SEC Adopts New Disclosure Requirements for Investment Advisers

August 5, 2010

For the past 21 years, the Securities and Exchange Commission (SEC) has required investment advisers registered under the Investment Advisers Act of 1940 to supply new and prospective clients with information explaining the adviser’s qualifications, investment strategies and business practices. Historically, most advisers provided clients with Form ADV – Part II to satisfy these regulatory requirements. In its current state, Form ADV – Part II (commonly known as the “brochure”) is ten pages long and is comprised of generalized “check-the-box” style questions that may not always accurately describe the adviser’s business. Consequently, the disclosures from Form ADV- Part II may not describe the adviser’s business or conflicts of interest in a way that could be easily understood by an investor. To address this, the SEC began reviewing potential amendments geared toward improving the quality and format of the information provided by advisers to their clients.

On July 21, 2010 the SEC voted unanimously to adopt changes to the Form ADV – Part II. The SEC has gone away from the less specific “check-the-box” format and, instead, decided to transform the brochure into more of a plain English narrative. This narrative form, the SEC believes, will better serve the investors’ need and more adequately convey the adviser’s conflicts, compensation, business activities and disciplinary history.

The changes to Form ADV – Part II are intended to benefit the client. The amendments adopted by the SEC create the following significant changes:

  1. Improve the format and update the requirements of the brochure
  2. Expand the content to better include details most relevant to the clients of investment advisers
  3. Require brochure “supplements” to be delivered to new and prospective clients to give resume-like information about the individuals at an investment advisory form who will provide services to the clients
  4. Ensure the investors have easy access to the brochures as investment advisers are required to file them electronically for posting on the SEC’s website

As part of (1) and (2), advisers are required to prepare a narrative describing their:

  • Advisory business
  • Fees and compensation
  • Performance-based fees and side-by-side management
  • Methods of analysis, investment strategies and risk of loss
  • Disciplinary information
  • Code of ethics, participation or interest in client transactions and personal trading
  • Brokerage practices

Furthermore, a summary of material changes to the brochure must be delivered to clients annually. As part of (3), advisers are required to deliver a brief resume-like disclosure pertaining to educational background, business experience and disciplinary history. This requirement is intended to provide significant information about the adviser so that the investor can assess the adviser’s background and qualifications. Finally, the requirements of (4) require electronic filing so that the information will be easily accessible to the public.

The changes adopted by the SEC will be effective 60 days after publication in the Federal Register. As such, investment advisers will likely begin to publicly post and distribute new brochures in the first quarter of 2011. Additionally, the SEC authorized the staff to delay publication of the Form ADV – Part II to enable the adviser’s registering for their state to register using the new uniform SEC-state form.

For more information about "SEC Adopts New Disclosure Requirements for Investment Advisers," contact Jonathan L. Schuster at jschuster@axley.com or 608.283.6769.