SEC adopts changes to investment adviser registration form

Practical Law UK Legal Update 3-503-4079 (Approx. 3 pages)

SEC adopts changes to investment adviser registration form

by Nathan J. Greene and Amy E. Bohannon , Shearman & Sterling LLP

Published on 01 Oct 2010 • USA (National/Federal)

This article is part of the PLC Global Finance September 2010 e-mail update for the United States.

The US Securities and Exchange Commission recently adopted changes to Form ADV, the form used by investment advisers registered or registering with the agency. The changes, which are to Part 2 of the Form and related rules under the US Investment Advisers Act of 1940, represent a major overhaul of investment adviser disclosure practices.

The US Securities and Exchange Commission recently adopted changes to Form ADV, the form used by investment advisers registered or registering with the agency. Form ADV is divided into two parts: Part 1 collects basic firm information and Part 2 (sometimes called the firm's brochure) provides more detail on the investment adviser's business. The changes, which are to Part 2 of the Form and related rules under the US Investment Advisers Act of 1940, represent a major overhaul of investment adviser disclosure practices.

As a result, investment advisers filing SEC registration forms in 2011 will encounter disclosure requirements that are more detailed and prescriptive than in the previous version of the form. For firms already registered with the SEC, transitioning to the newly required format, presumably as part of the required annual update of a firm's registration, means modifying almost every section of a firm's current Part 2 brochure.

New requirement highlights include:

Filing with the SEC. Under the new amendments, Part 2 will be required to be filed with the SEC and the filings will now be publicly available in text searchable PDF format (and not just available to a firm's clients and prospective clients, as is current practice).
New "Summary of Form ADV Changes". A new summary of the changes made in the course of a firm's annual update now must be prepared and provided to clients along with the annual update itself. For firms that do not routinely deliver their updated Part 2 brochure to clients each year, but rather offer to deliver the annual update to clients (which is a permitted alternative), the offer to deliver must now include the summary of changes.
Narrative responses. Part 2 brochures will now be entirely narrative, rather than the mix of check-the-box and narrative responses used in the prior version of the form.
Plain English disclosures. All disclosures must now be in plain English. Plain English means using short sentences; definite, concrete, everyday words; and the active voice. The SEC says that the goal is a "succinct and readable" document.
Disclosure of disciplinary history. Part 2 brochures will now include information about disciplinary events affecting the firm and its personnel and affiliates. Previously, that information was required only in Form ADV Part 1. Since the Part 2 brochures are delivered to clients, while Part 1 is not, this represents a significant change in practice.
Disclosure of risks and mitigation of conflicts. Details on risks and the mitigation of conflicts of interest will now be specifically required.
Personnel-specific brochure supplements required. A firm's Part 2 brochure will be broken into the full brochure (Part 2A) and one or more brochure supplements (Part 2B). Each supplement will include biographical and other information about the personnel who service a particular client's account, with a separate supplement to be prepared for each individual. Currently, no such document is required. Brochure supplements will not be filed with the SEC.

Overview of the new Part 2 format

In addition to the substantive changes discussed above, new Part 2 brochures will follow a new format. Every Part 2 brochure will have similar underlying architecture since the ordering and content of the brochure is required to be organised around 18 specified headings (referred to as "items" in the Form ADV instructions). If the subject matter of a particular heading is irrelevant to a firm, the heading is still required, with an explanation that the topic is not applicable to the business. Likewise, if information would be duplicated through the same or similar responses under multiple headings, cross references may be used.

That said, some steps may be taken to tailor the brochure to a firm's individual requirements, including that a firm may:

Develop an introductory summary of its brochure to use in addition to the 18 required headings.
Include other information of its choosing (for example, going beyond information directly responsive to questions posed by the required headings), so long as the additional information is relevant and does not obscure required content.
Use different versions of its brochure with different audiences.

Compliance timeline

Currently registered investment advisers must follow the new format when they make annual updates to their registrations next year, which for most firms will be in March 2011. The new format also applies to forms filed by any investment adviser applying for SEC registration after 1 January 2011. Voluntary early compliance is also permitted.

For a more detailed summary of these matters, please click here.

SEC adopts changes to investment adviser registration form | Practical Law