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SEC Adopts Amendments to Part II of Form ADV
July 22, 2010
On Wednesday, July 21, 2010, the Securities and Exchange Commission (SEC) adopted long overdue amendments to Part II of Form ADV (also commonly known as the "brochure"). The amendments, which were originally proposed in March 2000 and subsequently re-proposed in March 2008, require SEC-registered investment advisers to provide clients with narrative brochures containing plain-English descriptions of their advisory businesses, services and conflicts of interest. The amendments also require SEC-registered investment advisers to electronically file Part II of Form ADV with the SEC, which would then be available to the public through the SEC’s website. The amendments were unanimously adopted by the Commissioners in the form recommended by the Division of Investment Management and as modified in response to the 81 comment letters to the proposal.
Although the final text of the amendments to Part II of Form ADV has not yet been published, the SEC staff described the main features of the amendments during the open meeting held to consider their adoption. The amendments change the format of the brochure from the previous "check-the-box/fill in the blank" format to a narrative written in plain English designed to improve the overall character and quality of disclosure. The amendments are intended to transform the brochure into a uniform format to allow clients and prospective clients to readily and more easily compare the brochures of multiple investment advisers. The brochure will contain eighteen separate items, each covering a different disclosure topic related to an investment advisor’s business and potential conflicts of interest. Such disclosure items include, among others, an investment adviser's business practices, advisory fees, disciplinary information, methods of analysis of investment strategies, participations in client transactions, brokerage practices, and custody arrangements. Chairman Shapiro anticipates that these greater disclosure requirements will result in investment advisors modifying their business practices and compensation schemes to resolve conflicts in ways that better serve clients.
In addition, the amendments include a new "brochure supplement", which requires disclosure of information regarding the specific individuals providing investment advice to, or having direct contact with, the client. The supplement is expected to be less than one page long and will look similar to a resume. The types of information required in the supplement include the employee's educational background, business experience, disciplinary history, compensation, other business activities and contact information.
Filing, Delivery and Compliance
Investment advisers must file the brochure and any amendments with the SEC electronically via the Investment Adviser Registration Depository (IARD) system, making them publicly available. Note, however, the brochure supplement will not be required to be filed with the SEC, but rather must be maintained by the adviser and available for SEC examination. During the open meeting, Commissioner Walter recommended that the SEC consider including a requirement that the brochure supplement also be filed with the SEC, though this was raised as an issue to be addressed in the future.
The brochure and brochure supplements must be delivered by an adviser before or at the time it enters into an advisory contract with a client or, in the case of a brochure supplement, before or at the time the specific employee begins to provide investment advisory services to that client. Further, advisers must deliver a summary of material changes to its brochure or brochure supplement on an annual basis, and provide, or offer to provide clients with a revised brochure reflecting those changes. Advisers must also deliver interim updates upon material changes to a disciplinary event or the occurrence of a new disciplinary event. During the open meeting Commissioner Paredes noted that, in light of the comment letters, different means of delivering annual updated brochures should also be considered in the future.
Investment Advisers already registered with the SEC whose fiscal year ends on or after December 31, 2010, must comply with the new requirements when filing their next annual updating amendment to Form ADV. Those SEC-registered investment advisers also have an additional sixty days to deliver their updated brochures to existing clients. Investment advisers applying for SEC registration after January 1, 2011, must comply with the new requirements when initially filing Form ADV with the SEC.
Applications of Amendments to State Registrants
Upon the request of the Division of Investment Management, the SEC will not publish its adopting release setting forth these amendments to Part II of Form ADV for five business days from the date of their adoption so that it has time to work with the states on their technical amendments to accommodate various state-specific items and instructions. If they are successful in doing so, the SEC will publish the release in a uniform form. Otherwise, the form will be published as being applicable to SEC-registered investment advisors only.
Additional Changes to Form ADV
These brochure amendments are not the only changes to Form ADV adopted by the SEC this year. As more fully discussed in our January 5, 2010 Client Alert, the SEC adopted changes to require more detailed disclosure of advisers' custody practices to reflect amendments to Investment Advisers Act Rule 206(4)-2, including disclosure of whether client assets are subject to a surprise examination. In March 2010, the SEC adopted changes to require more detailed disclosure of advisers' custody practices to reflect amendments to Investment Advisers Act Rule 206(4)-2, including disclosure of whether client assets are subject to a surprise examination. All of the changes should be considered when updating or filing Form ADV to ensure compliance with the SEC rules and Form ADV.