SEC Overhauls Form ADV Part 1A to Conform to New Dodd-Frank Requirements

By Craig Foster

As we detailed in previous client alerts, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) has significantly changed how investment advisers are regulated. Among other things, Dodd-Frank (a) increased the amount of assets under management (“AUM”) required for SEC registration and (b) eliminated the so-called “private adviser” exemption, obligating many managers of private investment funds to register with the SEC or report to the SEC as “exempt reporting advisers.”

To account for these new registration requirements and provide for some additional disclosures, the SEC overhauled Part 1A of Form ADV (“Part 1A”). While a marked copy highlighting all the changes to the previous Part 1A may be found here, significant changes include:

  • A revised method of calculating AUM (advisers must now calculate “regulatory” AUM)
  • Updated registration thresholds and new thresholds for exempt reporting advisers
  • Additional and detailed disclosures about private funds advised
  • Expanded disclosures on employees, clients, other business activities and financial industry affiliations

Regulatory AUM

To determine whether they may register or remain registered with the SEC, many advisers must now calculate their “regulatory” AUM, which now requires the adviser to include family or proprietary account assets, assets managed for free and assets of non-U.S. clients. Furthermore, the revised instructions clarify that regulatory AUM must be calculated on a gross basis, meaning that advisers may not subtract outstanding indebtedness or other accrued but unpaid liabilities in a client’s account.

Generally, advisers include as regulatory AUM any account that is a “securities portfolio,” meaning that securities and cash comprise at least half the account’s assets. However, to calculate the regulatory AUM of a “private fund,” advisers must count all the fund’s assets, regardless of the fund’s asset composition. Recall from our previous alerts that private funds are funds that would be investment companies under section 3 of the Investment Company Act of 1940, but are not because they meet the requirements of section 3(c)(1) or 3(c)(7) of that act.

Exception for Firm Brochure. An adviser may use a different method to calculate the AUM disclosed in its firm brochure (Form ADV Part 2A), but if it does, it should retain documentation describing that method.

New Registration Thresholds and Thresholds for Exempt Reporting Advisers (Item 2)

Item 2 of Part 1A now reflects the new registration thresholds required by Dodd-Frank. Specifically, an adviser must register with the SEC if any of the following applies:

  • The adviser has regulatory AUM of more than $100 million, unless all its clients are private funds
  • The adviser has regulatory AUM of at least $150 million and advises private funds only
  • The adviser had regulatory AUM of more than $90 million when its last amendment to Form ADV was filed, and the adviser is currently registered with the SEC
  • The adviser has regulatory AUM of between $25 million and $100 million and is not required to be registered in the state where its principal office and principal place of business is located, or it is not subject to examination in that state
  • The adviser is a pension consultant to assets over $200 million
  • The adviser has less than $100 million of regulatory AUM but would otherwise be required to be registered in over 15 states

Additionally, Item 2 has been revised to provide a check-box for an adviser who must report to the SEC as an exempt reporting adviser because it (a) advises only one or more venture capital funds with an aggregate U.S. AUM of at least $25 million, or (b) advises only private funds and has U.S. AUM of at least $25 million but less than $150 million.

New Private Fund Disclosures (Item 7.B)

Item 7.B of Part 1A, as amended, requires advisers to disclose a wealth of information about the private funds they advise, including:

  • Information identifying the fund’s name, jurisdiction of organization and management persons
  • Investment strategies employed
  • Gross asset value
  • Investment minimums
  • Number of beneficial owners
  • Whether the adviser’s clients are solicited to invest in such private funds
  • Identification of related funds under “master-feeder” arrangements
  • Information about the adviser’s service providers for the fund, such as auditors, prime brokers, custodians, administrators and marketers

Employees, Clients, Other Business Activities and Financial Industry Affiliations (Items 5, 6 and 7.A)

Employees and Clients. Item 5 of Part 1A now requires advisers to approximate the actual number (as opposed to selecting ranges) of employees serving in different capacities and to provide additional disclosure on employees with licenses as investment adviser representatives or insurance agents. Advisers must also now report their client base both by number and associated regulatory AUM, as well as report the percentage of their client base comprised of non-U.S. clients.

Other Business Activities. Item 6 of Part 1A has new check-boxes that require advisers to report whether they are engaging in business as trust companies, registered municipal advisers, registered security-swap dealers, major security-based swap participants, accountants or law firms. Furthermore, additional narrative disclosure is now required if an adviser sells products or provides services other than investment advice to clients.

Financial Industry Affiliations. Item 7.A of Part 1A requires advisers to disclose whether related persons engage in a number of other financial industries. Previously, Item 7.A required additional disclosures on Schedule D for any related persons serving as brokers, dealers or advisers – now such additional disclosure will be required for any such related persons.

Deadlines and Transition Rules

Amendment and Registration. Currently registered advisers must amend Form ADV (using the new Part 1A) by March 30, 2012. Those newly required to register must be registered by the same date, so they should file by February 14, 2012 to account for a potential 45-day processing time. Advisers no longer eligible to remain registered with the SEC will have until June 28, 2012 to register with the applicable state(s).

Ongoing Transition Rules. The SEC provided a $20 million “buffer zone” under which (a) SEC-registered advisers must fall below $90 million in regulatory AUM to be required to switch to state registration, and (b) state-registered advisers must switch to SEC registration once their regulatory AUM rises above $110 million.


Because of Dodd-Frank’s sweeping changes to the investment adviser regulatory regime, we recommend that advisers:

  • Reevaluate their regulatory AUM under the new requirements to determine registration or reporting responsibilities
  • Review Part 1A’s new disclosure requirements and start gathering all data required
  • Review firm brochures and private fund offering documents to ensure consistency with Part 1A disclosures
  • Monitor compliance with deadlines and account for necessary processing time

For further information about Dodd-Frank and its impact on investment adviser regulation, please contact our Financial Services practice group.

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