Last week, the Securities and Exchange Commission (SEC) issued a widely-publicized release announcing the proposal of new regulatory rules that would apply to registered investment adviser (RIA) firms registered at the federal level. Previously, we discussed how the proposal makes it evident that the SEC is reviewing the outsourced RIA Chief Compliance Officer (CCO) model, that the SEC would like advisory firms to disclose social media platform addresses, and that the federal investment adviser regulator would like RIAs to be required to maintain all performance information. In this post, we take a closer look at the SEC’s proposed changes to the Part 1 of the Form ADV as they relate to requiring additional information about investment adviser branch offices to be disclosed.
Pages 17 and 18 of the full proposed rule release (file number S7-09-15 published in the Federal Register) state the following:
We propose amending Item 1.F of Part 1A of Form ADV and Section 1.F. of Schedule D to expand the information provided about an adviser’s offices other than its principal office and place of business. We currently require an adviser to provide contact and other information about its principal office and place of business, and, if an adviser conducts advisory activities from more than one location, about its largest five offices in terms of number of employees. In order to assist Commission examination staff to learn more about an investment adviser’s business and identify locations to conduct examinations, we are now proposing that advisers provide us with the total number of offices at which they conduct investment advisory business and provide information in Schedule D about their 25 largest offices in terms of number of employees. We propose 25 offices as the number to be reported because it would provide a complete listing of offices for the vast majority of investment advisers, and provide valuable information about the main business locations for the few advisers that have a very large number of offices.
In addition to providing contact information for the 25 largest offices, we propose to amend Section 1.F. of Schedule D to require advisers to report each office’s CRD branch number (if applicable) and the number of employees who performed advisory functions from each office, identify from a list of securities-related activities the business activities conducted from each office, and describe any other investment-related business conducted from each office. This information would help our staff assess risk, because it provides a better understanding of an investment adviser’s operations and the nature of activities conducted in its top 25 offices. In addition, if the staff wanted to focus on offices that conducted a combination of activities, such as those that engaged in municipal advisory activities as well as investment advisory activities, it would have that information readily available.
In its proposal, the SEC appears to be focusing in on a small, but growing number of large RIA firms that have operations across the country. The SEC notes in its proposal that only around 2% of SEC-registered investment advisory firms have 25 or more offices. In particular, the proposal notes the following logic behind this proposed change:
- Allow staff of the SEC Office of Compliance Inspections and Examinations (SEC) to now have a full list of branch offices for the vast majority of investment advisory firms
- Allow SEC OCIE staff to more easily focus in on branch office locations that are conducting activities of most interest in regards to a particular RIA audit
It’s also important to note that along with this proposal, for the first time earlier this year, the SEC listed branch offices as one of its 2015 investment adviser examination priorities. As we’ve discussed before, it’s vital that firms operating across multiple offices have the proper technology in place to assist with additional investment adviser regulatory requirements associated with such a business model. While it may be true that this particular proposed change seems to be more targeted towards very large RIA firms, it’s still a good reminder to all state and federally-registered investment advisory firms that branch offices are becoming more of a regulatory focus area.