July 22, 2015
I would like to submit comments in four areas regarding the proposed amendments to Form ADV contained in Release No. IA-4091.
1. Collection of Additional Information Regarding Separately Managed Accounts: The proposed amendment defines separately managed accounts as ..advisory accounts other than those that are pooled investment vehicles (i.e., registered investment companies, business development companies, and pooled investment vehicles that are not investment companies (i.e., private funds)) Section II.A.1, p8. I think the definition should be clarified to address whether or not an investment adviser acting as a sub-adviser and managing a portion of a private fund advised by another adviser would need to report this as a separately managed account in the new format. I am referring to the situation where the other investment adviser to that private fund is completing the Form PF for the private fund, and the registering investment adviser is listing the fund in Schedule D, 7B2 due to its being a sub-advisor of just a portion of that private fund in a separate account. Would that be considered a separately managed account for purposes of the new format?
2. Information Request about Third-Party Compliance Auditors: In Section II.A.2, p 21, you raise the question as to whether you should request information about advisers use of third-party compliance auditors. I think the information provided in response to this question would be helpful to both investors and the SEC in assessing an advisers compliance program. However, I think if this question is ultimately put into the ADV, you will need to carefully define what a third-party compliance auditor is. I think what you may be referring to is an outside compliance consultant who is retained by an adviser on an on-going basis, not for an individual project (including a one-time mock audit) or limited engagement. I also think the word auditor is confusing in this context, as that might be taken to mean an accounting audit or similar formal audit process.
3. Information Request about Percentage of Qualified Clients: In Section II.A.2, p 26, you ask whether advisers could readily access data on the percentage of a private fund owned by qualified clients. While this is seemingly a simple question, simply requiring the adviser to refer back to the initial subscription documents of each investor in the fund, it raises the issue of whether investors will need to be recertified each year. Presently, typical subscription documents require investors to notify the adviser should they no longer qualify, however I wonder whether the question would put more of an obligation on the adviser to affirmatively recertify, which would be extremely burdensome.
4. Additional Amendments to Form ADV: In Section II.A.4, p43, you ask whether there are any other ambiguities in the Form ADV that should be addressed. I believe that Item 8(A)(2) regarding proprietary interests in client transactions should be clarified at this time, especially in light of your proposed change to limit responses to the advisers expectations for the coming year. This question asks whether you or a related person buys or sells for themselves securities that are also recommended to clients. The term related person clearly encompasses employees, as per the glossary definition. As the question now stands, I believe many advisers that allow personal trading answer this question yes in light of a theoretical possibility that an employee might transact in a security that a client also transacts in. I am not certain that this was the actual intent of the question and I think this ambiguity should be reviewed at this time. In addition, in light of the proposed instructions regarding expectations for the coming year, it would be very difficult, if not impossible, for an adviser to respond to this question should it in fact remain inclusive of employee transactions.
Thank you very much for your attention.