burden for SEC-registered advisers to file and complete 
Form ADV (Part 1 and Part 2), including private fund reporting, plus 
the burden associated with amendments to the form, preparing brochure 
supplements and delivering codes of ethics to clients; and (ii) the 
total annual collection of information burden for exempt reporting 
advisers to file and complete the required items of Part 1A of Form 
ADV, including the private fund reporting, plus the burden associated 
with amendments to the form.
    As discussed above, we are adopting amendments to Form ADV that are 
designed to provide additional information about investment advisers 
and their clients, including clients in separately managed accounts, 
provide for umbrella registration for private fund advisers and clarify 
and address technical and other issues in certain Form ADV items and 
instructions. The amendments we are adopting will increase the 
information requested in Part 1A of Form ADV, and we expect that this 
will correspondingly increase the average burden on an adviser filing 
Form ADV.
    As discussed in Sections II.A. and II.B. of this Release, we 
received several comments that addressed whether the amendments to Form 
ADV and Rule 204-2 are necessary, whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected, and 
whether we could further minimize the burden. Certain commenters 
addressed the accuracy of our burden estimates for the proposed 
collections of information, suggesting in general that our estimates 
were too low.\353\ We have considered these comments and have made 
certain modifications designed to address these and other comments 
received, and we are increasing our PRA burden estimates related to the 
amendments.
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    \353\ ACG Letter; Adrian Day Letter; ASG Letter; Anonymous 
Letter; IAA Letter; NRS Letter; PEGCC Letter; PCA Letter; SBIA 
Letter. See also AIMA Letter (discussed reputational and marketing 
costs associated with separately managed account reporting).
---------------------------------------------------------------------------

    We discuss below, in three subsections, the estimated revised 
collection of information requirements for Form ADV: First, we provide 
estimates for the revised burdens resulting from the amendments to Part 
1A; second, we determine how those estimates will be reflected in the 
annual burden attributable to Form ADV; and third, we calculate the 
total revised burdens associated with Form ADV. The paperwork burdens 
of filing an amended Form ADV, Part 1A will vary among advisers, 
depending on factors such as the size of the adviser, the complexity of 
its operations, and the number or extent of its affiliations.
1. Changes in Average Burden Estimates
    As a result of the differing burdens on advisers to complete Form 
ADV, we have divided the effect of the amendments to the form into 
three subsections; first we address the change to the collection of 
information for registered advisers as a result of our amendments to 
Part 1A of Form ADV excluding those changes related to private funds; 
second, we discuss the amendments to Form ADV related to registered 
advisers to private funds, including the amendments to Section 7.B. of 
Schedule D and the new Schedule R that will implement umbrella 
registration; and third, we address the amendments to Form ADV 
affecting exempt reporting advisers.
a. Estimated Change in Burden Related to Part 1A Amendments (Not 
Including Private Fund Reporting)
    We are adopting amendments to Part 1A, some of which are merely 
technical changes or very simple in nature, and others that will 
require more time for an adviser to prepare a response. Advisers should 
have ready access to all the information necessary to respond to the 
items we are adopting today in their normal course of operations, 
because they likely maintain and use the requested information in 
connection with managing client assets. We anticipate that the 
responses to many of the questions will be unlikely to change from year 
to year, which will minimize the ongoing reporting burden associated 
with these questions.
i. Amendments Related to Reporting of Separately Managed Account 
Information
    The amendments to Part 1A, Items 5.K.(1), 5.K.(2), 5.K.(3) and 
5.K.(4) and Schedule D, Sections 5.K.(1), 5.K.(2) and 5.K.(3) are 
designed to collect information about the separately managed accounts 
managed by advisers. These amendments will enhance existing information 
we receive and permit us to conduct more robust risk monitoring with 
respect to advisers of separately managed accounts. As discussed above, 
the information collected about separately managed accounts will 
include regulatory assets under management reported by asset type, 
borrowings and derivatives information, and the identity of custodians 
that hold at least ten percent of separately managed account regulatory 
assets under management. We believe that advisers to separately managed 
accounts may maintain and use this or similar information for 
operational reasons (e.g., trading systems) and for customary account 
reporting to clients in separately managed accounts.
    Although we understand that much of the requested information may 
be used by advisers for operational reasons or account reporting, we 
expect that these amendments may subject advisers, particularly those 
that advise a large number of separately managed accounts and engage in 
borrowings and derivatives transactions on behalf of separately managed 
accounts, to an increased paperwork burden. We are adopting new Items 
5.K.(1) through (4) and Sections 5.K.(1) and 5.K.(3) largely as 
proposed with certain modifications in response to comments we 
received. With respect to Section 5.K.(2), in order to minimize the 
burden on advisers

[[Page 60449]]

with a smaller amount of separately managed account assets under 
management, we initially proposed to require: (1) Advisers with 
regulatory assets under management attributable to separately managed 
accounts of at least $150 million but less than $10 billion to report 
borrowings and derivatives information as of the date the adviser 
calculates its regulatory assets under management for purposes of its 
annual updating amendment; and (2) advisers with regulatory assets 
under management attributable to separately managed accounts of at 
least $10 billion to report information as of that date and six months 
before that date. As we discussed above,\354\ at the suggestion of 
several commenters,\355\ we increased the proposed $150 million 
reporting threshold to $500 million in order to further alleviate the 
reporting burdens on smaller advisers without compromising our 
objectives.\356\ In response to commenters, we modified Section 5.K.(2) 
to base the reporting of borrowings and derivatives on regulatory 
assets under management in separately managed accounts, rather than the 
net asset value of the accounts, as proposed, because advisers may not 
characterize their separately managed accounts using net asset 
value.\357\ We also eliminated the requirement to report number of 
accounts. We believe that these changes will further decrease the 
burden on advisers to report information on separately managed 
accounts.
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    \354\ Supra Section II.A.1.
    \355\ IAA Letter; NYSBA Committee Letter; Schwab & Co. Letter.
    \356\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(2).
    \357\ See IAA Letter.
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    In the Proposing Release, we estimated that each adviser would 
spend, on average, 2 hours completing the questions regarding 
separately managed accounts in the first year a new or existing 
investment adviser completes these questions.\358\ A number of 
commenters expressed concern that our estimate of the paperwork burdens 
associated with our proposed questions regarding separately managed 
accounts was too low.\359\ We are revising our estimate of the time 
that that it will take each adviser to complete the questions regarding 
separately managed accounts in the first year a new or existing adviser 
completes these questions from 2 hours to 3 hours.\360\ We have arrived 
at this burden estimate by considering the following: (1) The changes 
we are making to Part 1A, Items 5.K.(1), 5.K.(2), 5.K.(3) and 5.K.(4) 
and Schedule D, Sections 5.K.(1), 5.K.(2) and 5.K.(3); (2) our efforts 
to further alleviate the reporting burden on advisers that manage a 
smaller amount of separately managed account regulatory assets under 
management; and (3) the comments we received on our proposed burden 
estimate. We recognize that burdens will vary across advisers. Advisers 
that advise a large number of separately managed accounts, or that have 
significant regulatory assets under management attributable to 
separately managed accounts, will incur a greater burden than advisers 
that have no separately managed account clients or a limited number of 
such clients. Based on our review of advisers' separately managed 
account business and the new reporting requirements, we believe that, 
on average, 3 hours is an appropriate estimate.
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    \358\ Proposing Release, supra footnote 3 at Section IV.A.1.a.i.
    \359\ Adrian Day Letter; ASG Letter (one adviser suggested that 
outsourcing the work might be costly; another adviser reported 
having the required data but estimated that it would take 
approximately 1 hour to compile data in response to Sections 
5.K.1(a) and (b)); IAA Letter. See also NYSBA Committee Letter (the 
proposed amendments to Form ADV and the Advisers Act will 
significantly increase the reporting obligations for many advisers); 
NRS Letter (burden estimate for proposed amendments is completely 
unrealistic and extremely low); SIFMA II Letter (most exposure data 
is gathered at the client or account level and it would require 
significant systems work to aggregate these values at the adviser 
level).
    \360\ Based on IARD system data as of May 16, 2016, 
approximately 8,718 registered investment advisers, or approximately 
73% of all investment advisers registered with us, reported 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. Of those approximately 
8,718 advisers, we estimate that 2,538 (approximately 29%) reported 
at least $500 million and less than $10 billion in regulatory assets 
under management from separately managed accounts and 545 
(approximately 6%) reported at least $10 billion in regulatory 
assets under management from separately managed account clients.
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ii. Other Additional Information Regarding Investment Advisers
    We are adding several new questions and amending existing questions 
on Form ADV regarding an adviser's identifying information, advisory 
business, and financial industry affiliations. The revised questions 
primarily refine or expand existing questions or request information we 
believe that advisers already have for compliance purposes. For 
example, we are requiring each adviser to provide CIK Numbers if it has 
one or more such numbers and to provide the address of each of the 
adviser's social media pages. Other questions require advisers to 
provide readily available or easily accessible information, such as the 
amendment to Part IA, Item 1.O. that requires advisers to report their 
assets within ranges. However, some of the revised questions may take 
longer for advisers to complete, such as the amendments to Schedule D, 
Section 1.F that require information about an adviser's 25 largest 
offices other than its principal office and place of business. While 
this information should be readily available to an adviser because it 
should be aware of its offices, a clerk will be required to manually 
enter expanded information about the adviser's offices in the first 
year the adviser responds to the item and then make updates in 
subsequent years. Some commenters thought that additional office 
reporting would be a significant burden on advisers.\361\ As discussed 
above in Section II.A.2.a., we recognize that the burden on some large 
advisers might be significant, especially in the initial reporting 
cycle when they are required to report their additional offices for the 
first time. However, we believe that the burden will decrease after the 
initial filing because in subsequent filings, advisers will only be 
reporting changes to their previously reported additional office 
information. We have clarified that advisers will only be required to 
update the information in Section 1.F. on an annual basis, which should 
help address some of the concerns raised by commenters about the burden 
associated with this amendment.\362\
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    \361\ ACG Letter; CFA Letter; Morningstar Letter (for larger 
advisers, additional office reporting would require substantial 
time, although that burden would ease after the initial reporting 
period); NYSBA Committee Letter.
    \362\ ASG Letter (updating additional office reporting more than 
annually would be burdensome); Morningstar Letter (the Commission 
should clarify how often additional office reporting needs to be 
updated).
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    We are adopting a number of amendments to Item 5 in addition to the 
questions relating to separately managed accounts discussed above. Like 
other new or revised items, we believe several of these new Item 5 
questions will require advisers to provide readily available 
information, such as the number of clients and regulatory assets under 
management attributable to each category of clients during the last 
fiscal year. Advisers currently provide this information in ranges, and 
therefore likely already have available to them the more precise 
numbers to report. In addition, information such as whether the adviser 
uses different assets under management numbers in Part 1A vs. Part 2A 
of Form ADV should be readily available. Other revised items will 
likely present greater burdens for some

[[Page 60450]]

advisers but not others, depending on the nature and complexity of 
their businesses. For instance, the burden associated with the revised 
disclosure regarding wrap fee programs or non-U.S. clients will depend 
on whether and to what extent an adviser allocates client assets to 
wrap fee programs or the extent to which the adviser has non-U.S. 
clients.
    In the Proposing Release, we estimated that the proposed revisions 
to Part 1A of Form ADV and Schedule D would take each adviser 
approximately 1 hour, on average, to complete in the first year a new 
or existing adviser responds to the questions.\363\ Some commenters 
expressed concern that our burden estimate was too low,\364\ while 
others expressed concern about the impact of the increased overall 
compliance burden on smaller advisers.\365\ We are revising our 
estimate of the time that these amendments to Part 1A of Form ADV and 
Schedule D will take each adviser to complete in the first year a new 
or existing adviser responds to these questions from 1 hour to 2 hours. 
We have arrived at this revised burden estimate, in part, by 
considering the following: (1) The relative complexity and availability 
of the information required by the revised items to the current form 
and its approved burden; (2) the number and types of advisers affected 
by the proposed amendments; and (3) the comments we received on our 
proposed burden estimate. We understand that the burden will vary 
across advisers depending on their business and the factors discussed 
in this section. The burden for some advisers will exceed our estimate, 
and the burden for others will be less due to the nature of their 
business. We believe, on balance, that 2 hours is a reasonable 
estimate.
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    \363\ Proposing Release, supra footnote 3 at Section 
IV.A.1.a.ii.
    \364\ ASG Letter (amendments will increase the time required to 
prepare response to Item 5). See NYSBA Committee Letter (the 
proposed amendments to Form ADV and the Advisers Act will 
significantly increase the reporting obligations for many advisers); 
NRS Letter (burden estimate for proposed amendments is completely 
unrealistic and extremely low).
    \365\ PCA Letter (Commission grossly underestimated the 
potential cost for many advisers, particularly small advisers); SBIA 
Letter (Commission should consider the impact of the increased 
overall compliance burden on smaller private fund advisers).
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iii. Clarifying, Technical and Other Amendments
    As discussed above, we are adopting several further amendments to 
Form ADV that are designed to clarify the Form and its instructions and 
address technical issues. These changes primarily refine existing 
questions. For example, we are deleting the phrase ``newly formed 
adviser'' from Part IA, Item 2.A.(9) because of questions from filers 
about whether that phrase refers to only newly formed corporate 
entities. Similarly, we are amending Part IA, Item 8.B.(2) to clarify 
that the question applies to any related person who recommends the 
adviser to advisory clients or acts as a purchaser representative. 
Because these amendments do not change the scope or amount of 
information required to be reported on Form ADV, we do not believe that 
these clarifying, technical, and other amendments to Part 1A of Form 
ADV will increase or decrease the average total collection of 
information burden for advisers in their first year filing Form ADV. We 
did not receive comments regarding reporting burdens associated with 
these technical and clarifying amendments.
    As a result of the amendments to Form ADV Part 1A discussed above, 
including the amendments related to separately managed accounts, 
additional items, and technical and clarifying amendments, we estimate 
the average total collection of information burden will increase 5 
hours to 45.74 hours per adviser for the first year that an adviser 
completes Form ADV (Part 1 and Part 2).\366\
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    \366\ Currently approved estimate of the average total 
collection of information burden per SEC registered adviser for the 
first year that an adviser completes Form ADV (40.74 hours) + 3 
hours to complete the questions about separately managed accounts + 
2 hours to complete other additional information regarding 
investment advisers = 45.74 hours.
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b. Estimated Changes in Burden Related to Private Fund Reporting 
Requirements
    We are adopting several amendments to Part 1A, Schedule D, Section 
7.B. that will refine and enhance existing information we receive about 
advisers to private funds. In addition, as part of our codification of 
umbrella registration, we are adding a new schedule to Part 1A--
Schedule R--to be submitted by advisers to private funds that use 
umbrella registration to file a single Form ADV. We believe the 
information required by the amendments to Part 1A, Schedule D, Section 
7.B will be readily available or easily accessible to advisers to 
private funds. For example, the PCAOB assigned number for a private 
fund auditor should be readily available or easily accessible to that 
private fund's adviser. As discussed in Section II.A.2.c., we modified 
Part 1A, Schedule D, Section 7.B.(1). Question 15(b) regarding sales of 
private funds to qualified clients in response to commenters' concerns. 
The question is now limited to 3(c)(1) funds, and requires only a 
``yes'' or ``no'' answer, rather than requiring advisers to report the 
percentage of a private fund held by qualified clients. Other 
amendments to Section 7.B. are designed to make the questions easier to 
answer, but do not cause a change in reporting burden, including moving 
certain ``notes'' to questions and changes to the current question 
regarding unqualified opinions. The currently approved total annual 
burden estimate for advisers making their initial filing in completing 
Item 7.B. and Schedule D, Section 7.B. is 1 hour per private fund. We 
do not estimate that the amendments to Schedule D, Section 7.B, 
including the changes from the proposal, will increase or decrease the 
total annual burden because the information is readily available to 
advisers. Most of the comments on the amendments to Part 1A, Schedule 
D, Section 7.B. concerned the qualified client question, Question 
15(b), which we modified as discussed above.
    The incorporation of umbrella registration into Form ADV will 
codify a staff position and provide a method for certain private fund 
advisers that operate as a single advisory business to file a single 
registration form. Umbrella registration will only be available if 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, that are otherwise 
eligible to invest in the private funds advised by the filing or a 
relying adviser. The filing and relying advisers will also have to 
satisfy certain requirements, including that each relying adviser is 
controlled by or under common control with the filing adviser. There 
has been staff guidance for single registration under defined 
circumstances since 2012,\367\ and the amendments to Form ADV will 
provide for umbrella registration and simplify the process of umbrella 
registration for advisers that operate as a single advisory business. 
We are adding a new schedule to Part 1A, Schedule R, that will need to 
be filed with respect to each relying adviser, as well as a new 
question to Schedule D, that will link a private fund reported on Form 
ADV to the specific (filing or relying) adviser that advises it. 
Schedule R will require identifying information, basis for Commission 
registration, and ownership information about each relying adviser.
---------------------------------------------------------------------------

    \367\ See 2012 ABA Letter, supra footnote 5.
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    We believe that much of the information we are requiring in

[[Page 60451]]

Schedule R will be readily available to private fund advisers because 
it is information that they are already reporting either on Form ADV 
filings for separate advisers or on a single Form ADV filing, in 
reliance on the staff guidance. Accordingly, although these new 
requirements will cause an increase in the information collected, the 
increased burden should largely be attributable to data entry and not 
data collection. Furthermore, some advisers who currently separately 
file Form ADV for each of their advisers may cumulatively have a 
reduced Form ADV burden by switching to umbrella registration. We also 
believe that new filing advisers using umbrella registration will 
readily have information available about their relying advisers, 
because they are operating as a single advisory business. In addition, 
filing advisers will be able to check a box indicating that the relying 
adviser's address is the same as the filing adviser, rather than 
provide the relying adviser's address. We did not receive comments on 
the burdens specific to Schedule R.
    There is no currently approved annual burden estimate for 
completing Schedule R because it is a new Schedule. Taking into account 
the scope of information we are requesting, our understanding that much 
of the information is readily available and currently required on Form 
ADV, and the fact that private fund advisers that file an umbrella 
registration in reliance on staff guidance had on average three relying 
advisers,\368\ we continue to estimate that advisers to private funds 
that elect to rely on umbrella registration will spend on average 1 
hour per filing adviser completing new Schedule R for the first time.
---------------------------------------------------------------------------

    \368\ Based on IARD system data as of May 16, 2016, 
approximately 743 investment advisers rely on the 2012 ABA Letter to 
file Form ADV on behalf of themselves and 2,587 relying advisers, an 
average of approximately 3 relying advisers per filing adviser.
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c. Estimated Changes in Burden Related to Exempt Reporting Adviser 
Reporting Requirements
    Exempt reporting advisers are required to complete a limited number 
of items in Part 1A of Form ADV (consisting of Items 1, 2.B., 3, 6, 7, 
10, 11 and corresponding schedules), are not required to complete Part 
2 and will not be eligible to file new Schedule R. The amendments to 
Part 1A will revise only Items 1 and 7 for exempt reporting advisers. 
We believe that most exempt reporting advisers are unlikely to be 
required to do additional reporting in response to the new 
requirements. In addition, the information required by these revisions 
should be readily available to any adviser as part of their ongoing 
operations and management of client assets.\369\ For instance, we 
estimate that almost all exempt reporting advisers currently have five 
or fewer offices (the number of offices currently required by Form ADV) 
and thus will not have to provide information on additional 
offices.\370\ Accordingly, we do not expect that the amendments will 
increase or decrease the currently approved total annual burden 
estimate of two hours per exempt reporting adviser initially completing 
these items on Form ADV, other than Item 7.B. We also do not expect 
that the amendments will increase or decrease the currently approved 
total annual burden estimate of 1 hour per private fund per exempt 
reporting adviser initially completing Item 7.B. and Section 7.B. of 
Schedule D.
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    \369\ One commenter suggested that it would be burdensome for 
exempt reporting advisers to begin collecting information on the 
qualified client status of their investors. As discussed above, we 
have made revisions to address this concern. SBIA Letter.
    \370\ Based on IARD system data as of May 16, 2016, 
approximately 15 exempt reporting advisers reported on Form ADV that 
they had five or more other offices.
---------------------------------------------------------------------------

2. Annual Burden Estimates
a. Estimated Annual Burden Applicable to All Registered Investment 
Advisers
i. Estimated Initial Hour Burden (Not Including Burden Applicable to 
Private Funds) for First Year Adviser To Complete Form ADV (Part 1 and 
Part 2)
    We estimate that, as a result of the amendments to Form ADV Part 1A 
discussed above, other than those applicable to private funds, the 
average total collection of information burden per respondent will 
increase 5 hours to 45.74 hours per adviser for the first year that an 
adviser completes Form ADV (Part 1 and Part 2).
    Approximately 12,024 investment advisers are currently registered 
with the Commission.\371\ Not including private fund reporting, the 
estimated aggregate annual burden applicable to these advisers will be 
549,978 hours \372\ (60,120 hours of it attributable to the 
amendments).\373\ As with the Commission's prior Paperwork Reduction 
Act estimates for Form ADV, we believe that most of the paperwork 
burden will be incurred in advisers' initial submission of the amended 
Form ADV, and that over time this burden will decrease substantially 
because the paperwork burden will be limited to updating 
information.\374\ Amortizing the burden imposed by Form ADV over a 
three-year period to reflect the anticipated period of time that 
advisers will use the revised Form will result in an average annual 
burden of an estimated 183,326 hours per year \375\ (20,040 hours per 
year of it attributable to the amendments),\376\ or approximately 15.25 
hours per year for each adviser currently registered with the 
Commission.\377\
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    \371\ Based on IARD system data as of May 16, 2016. We include 
currently registered advisers in the estimated initial hour burden 
calculation because, for purposes of estimating burdens under the 
Paperwork Reduction Act, we assume that every new and existing 
registered adviser completes an initial registration in a three year 
period, which is the period after which estimates are required to be 
renewed.
    \372\ 45.74 hour per-adviser burden x 12,024 advisers = 549,978 
hours.
    \373\ 5 hour per-adviser additional burden x 12,024 advisers = 
60,120 hours.
    \374\ We discuss the burden for advisers making annual updating 
amendments to Form ADV in Section iii below.
    \375\ 549,978 hours/3 = 183,326 hours.
    \376\ 60,120 hours/3 = 20,040 hours.
    \377\ 183,326 hours/12,024 advisers = 15.25 hours.
---------------------------------------------------------------------------

    Based on IARD system data, we estimate that there will be 
approximately 1,000 new investment advisers filing Form ADV with us 
annually. Therefore, we estimate that the total annual aggregate burden 
estimate applicable to these advisers for the first year that they 
complete Form ADV but excluding private fund reporting requirements is 
45,740 hours (1,000 advisers x 45.74 hours). Amortizing the burden 
imposed by Form ADV for new registrants over a three-year period to 
reflect the anticipated period of time that advisers will use the 
revised Form will result in an average annual aggregate burden estimate 
of 15,247 hours per year \378\ (1,667 of it attributable to the 
amendments).\379\ We therefore estimate the total annual aggregate hour 
burden to be 198,573 hours per year.\380\
---------------------------------------------------------------------------

    \378\ 45,740 hours/3 = 15,247 hours.
    \379\ 5,000 hours/3 = 1,667 hours.
    \380\ 15,247 hours for new registrants + 183,326 hours for 
existing registrants = 198,573 hours.
---------------------------------------------------------------------------

ii. Estimated Initial Hour Burden Applicable to Registered Advisers to 
Private Funds
    The amount of time that a registered adviser managing private funds 
will incur to complete Item 7.B. and Section 7.B. of Schedule D will 
vary depending on the number of private funds the adviser manages. Of 
the advisers currently registered with us, we estimate that 
approximately 4,469 registered advisers advise a total of 30,896 
private funds, and, on average, 300 Commission-registered advisers 
annually will make their initial filing with us reporting approximately 
1,100

[[Page 60452]]

private funds.\381\ The currently approved annual burden estimate for 
advisers making their initial filing in completing Item 7.B. and 
Schedule D, Section 7.B. is 1 hour per private fund. As a result, we 
estimate that the private fund reporting requirements that are 
applicable to registered investment advisers will add 31,996 hours to 
the overall annual aggregate burden estimate applicable to registered 
advisers.\382\ As noted above, we believe most of the paperwork burden 
will be incurred in connection with advisers' initial submission of 
Form ADV, and that over time the burden will decrease substantially 
because it will be limited to updating (instead of compiling) 
information. Amortizing this burden over three years, as we did above 
with respect to the initial filing of the rest of the form, results in 
an annual aggregate average estimated burden of 10,665 hours per 
year.\383\
---------------------------------------------------------------------------

    \381\ Based on IARD system data as of May 16, 2016. We include 
existing funds of currently registered advisers in the estimated 
initial hour burden calculation because, for purposes of estimating 
burdens under the Paperwork Reduction Act, we assume that every 
existing registered adviser completes an initial filing completing 
Item 7.B. and Schedule D, Section 7.B. per fund in a three year 
period, which is the period after which estimates are required to be 
renewed.
    \382\ 1 hour x 30,896 private funds = 30,896 hours. 1 hour x 
1,100 private funds = 1,100 hours. 30,896 hours + 1,100 hours = 
31,996 hours.
    \383\ 31,996 hours/3 = 10,665 hours.
---------------------------------------------------------------------------

    We also are adding a new Schedule R to Form ADV for umbrella 
registration. Of the advisers currently registered with us, we estimate 
based on current Form ADV filings that approximately 743 registered 
advisers currently submit a single Form ADV on behalf of themselves and 
approximately 2,587 relying advisers.\384\ Taking into account the 
scope of information we are requesting and our understanding that much 
of the information is readily available and is already reported by 
advisers, we estimate that advisers to private funds that elect to rely 
on umbrella registration will spend 1 hour per filing adviser 
completing new Schedule R. As a result, we estimate that umbrella 
registration will add 743 \385\ hours to the annual burden estimate 
applicable to registered advisers. We estimate that, on average, 51 SEC 
registered advisers annually will make their initial filing with us as 
filing advisers, increasing the overall annual burden for advisers to 
private funds an additional 51 hours, or 794 hours in total. Amortizing 
these hours for a three year period as with the rest of the burdens 
associated with Form ADV, results in an annual aggregate average burden 
of 265 additional hours per year.\386\
---------------------------------------------------------------------------

    \384\ Based on IARD system data as of May 16, 2016.
    \385\ 743 filing advisers x 1 hour per completing Schedule R = 
743 hours.
    \386\ 794 hours/3 = 265 hours.
---------------------------------------------------------------------------

iii. Estimated Annual Burden Associated With Amendments, New Brochure 
Supplements, and Delivery Obligations
    The current approved collection of information burden for Form ADV 
has three elements in addition to those discussed above: (1) The annual 
burden associated with annual and other amendments to Form ADV; (2) the 
annual burden associated with creating new Part 2 brochure supplements 
for advisory employees throughout the year; and (3) the annual burden 
associated with delivering codes of ethics to clients as a result of 
the offer of such codes contained in the brochure. We anticipate that 
our amendments to Form ADV will increase the currently approved annual 
burden estimate associated with annual amendments to Form ADV from 6 
hours to 8 hours per adviser, but will not impact interim updating 
amendments to Form ADV.\387\
---------------------------------------------------------------------------

    \387\ Certain commenters were concerned about the burden on 
advisers of updating social media information via interim updating 
amendments. See BlackRock Letter; Oppenheimer Letter; SIFMA Letter. 
As discussed in Section II.A.2.a., we clarified that we are limiting 
the required social media reporting to an adviser's accounts on 
publicly available social media platforms where the adviser controls 
the content. We believe changes to such platforms will be less 
frequent than changes, for example, to platforms where an adviser 
does not control the content. Therefore, we do not believe that 
updating social media reporting via interim updating amendments will 
increase the currently approved annual burden estimate associated 
with interim updating amendments.
---------------------------------------------------------------------------

    We continue to estimate that, on average, each adviser filing Form 
ADV through the IARD will likely amend its form two times during the 
year. We estimate, based on IARD system data, that advisers, on 
average, make one interim updating amendment (at an estimated 0.5 hours 
per amendment) and one annual updating amendment each year. Our 
estimate for the annual updating amendment in the Proposing Release was 
7 hours per amendment each year. Based on the comments we received 
regarding separately managed account reporting that are discussed 
above,\388\ we are increasing the estimate to 8 hours per amendment 
each year.\389\
---------------------------------------------------------------------------

    \388\ AIMA Letter; ASG Letter; IAA Letter; SIFMA Letter. See 
also Adrian Day Letter; NRS Letter.
    \389\ (12,024 advisers x 0.5 hours/other than annual amendment) 
+ (12,024 advisers x 8 hours/annual amendment) = 102,204 hours.
---------------------------------------------------------------------------

    In addition, the currently approved annual burden estimates are 
that each investment adviser registered with us will, on average, spend 
1 hour per year making interim amendments to brochure supplements,\390\ 
and an additional 1 hour per year to prepare new brochure supplements 
as required by Part 2.\391\ The currently approved annual burden 
estimate is that advisers spend an average of 1.3 hours annually to 
meet obligations to deliver codes of ethics to clients upon 
request.\392\ We are not changing these estimates as the amendments do 
not affect these requirements. The increase in the annual burden 
estimate associated with annual amendments to Form ADV and the increase 
in the number of registered investment advisers since the last approval 
of this collection, increase the total annual burden for advisers 
registered with us attributable to amendments, brochure supplements and 
obligations to deliver codes of ethics to 141,883 hours.\393\
---------------------------------------------------------------------------

    \390\ 12,024 hours attributable to interim amendments to the 
brochure supplements = 12,024 advisers x 1 hour = 12,024 hours.
    \391\ 12,024 hours attributable to new brochure supplements = 
12,024 advisers x 1 hour = 12,024 hours.
    \392\ 15,631 hours for the delivery of codes of ethics = 12,024 
advisers x 1.3 hours = 15,631 hours.
    \393\ 102,204 hours + 12,024 hours + 12,024 hours + 15,631 hours 
= 141,883 hours.
---------------------------------------------------------------------------

iv. Estimated Annual Cost Burden
    The currently approved total annual collection of information 
burden estimate for Form ADV has a one-time initial cost for outside 
legal and compliance consulting fees in connection with the initial 
preparation of Part 2 of Form ADV. We do not anticipate that the 
amendments we are adopting to Form ADV will affect the per adviser cost 
burden estimates for outside legal and compliance consulting fees. In 
addition to the estimated legal and compliance consulting fees, 
investment advisers of private funds incur costs with respect to the 
requirement for investment advisers to report the fair value of private 
fund assets. We did not receive any comments regarding these specific 
costs.
    We expect that 1,000 new advisers will register annually with the 
Commission. We estimate that the initial cost related to preparation of 
Part 2 of Form ADV will be $4,400 for legal services and $5,000 for 
compliance consulting services, in each case, for those advisers who 
engage legal counsel or consultants. We anticipate that a quarter of 
these advisers will seek the help of outside legal services and half 
will seek the help of compliance consulting services. Accordingly, we 
estimate that 250 of these advisers will use outside legal services, 
for a total annual aggregate cost burden of

[[Page 60453]]

$1,100,000,\394\ and 500 advisers will use outside compliance 
consulting services, for a total annual aggregate cost burden of 
$2,500,000,\395\ resulting in a total annual aggregate cost burden 
among all respondents of $3,600,000 for outside legal and compliance 
consulting fees related to drafting narrative brochures.\396\
---------------------------------------------------------------------------

    \394\ 25% x 1000 SEC registered advisers = approximately 250 
advisers. $4,400 for legal services x 250 advisers = $ 1,100,000.
    \395\ 50% x 1000 SEC registered advisers = 500 advisers. $5,000 
for consulting services x 500 advisers = $2,500,000.
    \396\ $1,100,000 + $2,500,000 = $3,600,000.
---------------------------------------------------------------------------

    We estimate that 6% of registered advisers have at least one 
private fund client that may not be audited. These advisers therefore 
may incur costs to fair value their private fund assets. Based on IARD 
system data as of May 16, 2016, 4,469 registered advisers currently 
advise private funds. We therefore estimate that approximately 268 
registered advisers may incur costs of $37,625 each on an annual basis, 
for an aggregate annual total cost of $10,083,500.\397\
---------------------------------------------------------------------------

    \397\ 268 advisers x $37,625 = $10,083,500.
---------------------------------------------------------------------------

    Together, we estimate that the total cost burden among all 
respondents for outside legal and compliance consulting fees related to 
third party or outside valuation services and for drafting outside 
legal and compliance consulting fees to be $13,683,500.\398\
---------------------------------------------------------------------------

    \398\ $3,600,000 + $10,083,500 = $13,683,500.
---------------------------------------------------------------------------

b. Estimated Annual Burden Applicable to Exempt Reporting Advisers
i. Estimated Initial Hour Burden
    Based on IARD system data as of May 16, 2016, there are 
approximately 3,248 exempt reporting advisers currently filing reports 
with the SEC.\399\ The paperwork burden applicable to these exempt 
reporting advisers consists of the burden attributable to completing a 
limited number of items in Form ADV Part 1A as well as the burden 
attributable to the private fund reporting requirements of Item 7.B. 
and Section 7.B. of Schedule D.
---------------------------------------------------------------------------

    \399\ Based on IARD system data as of May 16, 2016. We include 
existing exempt reporting advisers and their private funds in the 
estimated initial hour burden calculation because, for the purpose 
of estimating burdens under the Paperwork Reduction Act, we assume 
that every new and existing exempt reporting adviser completes an 
initial Form ADV in a three year period, which is the period after 
which estimates are required to be renewed.
---------------------------------------------------------------------------

    The currently approved estimate of the average total collection of 
information burden per exempt reporting adviser for the first year that 
an exempt reporting adviser completes a limited subset of Part 1 of 
Form ADV, other than Item 7.B. and Section 7.B. of Schedule D, is 2 
hours. As discussed above, we do not anticipate that our amendments to 
Form ADV will affect the per exempt reporting adviser burden estimate. 
Based on IARD system data, we estimate that there will be 500 new 
exempt reporting advisers filing Form ADV annually. Therefore, we 
estimate that the total aggregate annual burden applicable to the 
existing and new exempt reporting advisers for the first year that they 
complete Form ADV but excluding private fund reporting requirements 
increases to 7,496 hours.\400\ Amortizing the burden imposed by Form 
ADV over a three-year period to reflect the anticipated period of time 
that advisers will use the revised Form ADV results in an average 
annual aggregate burden estimate of 2,499 hours per year.\401\
---------------------------------------------------------------------------

    \400\ 2 hours x (3,248 reporting exempt reporting advisers + 500 
new exempt reporting advisers) = 7,496 hours.
    \401\ 7,496 hours/3 = 2,499 hours.
---------------------------------------------------------------------------

    As discussed above, we estimate the burden of completing Item 7.B. 
and Section 7.B. of Schedule D to be 1 hour per private fund. We do not 
anticipate that our amendments to Form ADV will affect the per exempt 
reporting adviser burden of completing Item 7.B. and Section 7.B. of 
Schedule D. Based on IARD system data as of May 16, 2016, we estimate 
that, on average, the 3,248 exempt reporting advisers report 11,915 
funds. In addition, we estimate that the 500 new exempt reporting 
advisers making their initial filing will report approximately 1,000 
funds, resulting in a total aggregate annual burden of 12,915 
hours.\402\ Amortizing this total burden over three years as we did 
above for registered advisers results in an average annual aggregate 
burden estimate of 4,305 hours per year,\403\ or approximately 1 hour 
per year, on average, for each exempt reporting adviser.\404\
---------------------------------------------------------------------------

    \402\ 11,915 funds + 1,000 funds = 12,915 funds. 12,915 x 1 hour 
= 12,915 hours.
    \403\ 12,915 hours/3 years = 4,305 hours per year.
    \404\ 4,305 hours per year/3,748 exempt reporting advisers = 1.1 
hours per year.
---------------------------------------------------------------------------

ii. Estimated Annual Burden Associated With Amendments and Final 
Filings
    In addition to the burdens associated with initial completion and 
filing of the portion of the form that exempt reporting advisers are 
required to prepare, we estimate that, based on IARD system data, each 
exempt reporting adviser will amend its form 2 times per year. On 
average, these consist of one interim updating amendment (at an 
estimated 0.5 hours per amendment) \405\ and one annual updating 
amendment (at an estimated 1 hour per amendment) \406\ each year. In 
addition, we anticipate 200 final filings by exempt reporting advisers 
annually (at an estimated 0.1 hours per filing).\407\ We do not 
anticipate that our amendments to Form ADV will affect the per exempt 
reporting adviser burden for amendments or final filings. However, 
based on the increase in the number of exempt reporting advisers, the 
total annual burden associated with exempt reporting advisers filing 
amendments and final filings has increased to 4,892 hours.\408\
---------------------------------------------------------------------------

    \405\ 3,248 exempt reporting advisers x .5 hours = 1,624 hours.
    \406\ 3,248 exempt reporting advisers x 1 hour = 3,248 hours.
    \407\ 200 final filings x 0.1 hours = 20 hours.
    \408\ 1,624 hours + 3,248 hours + 20 hours = 4,892 hours. Exempt 
reporting advisers are not required to complete Part 2 of Form ADV 
and so will not incur an hour burden to prepare new brochure 
supplements or the cost for preparation of the brochure. Exempt 
reporting advisers also do not have an obligation to deliver codes 
of ethics to clients when requested as required by Part 2 of Form 
ADV.
---------------------------------------------------------------------------

3. Total Revised Burdens
    The revised total annual aggregate collection of information burden 
for SEC registered advisers to file and complete the revised Form ADV 
(Parts 1 and 2), including the initial burden for both existing and 
anticipated new registrants, private fund reporting, plus the burden 
associated with filing amendments to the form, preparing brochure 
supplements and delivering codes of ethics to clients, is estimated to 
be approximately 351,386 hours per year, for a monetized total of 
approximately $89,427,737.\409\
---------------------------------------------------------------------------

    \409\ 198,573 hours per year attributable to initial preparation 
of Form ADV + 10,665 hours per year attributable to initial private 
fund reporting requirements + 265 hours per year for initial 
umbrella registration + 141,883 hours per year attributable to 
filing amendments, brochure supplements and obligations to deliver 
codes of ethics = 351,386 hours. One commenter stated that the work 
of compliance is generally carried out by the Chief Compliance 
Officer with limited assistance from others. PCA Letter. However, 
based on our experience, we expect that at most Commission 
registered advisers, the performance of this function will most 
likely be equally allocated between a senior compliance examiner and 
a compliance manager, or persons performing similar functions. Data 
from the SIFMA Management and Professional Earnings Report, modified 
by Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead, suggest that costs for these 
positions are $221 and $288 per hour, respectively. (175,693 hours x 
$221) + (175,693 hours x $288) = $89,427,737.
---------------------------------------------------------------------------

    The revised total annual collection of information burden for 
exempt reporting advisers to file and complete the required Items of 
Part 1A of Form

[[Page 60454]]

ADV, including the burdens associated with private fund reporting, 
amendments to the form and final filings, will be approximately 11,696 
hours per year, for a monetized total of $2,976,632.\410\
---------------------------------------------------------------------------

    \410\ 2,499 hours per year attributable to initial preparation 
of Form ADV + 4,305 hours per year attributable to initial private 
fund reporting requirements + 4,892 hours per year for amendments 
and final filings = 11,696 hours. We expect that the performance of 
this function will most likely be equally allocated between a senior 
compliance examiner and a compliance manager, or persons performing 
similar functions. Data from the SIFMA Management and Professional 
Earnings Report, modified by Commission staff to account for an 
1,800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits and overhead, 
suggest that costs for these positions are $221 and $288 per hour, 
respectively. (5,848 x $221) + (5,848 x $288) = $2,976,632.
---------------------------------------------------------------------------

    We estimate that with today's amendments to Form ADV, the revised 
total aggregate annual hour burden for the form will be approximately 
363,082 hours and the monetized total will be approximately 
$92,404,369.\411\ This is an increase of 208,680 hours and $55,733,942 
from the currently approved annual aggregate burden estimates,\412\ 
which is attributable primarily to the currently approved burden 
estimates not considering the amortized annual burden of Form ADV on 
existing registered advisers and exempt reporting advisers; but also to 
the larger registered investment adviser and exempt reporting adviser 
population since the most recent approval, adjustments for inflation, 
and the amendments to Form ADV. The resulting blended average per 
adviser burden for Form ADV is 23.77 hours (for a monetized total of 
$6,051),\413\ which consists of an average annual burden of 29.22 hours 
\414\ for each of the estimated 12,024 SEC registered advisers, and 
3.60 hours \415\ for each of the estimated 3,248 exempt reporting 
advisers.
---------------------------------------------------------------------------

    \411\ 351,386 hours + 11,696 hours = 363,082 hours. $89,427,737 
+ $2,976,632 = $92,404,369.
    \412\ 363,082 hours-154,402 hours = 208,680 hours. $92,404,369-
$36,670,427 (currently approved monetized burden estimate) = 
$55,733,942.
    \413\ 363,082 hours/(12,024 registered advisers + 3,248 exempt 
reporting advisers) = 23.77 hours. $92,404,369/(12,024 registered 
advisers + 3,248 exempt reporting advisers) = $6,051.
    \414\ 351,386 hours/12,024 registered advisers = 29.22 hours.
    \415\ 11,696 hours/3,248 exempt reporting advisers = 3.60 hours.
---------------------------------------------------------------------------

    Registered investment advisers are also expected to incur an annual 
cost burden of $13,683,500, an increase of $10,083,500 from the current 
approved cost burden estimate of $3,600,000. The increase in annual 
cost burden is attributable to the currently approved burden not 
considering the cost to advisers to fair value private fund assets.

B. Rule 204-2

    Rule 204-2 (OMB Control No. 3235-0278) requires investment advisers 
registered, or required to be registered under section 203 of the Act, 
to keep certain books and records relating to their advisory business. 
The collection of information under rule 204-2 is necessary for the 
Commission staff to use in its examination and oversight program. The 
information provided to the Commission in connection with staff 
examinations, investigations and oversight programs would be kept 
confidential subject to the provisions of applicable law. The 
collection of information is mandatory.
    The amendments to rule 204-2 will require investment advisers to 
make and keep the following records: (i) Documentation necessary to 
demonstrate the calculation of the performance the adviser distributes 
to any person, and (ii) all written communications received or sent 
relating to the adviser's performance.
    The currently approved total annual burden for rule 204-2 is based 
on an estimate of 10,946 registered advisers subject to rule 204-2 and 
an estimated average burden of 181.45 burden hours each year per 
adviser, for a total annual aggregate burden estimate of 1,986,152 
hours. Based upon updated IARD system data as of May 16, 2016, the 
approximate number of investment advisers is 12,024. As a result of the 
increase in the number of advisers registered with the Commission since 
the current total annual burden estimate was approved, the total burden 
estimate has increased by 195,603 hours.\416\ We estimate that most 
advisers provide, or seek to provide, performance information to their 
clients. Under the amendments, each adviser will be required to retain 
the records in the same manner, and for the same period of time, as 
other books and records under the rule.\417\ We believe based on staff 
experience, and several commenters confirmed,\418\ that the 
documentation necessary to support the performance calculations is 
customarily maintained, or required to be maintained by advisers 
already in account statements or portfolio management systems. We also 
believe that most advisers already maintain this information in their 
books and records, in order to show compliance with the Advisers Act 
advertising rule, rule 206(4)-1. In the Proposing Release, we estimated 
that the proposed amendments to rule 204-2 would increase the burden by 
approximately .5 hours per adviser annually. We received several 
comments suggesting that our estimated burden increase was 
significantly too low.\419\ While we continue to believe that most 
advisers currently maintain this information, after considering the 
commenters' concerns, we now estimate that the amendments to rule 204-2 
will increase the burden by approximately 1.5 hours per adviser 
annually for a total annual aggregate increase of 18,036 hours.\420\ 
The revised annual aggregate burden estimate will be 2,199,791 
hours.\421\ The revised average burden estimate of the recordkeeping 
requirements under rule 204-2 per SEC-registered adviser will be 
approximately 183 hours per year.\422\ The burden may be less than 1.5 
hours for those advisers that currently maintain this information, and 
we acknowledge that the burden may be greater than 1.5 hours for 
advisers that frequently provide performance information to clients and 
do not currently maintain this information. We believe that, on 
average, 1.5 hours is an appropriate estimate for this collection of 
information.
---------------------------------------------------------------------------

    \416\ 12,024 advisers x 181.45 hours = 2,181,755 hours. 
2,181,755 hours - 1,986,152 hours = 195,603 hours.
    \417\ Specifically, the records must be maintained in an easily 
accessible place for at least five years from the end of the fiscal 
year during which the last entry was made in such record, the first 
two years in an appropriate office of the investment adviser. See 
rule 204-2(e)(1).
    \418\ See, e.g., ABA Committee Letter; Morningstar Letter; PCA 
Letter.
    \419\ ACG Letter; Anonymous Letter (estimates a training burden 
of 4-8 hours per effected employee in the first year; estimates that 
there will be additional expenses for data analysis and storage); 
PEGCC Letter (argues that, with respect to the proposed amendments 
to rule 204-2, the Commission significantly understated the burden 
on advisers and presented little evidence to support its burden 
estimate). See ASG Letter.
    \420\ 12,024 advisers x 1.5 hours = 18,036 hours.
    \421\ 1,986,152 (current approved burden) + 195,603 (burden for 
additional registrants) + 18,036 (burden for amendments) = 2,199,791 
hours.
    \422\ 2,199,791 hours / 12,024 advisers = 183 hours.
---------------------------------------------------------------------------

    Advisers will likely use a combination of compliance clerks and 
general clerks to make and keep the information and records required 
under the rule. The currently approved total annual aggregate cost 
burden is $108,708,557.10. We estimate the hourly wage for compliance 
clerks to be $65 per hour, including benefits, and the hourly wage for 
general clerks to be $58 per hour, including benefits.\423\ For

[[Page 60455]]

each adviser, 183 annual burden hours will be required to make and keep 
the information and records required under the rule. We anticipate that 
compliance clerks will perform an estimated 32 hours of this work, and 
general clerks will perform the remaining 151 hours. The total annual 
cost per respondent therefore will be an estimated $10,838,\424\ for a 
total annual aggregate burden cost estimate of approximately 
$130,316,112,\425\ an increase of $21,607,555 from the currently 
approved total annual aggregate cost per respondent.\426\ The increase 
in cost is attributable to a larger registered investment adviser 
population since the most recent PRA approval, an adjustment for 
inflation in the hourly wage estimates for a compliance clerk and 
general clerk, and the rule 204-2 amendments discussed in this Release.
---------------------------------------------------------------------------

    \423\ Our hourly wage rate estimate for a compliance clerk and 
general clerk is based on data from the SIFMA Office Salaries in the 
Securities Industry Report 2013 (``SIFMA Office Salaries Report''), 
modified by Commission staff to account for an 1,800-hour work-year 
and inflation, and multiplied by 2.93, to account for bonuses, firm 
size, employee benefits and overhead.
    \424\ (32 hours per compliance clerk x $65) + (151 hours per 
general clerk x $58) = ($2,080 + $8,758) = $10,838.
    \425\ $10,838 per adviser x 12,024 advisers = approximately 
$130,316,112.
    \426\ $130,316,112 - $108,708,557 = $21,607,555.
---------------------------------------------------------------------------

VI. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory 
Flexibility Act Analysis, in accordance with section 4(a) of the 
Regulatory Flexibility Act, in relation to our amendments to Form ADV 
and rule 204-2 and our technical amendments to certain other rules 
under the Advisers Act.\427\ We prepared an Initial Regulatory 
Flexibility Analysis (``IRFA'') in the Proposing Release.\428\
---------------------------------------------------------------------------

    \427\ 5 U.S.C. 604(a).
    \428\ See Proposing Release, supra footnote 3 at Section V.
---------------------------------------------------------------------------

A. Need for and Objectives of the Amendments

    We are adopting amendments to Form ADV that are designed to provide 
the Commission with additional information about registered investment 
advisers, including information about separately managed accounts, 
provide for umbrella registration for multiple investment advisers 
operating as a single advisory business, and provide technical, 
clarifying and other amendments to certain Form ADV provisions. The 
amendments to Form ADV will improve the depth and quality of the 
information provided by investment advisers to the Commission and the 
public.
    We are also amending the Advisers Act books and records rule to 
require advisers to make and keep supporting documentation that 
demonstrates performance calculations or rates of return in any written 
communications that the adviser circulates or distributes, directly or 
indirectly, to any person. We believe that the amendments to the books 
and records rule will improve investor protections by providing useful 
information in examining and evaluating advisers' performance claims.
    Finally, we are adopting technical amendments to certain rules 
under the Advisers Act to remove transition provisions where the 
transition process is complete.

B. Significant Issues Raised by Public Comments

    The Commission is sensitive to the burdens that the Form ADV and 
rule amendments may have on small advisers. In the Proposing Release, 
we requested comment on matters discussed in the IRFA. In particular, 
we sought comments on the number of small entities, particularly small 
advisers, to which the amendments to Form ADV and Advisers Act rules 
would apply, and the impact of those amendments on the small entities, 
including whether the effects would be economically significant.
    The Commission received one comment letter specifically addressing 
the IRFA \429\ in addition to several comment letters that discussed 
the impact of the proposed amendments to Form ADV on smaller 
advisers.\430\ With respect to the reporting on Form ADV regarding 
separately managed accounts, several commenters suggested decreasing 
the burden on small advisers by increasing the threshold for reporting 
derivatives and borrowings information in Schedule D, Section 5.K.(2) 
to $500 million from the proposed $150 million.\431\ As discussed 
above, we are persuaded by commenters that this is a sensible 
accommodation that would allow us to meet our regulatory objectives 
while alleviating reporting burdens on smaller advisers, and have 
raised the minimum threshold for reporting information about the use of 
borrowings and derivatives in separately managed accounts to advisers 
with at least $500 million in separately managed account regulatory 
assets under management, from the proposed threshold of $150 
million.\432\ A commenter also suggested not requiring advisers with 
less than $150 million in separately managed account assets to report 
any separately managed account information, including in Sections 
5.K.(1) and 5.K.(3).\433\ As discussed in Section II.A.1. of this 
Release, we recognize that this reporting will impose some burden on 
all advisers with separately managed accounts, but we believe that 
gathering this information is important for us to gain a full 
understanding of assets held in separately managed accounts managed by 
investment advisers of different sizes. We also have limited both the 
scope of information to be reported and the frequency of reporting, 
which lessens the burden on small advisers.
---------------------------------------------------------------------------

    \429\ PCA Letter.
    \430\ Adrian Day Letter; AIMA Letter; Diercks Letter; IAA 
Letter; SBIA Letter; Schwab & Co. Letter.
    \431\ IAA Letter; NYSBA Committee Letter; Schwab & Co. Letter.
    \432\ See Amended Form ADV, Part 1A, Schedule D, Section 
5.K.(2).
    \433\ AIMA Letter; see also ASG Letter (suggesting establishing 
a minimum regulatory assets under management threshold above which 
reporting requirements would be imposed).
---------------------------------------------------------------------------

    One commenter described more generally the burdens of the 
amendments to Form ADV on smaller private fund advisers.\434\ Other 
commenters noted that smaller advisers may not have additional staff to 
meet any increased burdens in reporting, and that smaller advisers may 
not have the staffing that we assume in calculating monetary burdens on 
advisers.\435\ Another commenter noted that the requirement to report 
information about additional offices may have a disproportionate impact 
on smaller advisers.\436\
---------------------------------------------------------------------------

    \434\ See SBIA Letter.
    \435\ Adrian Day Letter; Diercks Letter; PCA Letter.
    \436\ NRS Letter.
---------------------------------------------------------------------------

    With respect to the amendments that we proposed to the Books and 
Records rule, one commenter noted that while the amendments were not 
themselves burdensome, when aggregated with other recordkeeping 
obligations, could lead to overall compliance burdens for smaller 
advisers.\437\ While we acknowledge commenters' concerns, records from 
advisers of all sizes are required for our staff to be able to conduct 
its oversight of advisers, including examinations and investigations. 
Further, based on our staff's experience and the information provided 
by several commenters,\438\ we believe that most advisers already 
maintain this information. Thus, we are adopting the amendments largely 
as proposed.
---------------------------------------------------------------------------

    \437\ SBIA Letter.
    \438\ See, e.g., ABA Committee Letter; Morningstar Letter; PCA 
Letter.
---------------------------------------------------------------------------

    With respect to the amendments to Form ADV and the Advisers Act 
rules generally, we believe that they will improve the depth and 
quality of information provided by investment advisers to the 
Commission and the public and our oversight of advisers.

[[Page 60456]]

Information about advisers of all sizes is required for the Commission 
and its staff to perform their roles in overseeing advisers. 
Accordingly, we are not modifying the reporting requirements for 
smaller advisers.

C. Small Entities Subject to the Rule and Rule Amendments

    The amendments to Form ADV and the Advisers Act rules affect all 
advisers registered with the Commission and exempt reporting advisers, 
including small entities. Under Commission rules, for the purposes of 
the Advisers Act and the Regulatory Flexibility Act, an investment 
adviser generally is a small entity if it: (1) Has assets under 
management having a total value of less than $25 million; (2) did not 
have total assets of $5 million or more on the last day of the most 
recent fiscal year; and (3) does not control, is not controlled by, and 
is not under common control with another investment adviser that has 
assets under management of $25 million or more, or any person (other 
than a natural person) that had total assets of $5 million or more on 
the last day of its most recent fiscal year.\439\
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    \439\ Rule 0-7(a) under the Advisers Act.
---------------------------------------------------------------------------

    Our rule and Form ADV amendments will not affect most advisers that 
are small entities (``small advisers'') because they are generally 
registered with one or more state securities authorities and not with 
us. Under section 203A of the Advisers Act, most small advisers are 
prohibited from registering with the Commission and are regulated by 
state regulators. Based on IARD system data, we estimate that as of May 
16, 2016, approximately 526 advisers that are small entities are 
registered with the Commission.\440\ Because these advisers are 
registered, they, like all SEC-registered investment advisers, will all 
be subject to the amendments to Form ADV, rule 204-2 and other Advisers 
Act rules.
---------------------------------------------------------------------------

    \440\ Based on SEC-registered investment adviser responses to 
Form ADV, Item 5.F and Item 12.
---------------------------------------------------------------------------

    The only small entity exempt reporting advisers that are subject to 
the amendments are exempt reporting advisers that maintain their 
principal office and place of business in Wyoming or outside the United 
States. Advisers with less than $25 million in assets under management 
generally are prohibited from registering with us unless they maintain 
their principal office and place of business in Wyoming or outside the 
United States. Exempt reporting advisers are not required to report 
regulatory assets under management on Form ADV and therefore we do not 
have a precise number of exempt reporting advisers that are small 
entities. Exempt reporting advisers are required to report in Part 1A, 
Schedule D the gross asset value of each private fund they manage.\441\ 
Based on responses to that question, we estimate that there is 
approximately 1 exempt reporting adviser with its principal office and 
place of business in Wyoming that meets the definition of small entity. 
Advisers with their principal office and place of business outside the 
United States may have additional assets under management other than 
what is reported in Schedule D. Based on IARD filings, approximately 
14.3% of registered investment advisers with their principal office and 
place of business outside the U.S. are small entities. Based on IARD 
system data as of May 16, 2016, there are approximately 1,428 exempt 
reporting advisers with their principal office and place of business 
outside the U.S. We estimate that 14.3% of those advisers, 
approximately 204 exempt reporting advisers, are small entities.
---------------------------------------------------------------------------

    \441\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).A., 
Question 11.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The amendments to Form ADV and rule 204-2 impose certain reporting, 
recordkeeping, and compliance requirements on all Commission-registered 
advisers, including small advisers. All Commission-registered small 
advisers are required to file Form ADV and include the new information 
required by the amendments, and all Commission-registered small 
advisers are subject to the amended recordkeeping requirements. Our 
technical amendments to other Advisers Act rules do not impose 
different reporting, recordkeeping, or other compliance requirements on 
small advisers.
Form ADV Amendments
    The amendments to Form ADV require registered investment advisers 
to report different or additional information than what is currently 
required. Approximately 526 small advisers currently registered with us 
are subject to these requirements. We expect these 526 small advisers 
to spend, on average, 5 hours to respond to the new and amended 
questions, not including items relating to private fund reporting, 
which is discussed below.\442\ We expect the aggregate cost to small 
advisers associated with this process is $669,335.\443\
---------------------------------------------------------------------------

    \442\ See Section V. of this Release.
    \443\ We expect that performance of this function will most 
likely be equally allocated between a senior compliance examiner and 
a compliance manager. Data from the SIFMA Management and 
Professional Earnings Report, modified by Commission staff to 
account for an 1,800-hour work year and inflation, and multiplied by 
5.35 to account for bonuses, firm size, employee benefits, and 
overhead, suggest that costs for these positions are $221 and $288 
per hour, respectively. 526 small advisers x 5 hours = 2,630 hours. 
[1,315 hours x $221 = $290,615] + [1,315 hours x $288 = $378,720] = 
$669,335.
---------------------------------------------------------------------------

    In addition, of these 526 small advisers, we estimate that 3 small 
advisers currently rely on the 2012 ABA Letter to act as filing 
advisers for their relying advisers.\444\ We expect that our changes to 
codify umbrella registration will take 3 hours \445\ in the aggregate, 
at a cost to small advisers of $764.\446\ We do not know how many 
additional small advisers will use umbrella registration as 
incorporated into Form ADV.
---------------------------------------------------------------------------

    \444\ Based on IARD system data as of May 16, 2016.
    \445\ For purposes of the Paperwork Reduction Act, we estimated 
in Section V of this Release that amendments to codify umbrella 
registration will take an additional 1 hour per filing adviser.
    \446\ As discussed in connection with the Paperwork Reduction 
Act, we expect that performance of this function will most likely be 
equally allocated between a senior compliance examiner and a 
compliance manager. Data from the SIFMA Management and Professional 
Earnings Report, modified by Commission staff to account for an 
1,800-hour work year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead, 
suggest that costs for these positions are $221 and $288 per hour, 
respectively. 3 filing advisers x 1 hour = 3 hour. [1.5 hours x $221 
= $332] + [1.5 hours x $288 = $432] = $764.
---------------------------------------------------------------------------

    We do not estimate any increase or decrease in burden related to 
our amendments for small private fund advisers, other than the hours 
related to Schedule R, or for exempt reporting advisers. The total 
estimated costs associated with our amendments to Form ADV that we 
expect will be borne by small advisers is $670,099.\447\
---------------------------------------------------------------------------

    \447\ $669,335 + $764 = $670,099. These costs are discussed in 
Paperwork Reduction Act Analysis in Section V. of this Release.
---------------------------------------------------------------------------

Amendments to Books and Records Rule
    Our amendments to rule 204-2's performance information 
recordkeeping provisions require investment advisers to make and keep 
the following records: (i) Documentation necessary to demonstrate the 
calculation of the performance the adviser distributes to any person, 
and (ii) all written communications received or sent relating to the 
adviser's performance. These amendments will create reporting, 
recordkeeping, and other compliance requirements for small advisers. As 
discussed in the Paperwork Reduction Act Analysis in Section V. above, 
the amendments to rule 204-2 will increase the burden by

[[Page 60457]]

approximately 1.5 hours per adviser. We expect the aggregate cost to 
small advisers associated with our amendments is $46,700.\448\
---------------------------------------------------------------------------

    \448\ As discussed in connection with the Paperwork Reduction 
Act, we expect that performance of this function will most likely be 
allocated between compliance clerks and general clerks with 
compliance clerks performing 17% of the function and general clerks 
performing 83% of the function. Data from the SIFMA Office Salaries 
Report modified by Commission staff to account for an 1,800-hour 
work year and inflation, and multiplied by 2.93 to account for 
bonuses, firm size, employee benefits, and overhead, suggest that 
costs for these positions are $65 per hour and $58 per hour, 
respectively. 526 small advisers x 1.5 hours = 789 hours. [0.17 x 
789 hours x $65 = $8,718] + [0.83 x 789 hours x $58 = $37,982] = 
$46,700.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. In 
connection with the Form ADV and rule amendments, the Commission 
considered the following alternatives: (i) The establishment of 
differing compliance or reporting requirements that take into account 
the resources available to small advisers; (ii) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the Form ADV and rule amendments for such small 
entities; (iii) the use of performance rather than design standards; 
and (iv) an exemption from coverage of the Form ADV and rule 
amendments, or any part thereof, for such small entities.
    Regarding the first and second alternatives, the adopted amendments 
require reporting on separately managed accounts on Schedule 5.K.(2) of 
Form ADV only for advisers with $500 million or more of regulatory 
assets under management attributable to separately managed accounts. 
Further, we require semi-annual information filed annually for those 
advisers with regulatory assets under management attributable to 
separately managed accounts of at least $10 billion, and annual 
information for other advisers.\449\ Requiring no reporting on these 
items for advisers with less than $500 million, and less detailed 
reporting for advisers with less than $10 billion, is designed to 
balance our regulatory needs for this type of information while seeking 
to minimize the reporting burden on advisers that manage a smaller 
amount of separately managed account assets where appropriate.
---------------------------------------------------------------------------

    \449\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(1).
---------------------------------------------------------------------------

    Regarding the first and fourth alternatives for the other 
amendments to Form ADV and Advisers Act rules, we do not believe that 
different compliance or reporting requirements or an exemption from 
coverage of the Form ADV and rule amendments, or any part thereof, for 
small entities, would be appropriate. Information about advisers of all 
sizes is required for the Commission and its staff to perform their 
role in overseeing investment advisers. Accordingly, we are not 
modifying the reporting requirements for smaller advisers.
    Regarding the second alternative for the other amendments to Form 
ADV and the Advisers Act rules, we considered whether further 
clarification, consolidation, or simplification of the compliance 
requirements was feasible or necessary. In response to commenters, we 
clarified certain instructions and items, which apply to all advisers 
filing Form ADV. The remaining Form ADV amendments do not change that 
all SEC-registered advisers use a single form, Form ADV, and an 
existing filing system, IARD, for reporting and registration purposes, 
and this does not change for small entities. With respect to the rule 
204-2 amendments, we believe that the same requirements should apply to 
all advisers to permit our staff to more effectively examine them.
    Regarding the third alternative, we considered using performance 
rather than design standards with respect to the amendments to Form ADV 
and rule 204-2 but, for the Commission and its staff to perform their 
role in overseeing advisers, advisers must provide certain registration 
information and maintain books and records in a uniform and 
quantifiable manner so that it is useful to our regulatory and 
examination program.

VII. Statutory Authority

    The Commission is adopting amendments to Form ADV under section 
19(a) of the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) 
and 28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) 
and 78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15 
U.S.C. 7sss(a)], section 38(a) of the Investment Company Act of 1940 
[15 U.S.C. 80a-37(a)], and section 203(c)(1), 204 and 211(a) of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-
11(a)]. The Commission is amending rule 204-2 pursuant to the authority 
set forth in sections 204 and 211 of the Advisers Act [15 U.S.C. 80b-4 
and 80b-11]. The Commission is amending rule 202(a)(11)(G)-1 pursuant 
to authority in sections 202(a)(11)(G) and 206A of the Advisers Act [15 
U.S.C. 80b-2(a)(11)(G) and 80b-6A]. The Commission is amending rule 
203-1 pursuant to authority in section 206A of the Advisers Act [15 
U.S.C. 80b-6A]. The Commission is rescinding rule 203A-5 and amending 
rule 204-1 pursuant to authority in sections 204 and 211(a) of the 
Advisers Act [15 U.S.C. 80b-4 and 80b-11(a)]. The Commission is 
amending rule 204-3 pursuant to authority in sections 204, 206(4) and 
211(a) of the Advisers Act [15 U.S.C. 80b-4, 80b-6(4) and 80b-11(a)].

List of Subjects in 17 CFR Parts 275 and 279

    Reporting and recordkeeping requirements; Securities.

Text of Rule and Form Amendments

    For the reasons set forth in the preamble, title 17, chapter II of 
the Code of Federal Regulations is amended as follows.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
1. The general authority citation for part 275 continues to read as 
follows, and the sectional authority for Sec.  275.230A-5 is removed.

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless 
otherwise noted.
* * * * *

Sec.  275.202(a)(11)(G)-1  [Amended]

0
2. Amend Sec.  275.202(a)(11)(G)-1 by removing paragraph (e).
0
3. Section 275.203-1 is amended by:
0
a. In the first sentence of paragraph (a) removing the phrase ``Subject 
to paragraph (b), to'' and adding in its place ``To'';
0
b. Removing paragraph (b);
0
c. In the NOTE TO PARAGRAPHS (a) AND (b), revising the paragraph 
heading;
0
d. Redesignating paragraphs (c) and (d) as paragraphs (b) and (c); and
0
e. Removing paragraph (e).
    The revision reads as follows:

Sec.  275.203-1  Application for investment adviser registration.

    (a) * * *
    NOTE TO PARAGRAPH (a): * * *
* * * * *

Sec.  275.203A-5  [Removed and Reserved]

0
4. Section 275.203A-5 is removed and reserved.

[[Page 60458]]

Sec.  275.204-1  [Amended]

0
5. Section 275.204-1 is amended by:
0
a. In the first sentence of paragraph (b)(1) removing the phrase 
``Subject to paragraph (c) of this section, you'' and adding in its 
place ``You'';
0
b. Removing paragraph (c); and
0
c. Redesignating paragraphs (d) and (e) as paragraphs (c) and (d).
0
6. Section 275.204-2 is amended by:
0
a. Revising paragraph (a)(7); and
0
b. In paragraph (a)(16) removing the phrase ``to 10 or more persons'' 
and adding in its place ``to any person''.
    The revision reads as follows:

Sec.  275.204-2  Books and records to be maintained by investment 
advisers.

    (a) * * *
    (7) 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;
    (iii) The placing or execution of any order to purchase or sell any 
security;
    (iv) The performance or rate of return of any or all managed 
accounts or securities recommendations: Provided, however:
    (A) That the investment adviser shall not be required to keep any 
unsolicited market letters and other similar communications of general 
public distribution not prepared by or for the investment adviser, and
    (B) That if the investment adviser sends any notice, circular or 
other advertisement offering any report, analysis, publication or other 
investment advisory service to more than 10 persons, the investment 
adviser shall not be required to keep a record of the names and 
addresses of the persons to whom it was sent; except that if such 
notice, circular or advertisement is distributed to persons named on 
any list, the investment adviser shall retain with the copy of such 
notice, circular or advertisement a memorandum describing the list and 
the source thereof.
* * * * *

Sec.  275.204-3  [Amended]

0
7. Section 275.204-3 is amended by:
0
a. Removing paragraph (g); and
0
b. Redesignating paragraph (h) as paragraph (g).

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

0
8. The authority citation for Part 279 continues to read as follows:

    Authority:  The Investment Advisers Act of 1940, 15 U.S.C. 80b-
1, et seq.

0
9. Form ADV [referenced in Sec.  279.1] is amended by:
0
a. In the instructions to the form, revising the sections entitled 
``Form ADV: General Instructions.'' The revised version of Form ADV: 
General Instructions is attached as Appendix A;
0
b. In the instructions to the form, revising the section entitled 
``Form ADV: Instructions for Part 1A.'' The revised version of Form 
ADV: Instructions for Part 1A is attached as Appendix B;
0
c. In the instructions to the form, revising the section entitled 
``Form ADV: Glossary of Terms.'' The revised version of Form ADV: 
Glossary of Terms is attached as Appendix C;
0
d. In the form, revising Part 1A. The revised version of Form ADV, Part 
1A, is attached as Appendix D.
    Note: The text of Form ADV does not and the amendments will not 
appear in the Code of Federal Regulations.

    By the Commission.

    Dated: August 25, 2016.
Brent J. Fields,
Secretary.
BILLING CODE 8011-01-P

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[FR Doc. 2016-20832 Filed 8-31-16; 8:45 am]
 BILLING CODE 8011-01-C