SEC Revises Form ADV
July 27, 2010
Scott R. MacLeod- Orlando
Amy R. Rigdon- Orlando
The Securities and Exchange Commission (SEC) has adopted two different amendments to the Form ADV, Parts 1 and 2. Form ADV is the form used to register as a federal or state investment adviser and is also used to provide ongoing disclosures about registered investment advisers. On December 30, 2009, the SEC amended the custody rule for SEC-registered investment advisers (RIAs) and announced revisions to Part 1 of Form ADV to require RIAs to report custody practices. On July 21, 2010, the SEC adopted amendments to Part 2 of Form ADV, the written disclosure statement commonly known as the “brochure.”
The amendments to Part 2 change the format of the brochure from the previous “check the box/fill in the blank” format to a uniform narrative format to allow clients to more easily compare the brochures of multiple investment advisers. As a result of the adopted amendments, RIAs will be required to report new information about their advisory business practices and to provide their clients with narrative brochures written in plain English. Specifically, these amendments will require RIAs to provide the following:
Part 1
Custody Practices – Disclosure of custody practices, identification of accountants and qualified custodians, and a determination if clients’ assets are subject to a surprise examination or are exempt under the amended custody rule
Part 2
Narrative Format – Concise narrative, plain English descriptions regarding the advisory business, fees and compensation, methods of analysis, investment strategies, disciplinary information, interest in client transactions or personal trading, code of ethics, brokerage practices, conflicts of interests and ways the RIA addresses such conflicts
Brochure Supplement – A “brochure supplement” disclosing resume-like information about the specific individuals providing investment advice to, or having direct contact with, the client; this information includes the employee’s educational background, business experience, disciplinary history, compensation, other business activities and contact information for the employee’s supervisor
Electronic Filing – Electronically file the brochure and any amendments with the SEC 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
Delivery – Delivery of the brochure and brochure supplements to clients before or at the time the RIA 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
Amendments – (a) Deliver a summary of material changes to its brochure or brochure supplement on an annual basis and (b) provide, or offer to provide, clients with a revised brochure reflecting those changes; RIAs must also deliver interim updates upon material changes to a disciplinary event or the occurrence of a new disciplinary event
Effective Date – RIAs who have a fiscal year end date of December 31 must electronically file this revised Form ADV, including the new brochure, by March 31, 2011 (the next annual updating period); further, RIAs must deliver the new Part 2 to their clients by May 31, 2011
The full text of the adopted amendments to Part 2 of Form ADV is now available. The text of the adopted amendments to Part 1 of Form ADV is not yet available, so the descriptions provided in this alert are based on the SEC’s press releases, adopting release, and statements made by the commissioners and the staff at the July 21, 2010 open meeting.
Related Practices