At an open meeting convened on July 21, 2010, the US Securities and Exchange Commission (SEC) voted to adopt amendments to Part 2 of Form ADV and related rules.¹ Although the adopting release has not yet been issued, the amendments are expected to, among other things, require registered investment advisers to deliver to current and prospective clients a brochure (the “Brochure”) that is written in "plain English" and includes disclosures regarding an adviser’s business practices, conflicts of interest, background and advisory personnel. The Brochure can be comprised of either the completed Part 2 of Form ADV or a document that includes at least the information required in that form. The amendments are expected to impose significant reporting obligations and regulatory compliance expenses on registered investment advisers.
Since many state-registered investment advisers also currently file Form ADV with their respective state regulatory authorities, the SEC is expected to delay the publication of the amended Part 2 of Form ADV for five business days from July 21st in order to collaborate with the state regulatory authorities regarding technical, state-specific changes to the items and instructions in order for Part 2 of Form ADV to be a uniform SEC and state form. The amended rules and forms will be effective 60 days after publication in the Federal Register. Investment advisers currently registered with the SEC with a fiscal year ending on or after December 31, 2009, are required to file the new Brochure at the time of their annual updating amendment to the form. Such advisers will have an additional 60 days to deliver the new Brochure to existing clients. Thus, the SEC anticipates that most registered investment advisers will begin distributing and publicly posting new Brochures in the first quarter of 2011. With respect to investment advisers applying for registration effective on or after January 1, 2011, such advisers will be required to file the Brochure with the SEC and deliver such Brochure to their clients and prospective clients accordingly.
The adopting release is not expected to become public for several days. However, we anticipate that the key amendments, if adopted, will be as follows:²
- Plain English Brochure and Delivery Requirements: As indicated previously, registered investment advisers will be required to prepare a narrative, "plain English" Brochure that is organized in a consistent, uniform manner and has clear and concise descriptions for each item called for by the form. The SEC expects that this format will improve the ability of clients and prospective clients to, among other things, evaluate advisers and understand conflicts of interest of advisers and their personnel. The Brochure must be delivered to a client before or at the time the adviser enters into an advisory contract with such client. In addition, advisers will be required to provide each client with an annual summary of material changes to the Brochure and either deliver a complete updated Brochure or offer to provide the client with the updated Brochure.
- More Detailed Disclosure and Expansion of Content: Registered investment advisers will have to provide more detailed disclosure in the Brochure with respect to topics such as an adviser’s advisory business; fees and compensation; performance-based fees and side-by-side management of client accounts; methods of analysis, investment strategies, and risk of loss; disciplinary information; code of ethics, participation or interest in client transactions, and personal trading; and brokerage activities. The disclosure for several of the foregoing topics in the Brochure would require an adviser to explain the various conflicts of interest associated with the adviser’s practices and describe how such conflicts of interest are being addressed.
- Brochure Supplement (Certain Background Information on Supervised Persons): Registered investment advisers will be required to deliver to new and prospective clients Brochure supplements that include certain information about specific individuals who provide services to clients (e.g., supervised persons who formulate investment advice for a client and have direct client contact, and supervised persons who make discretionary investment decisions regarding the client’s assets, even if such persons have no direct client contact).³ Such information will include educational background, business experience, other business activities, compensation and disciplinary history of the individuals. Contact information of the person responsible for supervising the advisory activities of the supervised persons will also need to be included.
- Electronic Filing: The Brochure and amendments to the Brochure will be required to be filed electronically, and will be made publicly available, through the SEC’s website. Brochure supplements will not be required to be filed electronically, but should be maintained in an adviser’s records for future SEC examinations and requests.
We will provide another Legal Update when the text of the adopting release becomes available. If you have any questions regarding these developments, or Form ADV in general, please contact the Mayer Brown attorney with whom you normally communicate or please contact Elizabeth M. Knoblock at +1 202 263 3263, Stephanie M. Monaco at +1 202 263 3379 or Amy Ward Pershkow at +1 202 263 3336.
Learn more about our Financial Services Regulatory & Enforcement and Private Investment Fund practice.
1. A video of the open meeting on July 21, 2010 and a SEC press release regarding the open meeting are available at http://www.sec.gov/news/openmeetings/2010/072110openmeeting.shtml and http://www.sec.gov/news/press/2010/2010-127.htm, respectively. Unless otherwise indicated, the content of this Client Update is based on the discussion in the open meeting and the SEC press release regarding the open meeting.
2. The SEC reproposed amendments to Part 2 of Form ADV in March 2008; see the reproposing release — Amendments to Form ADV, Exchange Act Rel. No. 57,419, Investment Advisers Act Rel. No. IA-2,711 (Mar. 3, 2008), 73 Fed. Reg. 13,958 (Mar. 14, 2008), available at http://www.sec.gov/rules/proposed/2008/ia-2711fr.pdf; see also the initial proposing release — Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Investment Advisers Act Rel. No. 1,862 (Apr. 5, 2000), 65 Fed. Reg. 20,524 (Apr. 17, 2000) (proposing extensive amendments to Part 1 and Part 2 of Form ADV, including changes necessary to permit investment advisers to file with the SEC electronically); and the electronic filing adopting release — Electronic Filing by Investment Advisers, Amendments to Form ADV, Investment Advisers Act Release No. 1,897 (Sept. 12, 2000), 65 Fed. Reg. 57,438 (Sept. 22, 2000) (adopting amendments to Part 1A and related rules, but deferring adoption of amendments to Part 2 so that the SEC could consider more fully, with state regulatory authorities, the many comments the SEC received on Part 2).
3. The examples of supervised persons were mentioned in the reproposing release. See supra note 2 for additional information regarding the reproposing release.