- Form ADV Part 2 Amended and Available to the Public
- August 27, 2010 | Author: Ephraim D. Lemberger
- Law Firms: Bingham McCutchen LLP - Boston Office ; Bingham McCutchen LLP - New York Office
On July 21, 2010, the SEC voted unanimously to adopt amendments to Part 2 of Form ADV and related rules under the Advisers Act. The amendments are designed to require a registered investment adviser to provide clients with clearly written and meaningful disclosure, in plain English, about the adviser’s business practices, conflicts of interest and advisory personnel. The new Form is divided into two parts.
Part 2A of the new Form (the “Brochure”) requires an adviser to provide information about a variety of topics relating to an adviser’s business practices and conflicts of interest. Many of the disclosure items in the Brochure are similar to the items required by old Part II of Form ADV, including a discussion of the adviser’s advisory business and types of clients. The Brochure also includes new disclosure items (such as a discussion of material changes in the Brochure since the last annual update) and incorporates disclosure items that were previously required under other Advisers Act rules (such as disclosure of certain legal or disciplinary events). An adviser will be required to specifically discuss the conflicts of interest created by certain of its business practices, and how the adviser addresses these conflicts. The Brochure contains an appendix for specialized disclosure relating to wrap fee programs. The Brochure must be filed electronically with the SEC, and will be publicly available on the SEC’s website.
Part 2B of the new Form (the “Brochure Supplement”) requires an adviser to provide information about certain advisory personnel. For each person for whom an adviser is required to prepare a Brochure Supplement, the adviser must disclose, among other things: (i) his or her formal education and business background; (ii) certain legal or disciplinary events; (iii) other capacities in which he or she participates in any investment-related business; (iv) any compensation he or she receives based on the sales of securities or other investment products; (v) economic benefits he or she receives from someone other than a client for providing advisory services; and (vi) how the firm monitors the advice he or she provides, including the name, title and telephone number of the supervisor. Brochure Supplements are not required to be filed electronically, and will not be publicly available on the SEC’s website.
The amendments adopted by the SEC will become effective on October 12, 2010. Advisers registering with the SEC on or after January 1, 2011, must file the new Form with their application for registration on Form ADV Part 1. Advisers that are currently registered and whose fiscal year ends on or after December 31, 2010, must include the new Form as part of the next annual updating amendment of their Form ADV Part 1. For example, advisers with a fiscal year ending December 31, 2010 must file the new Form no later than March 31, 2011. In addition, advisers must meet the delivery requirements detailed below for existing clients within 60 days after filing.
I. Part 2A: The Brochure
The Brochure includes information about an adviser’s business practices and conflicts of interest.1 To ensure that the Brochure provides meaningful disclosure to clients and to limit the length of an adviser’s Brochure, an adviser is permitted to create separate Brochures for different types of clients. In addition, an adviser may include a summary at the beginning of its Brochure.
Each Brochure created by an adviser must be filed electronically through the IARD system in text-searchable PDF format, as an attachment to Form ADV Part 1. Once filed, an adviser’s Brochure(s) will be publicly available on the SEC’s website.
The Brochure consists of 18 separate items on which the SEC requires disclosure, as well as one additional item of disclosure required solely for state-registered advisers. An adviser is required to complete each of the 18 applicable items in the order below. If an item is not applicable to an adviser, the adviser must nonetheless include the item in its Brochure and state that it is not applicable; the adviser cannot simply omit the item.
Item 1 — Cover Page. The cover page of the Brochure must include general biographic information about the adviser, including name, business address, contact information, website (if applicable) and the date of the Brochure. The adviser must also include a specific disclaimer stating that the Brochure was not approved by the SEC or any state securities authority.2 Finally, if an adviser refers to itself as a “registered investment adviser,” it must include a disclaimer that registration does not imply a certain level of skill or training.
Item 2 — Material Changes. This item is new. An adviser making an annual update to its Brochure must identify and discuss material changes in the Brochure since the last annual update, and identify the date of the last annual update. The summary can be placed in a separate document accompanying the Brochure (note that a summary that is placed in a separate document must also be filed as an exhibit to Part 1 of the adviser’s Form ADV). While not required, an adviser making a non-annual update to its Brochure should consider amending this item to avoid confusing or misleading clients.
An adviser should ensure that its response to this item is not a lengthy discussion that replicates the Brochure. Rather, the summary should only inform clients of the substance of material changes so that the client can determine whether to review the entire Brochure or contact the adviser for more information.
Item 3 — Table of Contents. Each Brochure must include a table of contents detailed enough for clients to locate topics easily.
Item 4 — Advisory Business. The Brochure must include a description of the adviser’s advisory business, including the types of advisory services offered, whether the adviser holds itself out as specializing in a particular type of advisory service and the amount of assets under management. The adviser must also identify its principal owners (including intermediate subsidiaries that are publicly held).
To allow an adviser to provide more meaningful disclosure about its business, the adviser is permitted to calculate its assets under management using a different method than the one used in Part 1 of Form ADV, provided that the adviser keeps documentation describing the method used.
Item 5 — Fees and Compensation. An adviser must describe how it is compensated, and provide a fee schedule and disclosure of whether fees are negotiable. Although not specifically discussed, we believe that a description of the range of fees will still satisfy this disclosure requirement. These descriptions are not required for Brochures delivered solely to qualified purchasers.
An adviser must make certain other compensation-related disclosures, including:
A description of the types of other costs that clients may pay in connection with advisory services, such as brokerage, custody fees and fund expenses
Disclosure of compensation received by the adviser or its personnel that is attributable to the sale of a security or other investment (e.g., brokerage commissions or service fees from the sale of mutual funds), the conflicts of interest created and how the adviser addresses these conflicts. The adviser must also disclose that the client may purchase the same security or investment from an unaffiliated broker. If the adviser primarily recommends mutual funds, it must disclose whether it will recommend “no-load” funds.
If an adviser receives more than half of its revenue from commissions and other sales-based compensation, an explanation that commissions are the adviser’s primary (or, if applicable, exclusive) form of compensation.
A description of advisory fees charged to individual clients in addition to commissions or markups, and disclosure of whether the adviser reduces its fees to offset the commissions or markups.
Disclosure of whether the adviser bills clients directly or deducts fees from clients’ accounts, and how often it assesses fees (or bills clients).
If the adviser charges fees in advance, an explanation of how the adviser calculates and refunds such fees upon termination of an advisory contract.
An adviser must respond to these items even if client fees are fully disclosed in advisory contracts.
Item 6 — Performance-Based Fees and Side-By-Side Management. This item is new. An adviser must disclose if it charges performance-based fees or has a supervised person who manages an account that pays such fees. If the adviser also manages accounts that are not charged such fees, the adviser must discuss the conflicts of interest that arise and how these conflicts are addressed.
Item 7 — Types of Clients. An adviser must describe the types of advisory clients it has, and any requirements for opening or maintaining an account.
Item 8 — Methods of Analysis, Investment Strategies and Risk of Loss. An adviser must describe its methods of analysis and investment strategies. An adviser must disclose that investing in securities involves risk of loss, and, if its strategies involve frequent trading, discuss how frequent trading can affect performance. An adviser is not required to discuss its cash balance practices.
In addition, an adviser must explain the material risks involved for each significant investment strategy or method of analysis used and particular type of security recommended, with more detail if those risks are significant or unusual (i.e., not otherwise apparent from reading the Brochure). A strategy or method of analysis is significant if the adviser uses the strategy or method in advising “more than a small portion of the adviser’s clients’ assets.”
Item 9 — Disciplinary Information. An adviser must disclose material facts about any legal or disciplinary event that is material to an evaluation of the integrity of the adviser or its management persons. An adviser cannot complete this item by adding a cross-reference to Part 1 of its Form ADV.
The instructions to the new Form include a list of items that are presumed to be material if they occurred within the past 10 years. An adviser can rebut the presumption of materiality and not disclose the event, taking into account (i) the proximity of the person involved in the event to the advisory function; (ii) the nature of the infraction that led to the event; (iii) the severity of the sanction; and (iv) the time elapsed since the date of the event. An adviser rebutting this presumption must document its determination in a memorandum to be kept with the adviser’s books and records.
An adviser is not presumptively required to disclose (i) events that were resolved in the favor of the adviser or its management person; (ii) findings that were reversed, suspended or vacated; (iii) arbitration awards; or (iv) SEC administrative orders (subject to the terms of the specific order).
In completing this disclosure, an adviser should take into account its obligation to make full and fair disclosure of all material facts. Accordingly, the adviser may be required to disclose events not included on the list, events that are not presumed to be material and/or events that are more than 10 years old.
Item 10 — Other Financial Industry Activities and Affiliations. An adviser must describe material relationships it (or any of its management persons) has with related financial industry participants, any material conflicts of interest that arise and how these conflicts are addressed. If an adviser selects or recommends other advisers for clients, the adviser must disclose any compensation arrangements or other business relationships between the advisory firms that create material conflicts of interest between the adviser and its clients along with a discussion of the conflicts and how they are addressed.
Item 11 — Code of Ethics, Participation or Interest in Client Transactions and Personal Trading. An adviser must include a brief, concise summary of its code of ethics, and state that a copy is available upon request. An adviser should not include a reiteration of the entire code.
In addition, an adviser must also disclose (i) if it or a related person recommends to clients, or buys and sells for client accounts, securities in which it has a material financial interest; (ii) personal trading by the adviser and its related persons (including whether the adviser and its related persons invest or are permitted to invest in the same securities recommended to clients, or in related securities, such as derivatives); and (iii) if the adviser or a related person trades in the same securities at or about the same time as a client, and explain how internal controls prevent contemporaneous trading. With respect to each of the foregoing, the adviser must discuss conflicts created and how the conflicts are addressed. Disclosure is not required for securities that are not “reportable securities”3 (such as shares in unaffiliated mutual funds).
Item 12 — Brokerage Practices. An adviser must describe how it selects brokers and determines the reasonableness of brokers’ compensation, and address conflicts of interest that arise from the receipt of soft dollar benefits. The description must be specific enough for clients to understand the types of products or services the adviser acquires (and must include proprietary and third-party research), and to permit clients to evaluate possible conflicts of interest. The description must be more detailed for products or services that do not qualify for the safe harbor under Section 28(e) of the Securities Exchange Act.
An adviser must also explain: (i) whether it uses soft dollars to benefit all accounts or only those accounts that pay for the benefits; (ii) whether it seeks to allocate soft dollar benefits proportionately to the accounts generating the soft dollars; (iii) whether it “pays up” for soft dollar benefits (i.e., pays more than the lowest available commission rate); (iv) that it benefits when it uses “soft dollars” to access research and other products and services from brokers because it relieves the adviser of the need to use “hard dollars” to purchase such research, products and services; and (v) that the adviser has an incentive to select or recommend brokers based on soft dollars, rather than on getting the most favorable execution.
In responding to this item, an adviser must disclose if it uses brokerage to compensate brokers for client referrals, the conflicts of interest created by this practice and procedures used by the adviser during the last fiscal year to direct client brokerage to referring brokers.
An adviser that permits directed brokerage must describe its practices, and explain that directed brokerage may be more costly for clients and may cause the adviser not to be able to obtain the most favorable execution (unless directed brokerage is subject to the ability to obtain best execution). An adviser must also disclose if it “routinely recommends, requests or requires” clients to direct brokerage and that not all advisers require directed brokerage. An adviser must describe any relationship with a broker-dealer to which brokerage may be directed that creates a material conflict of interest.
Finally, an adviser must disclose its trade aggregation practices. If the adviser has the opportunity to but does not aggregate trades, it must disclose that clients may therefore pay higher brokerage costs.
Item 13 — Review of Accounts. An adviser must disclose whether and how often it reviews client accounts, and who conducts the review. An adviser must explain factors that trigger a review other than on a periodic basis. A description of the content and frequency of regular reports provided to clients must also be included and a statement as to whether the reports are written.
Item 14 — Client Referrals and Other Compensation. An adviser must describe arrangements through which it or a related person compensates someone for client referrals, and describe the compensation. An adviser must also disclose any economic benefit received (including sales awards or prizes) from a non-client for providing advisory services to clients, and discuss conflicts of interest that arise from this practice and how they are addressed.
Item 15 — Custody. This item is new. Where an adviser has custody of client assets and a qualified custodian distributes quarterly (or more frequent)4 financial statements, the adviser must explain that clients will receive statements directly from qualified custodians, and the statements should be reviewed carefully. Additional disclosure is required if the adviser also sends account statements directly to clients.
Item 16 — Investment Discretion. An adviser must disclose if it has discretionary authority over client accounts, and discuss limitations clients may (or customarily do) place on this authority. The adviser may cross-reference this information if it is also provided in response to Item 4.
Item 17 — Voting Client Securities. An adviser must briefly describe the proxy voting policies and procedures it adopted under Rule 206(4)-6, including how the adviser addresses conflicts of interest and how a client can obtain information on how the adviser voted their securities. An adviser must explain that clients can obtain a copy of the adviser’s proxy voting policies and procedures upon request. An adviser must disclose if it does not have the authority to vote client securities. Detailed disclosure is not required with respect to the use of third-party proxy voting services and how the adviser pays for these services.
Item 18 — Financial Information. If an adviser has discretionary authority over client assets, has custody of client funds or securities, or meets certain other requirements, then the adviser must disclose any financial condition reasonably likely to impair the adviser’s ability to meet contractual commitments to clients. An adviser must also disclose if it was the subject of a bankruptcy petition during the past 10 years. Finally, an adviser that requires prepayment of more than $1,200 in fees per client, six or more months in advance, must give clients an audited balance sheet showing the adviser’s assets and liabilities at the end of its most recent fiscal year.5
Item 19 — Requirements for State-Registered Advisers. State-registered investment advisers must include additional information generally relating to their principal executive officers and management persons, business practices (other than the provision of investment advice), compensation, disciplinary items and other financial industry relationships or arrangements.
Updating the Brochure
The Brochure must be updated annually and promptly when information (other than assets under management, the fee schedule or the summary of material changes) becomes materially inaccurate. However, if an adviser is amending the Brochure and its disclosure of assets under management or its fee schedule has become materially inaccurate, then the adviser must update those items as well. In addition, the Brochure must be updated promptly when the adviser adds a disciplinary event or changes material information already disclosed in Item 9.
If an adviser’s Brochure is accurate in all material respects since the last annual amendment and the adviser has not filed any interim amendments, then (i) the adviser is not required to prepare or deliver a summary of material changes to clients and (ii) the adviser is not required to prepare and file an updated Brochure.
Note that the requirement to update the Brochure is subject to an adviser’s fiduciary duty to make full and fair disclosure of all material facts (including updates on assets under management).
Delivering the Brochure
A current Brochure must be delivered to clients before or at the time the adviser enters into the advisory contract. A Brochure is not required to be delivered to registered investment companies, business development companies (where the advisory contract meets certain requirements) or clients receiving impersonal advice that are charged less than $500 per year. If an adviser does not have any clients to whom it is required to deliver a Brochure, it is not required to prepare or file a Brochure.
In addition, within 120 days after the end of an adviser’s fiscal year, the adviser must deliver to clients an updated Brochure or a summary of material changes that includes an offer to provide a full copy of the Brochure (together with a website address and telephone number to obtain the Brochure and the website address to obtain information about the adviser through IAPD). An amendment is not required to be delivered to existing clients if the adviser does not have to prepare a summary of material changes.
An adviser must also deliver an updated Brochure (or document summarizing the material facts) promptly whenever the adviser adds a disciplinary event or changes material information already disclosed in Item 9.
The Brochure can be delivered electronically.6 However, an adviser that only provides electronic access to the Brochure would not generally be considered to have met its delivery obligations.
Note that an adviser is only required to deliver the Brochure to each of its “clients.” With respect to private funds (including hedge funds and private equity funds), the adviser’s “client” is the fund. Accordingly, an adviser to a private fund is only required to deliver the Brochure to the fund, and not to investors in the fund. We strongly suggest, however, that advisers provide the Brochure to investors in the private funds they advise.7
II. Appendix 1 to Part 2A: The “Wrap Fee Program Brochure”
An adviser that sponsors wrap fee programs is required to prepare a separate, specialized brochure for clients of the program. The Wrap Fee Program Brochure is similar to existing Schedule H to Form ADV Part II, except for amendments corresponding to the amendments to the Brochure.
An adviser whose entire advisory business is sponsoring wrap fee programs is only required to prepare the Wrap Fee Program Brochure; the adviser is not required to prepare a regular Brochure. In addition, an adviser that sponsors a wrap fee program with multiple sponsors is not required to create or deliver a Wrap Fee Program Brochure if another sponsor creates and delivers a Wrap Fee Program Brochure with the information required to be included in the adviser’s Wrap Fee Program Brochure. An adviser can delegate its delivery and recordkeeping requirements (which are the same as for the Brochure) to the sponsor of the wrap fee program as long as the sponsor will promptly produce certain records to the SEC.
The Wrap Fee Program Brochure consists of nine separate items on which the SEC requires disclosure, as well as one additional item of disclosure required solely for state-registered advisers.
Item 1, Item 2 and Item 3 are generally the same as in the Brochure.
Item 4 requires the disclosure of the services provided for each program, and information about the fees charged and other compensation received by the adviser.
Item 5 requires disclosure about requirements to open or maintain an account.
In Item 6, an adviser is required to describe and provide certain information about how it selects and reviews portfolio managers, including standards used to calculate portfolio manager performance and information on who (if anyone) reviews performance information to determine its accuracy. An adviser must disclose whether related person managers are subject to the same selection and review criteria as other managers in the program and, if not, how the related persons are selected and approved. An adviser must also identify if a related person is a portfolio manager in the program, and describe any resulting conflicts of interest.
Item 7 requires a description of client information that the adviser communicates to portfolio managers, and when updated information is provided.
In Item 8, an adviser must explain any restrictions placed on clients’ ability to contact and consult with portfolio managers.
In Item 9, an adviser must respond to Items 9, 10, 11, 13, 14 and 18 of the Brochure.
In Item 10, state-registered investment advisers must include additional information relating to other financial industry relationships or arrangements.
III. Part 2B: The Brochure Supplement
The Brochure Supplement requires the disclosure of information about advisory personnel on whom a client relies for investment advice. Specifically, with respect to a client, an adviser must prepare a Brochure Supplement for (i) any supervised person who formulates investment advice for the client and has direct client contact and (ii) any supervised person who has discretionary authority over the client’s assets. No supplement is required for a supervised person who has no direct client contact and has discretionary authority over client assets only as part of a team. Further, if investment advice is provided by a team comprised of more than five supervised persons, Brochure Supplements need only be prepared for the five supervised persons with the most significant responsibility for the day-to-day advice provided to the client.
An adviser may create a separate Brochure Supplement for each applicable supervised person, or can prepare supplements for different groups of supervised persons. An adviser can also have different Brochure Supplements for different clients.
While the Brochure Supplement is flexible as to format (it can be in a separate document or can be included at the end of the Brochure), an adviser must follow the ordered headings. The adviser must include a separate section for each supervised person.
The Brochure Supplement is not required to be filed electronically, and will not be publicly available. However, a state-registered investment adviser must file a copy of the Brochure Supplement through the IARD for each supervised person doing business in that state.
The Brochure Supplement consists of six separate items on which the SEC requires disclosure, as well as one additional item of disclosure required solely for state-registered advisers.
Item 1— Cover Page. The cover page must identify the advisory firm and the supervised person covered by the supplement (name, business address and telephone number), and must be dated. An adviser must also include a disclaimer similar to the one required in Item 1 of the Brochure.8
Item 2 — Educational Background and Business Experience. An adviser must describe the supervised person’s formal education and business background for the past five years. The adviser must disclose if the supervised person has no high school education, no formal education after high school or no business background. In addition, the adviser must identify the supervised person’s positions at prior employers (and not merely list the names of prior employers).
An adviser may include information about professional designations, provided it also includes an explanation of minimum qualifications required to obtain the designation.
Item 3 — Disciplinary Information. An adviser must disclose any legal or disciplinary event that is material to an evaluation of the supervised person’s integrity. The items required to be disclosed parallel the disclosure required in Item 9 of the Brochure.
In addition, an adviser must disclose any event for which the supervised person had ever resigned or otherwise relinquished a professional attainment, designation or license in anticipation of it being suspended or revoked (other than for suspensions or revocations for failure to pay membership dues), if the adviser knows or should have known that the supervised person relinquished his or her designation or license.
For Brochure Supplements that are delivered electronically, an adviser may disclose that a supervised person has a disciplinary event and provide a hyperlink to BrokerCheck or IAPD (together with a brief explanation of how the client can access the disciplinary history).
Item 4 — Other Business Activities. This item specifically requires disclosure with respect to other capacities in which the supervised person participates in any investment-related business, and any material conflicts of interest arising from such participation. The adviser must include information about any compensation, including bonuses and non-cash compensation, the supervised person receives based on the sales of securities or other investment products, as well as an explanation of the incentives this type of compensation creates.
In responding to this item, an adviser is only required to include other business activities involving a substantial amount of time or pay. An adviser can assume that an activity that represents less than 10% of a supervised person’s time and income is not substantial.
Item 5 — Additional Compensation. The adviser must describe arrangements pursuant to which someone other than a client gives the supervised person an economic benefit (such as a sales award or other prize) for providing advisory services. Bonuses based (in part or whole) on sales, client referrals or new accounts must be disclosed, but other bonuses and regular salaries need not be disclosed.
Item 6 — Supervision. An adviser must explain how it monitors the advice provided by the applicable supervised person. In addition, the adviser must provide the client with the name, title and telephone number of the specific individual responsible for supervising the advisory activities of the supervised person. Including a general contact number and email address is not sufficient to meet this disclosure obligation.
Item 7 — Requirements for State-Registered Advisers. State-registered investment advisers must include additional information generally relating to disciplinary events and whether the supervised person has been the subject of a bankruptcy petition.
Updating the Brochure Supplement
A Brochure Supplement must be amended promptly if it becomes materially inaccurate. In addition, a Brochure Supplement must be updated promptly when the adviser includes new disclosure of a disciplinary event, or a material change to disciplinary information already disclosed, in response to Item 3 (including if disclosure is made by a link to BrokerCheck or IAPD). This update can be in the form of a dated “sticker” that identifies the information that has become inaccurate and provides the new information.
Delivering the Brochure Supplement
A Brochure Supplement must initially be given to each client (including sophisticated clients) at or before the time when the applicable supervised person begins to provide advisory services to such client. Brochure Supplements may be delivered electronically.
Brochure Supplements are not required to be delivered to (i) clients to whom an adviser is not required to deliver a Brochure; (ii) clients who receive only impersonal investment advice; and (iii) certain “qualified clients” who also are officers, directors, employees and other persons related to the adviser. An adviser that does not have any clients to whom supplements must be delivered is not required to prepare any supplements. In addition, an adviser is not required to prepare a supplement for any supervised person who does not have any clients to whom a supplement must be delivered.
An updated Brochure Supplement is only required to be delivered to clients when there is new disclosure of a disciplinary event, or a material change to disciplinary information already disclosed, in response to Item 3 (including if disclosure is made by a link to BrokerCheck or IAPD). Instead of delivering the full supplement, an adviser may deliver a statement describing the material facts relating to the change.
IV. General Guidance on Completing the New Form
In completing the new Form, advisers must present information in a plain English9 narrative format (all multiple choice questions have been removed) that is succinct and readable, and which uses short sentences in the active voice, employing definite, concrete everyday words (avoiding legal jargon, highly technical business terms and multiple negatives). Tables or bullet point lists should be used for complex materials, and illustrative examples are encouraged.
The SEC does not intend for advisers to use a ‘kitchen sink’ approach to disclosure. Instead, an adviser should only discuss conflicts the adviser has or is reasonably likely to have, and practices in which it engages or is reasonably likely to engage. If an additional conflict arises or the adviser decides to engage in an additional practice, then the adviser will be required to supplement its disclosure. Further, if the adviser is subject to a particular conflict or only engages in a particular practice with respect to some of its clients, the adviser should indicate this fact and not simply state that the conflict ‘may’ apply or that it ‘may’ engage in the particular practice.
The SEC has not released a specific “form” that advisers must use when preparing the new disclosure. Rather, each adviser should prepare the disclosure on its own computers, following sequentially the items set forth in the new Form. As a result, while advisers’ completed Forms may look different, all will contain disclosure relating to the same topics in the same order. By taking this approach, the SEC hopes to facilitate client comparison of multiple advisers.
In addition, advisers to hedge funds, private equity funds and other privately offered funds should keep in mind the private offering exemptions under the Securities Act in completing the new Form. The SEC believes that advisers can provide the requested information without jeopardizing reliance on these exemptions. However, the SEC stated that advisers including fund information beyond that required (such as subscription instructions, performance information and financial statements) may jeopardize the fund’s reliance on these exemptions.
Finally, the requirement to complete the new Form should be viewed against the backdrop of an adviser’s fiduciary duty to make full and fair disclosure of all material facts. While the new Form contains the requirements for a “brochure” required to be delivered in accordance with Rule 204-3, it may not address all material disclosures required to be made by an adviser. Accordingly, an adviser may have to make additional disclosures to ensure that it is fulfilling its disclosure obligations.
V. Other Matters
Advisers will be required to retain copies of the following books and records:
Each Brochure, Wrap Fee Program Brochure and Brochure Supplement.
Each amendment to any of the foregoing.
If not included in the Brochure, each summary of material changes.
The date that each Brochure, Wrap Fee Program Brochure, Brochure Supplement, amendment or summary of material changes is given to any client.
Documentation describing the method used to calculate assets under management for Item 4 of the Brochure, if the method used is different than in Part 1 of Form ADV.
A memorandum describing any legal or disciplinary event presumed to be material that the adviser determines not to disclose in a Brochure, Wrap Fee Program Brochure or Brochure Supplement, and explaining the adviser’s determination.
Current Rule 206(4)-(4) generally requires that an adviser disclose to clients material facts with respect to (i) a financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients or (ii) a legal or disciplinary event that is material to an evaluation of the adviser’s integrity or ability to meet contractual commitments to clients. In light of the disclosure required by the new Form, this rule is being rescinded. With respect to any adviser, the rescission will be effective on the date by which the adviser is required to deliver its Brochure to existing clients and begins delivering its Brochure to prospective clients.
Rule 204-3 has been amended to reflect the brochure delivery requirement discussed above.
Glossary of Terms for Form ADV
In addition to amendments required to account for the changes above, the SEC is amending the Glossary of Terms for Form ADV to make the definition of “non-resident” consistent with the definition in Rule 0-2. This amendment may result in additional corporate entities qualifying as non-resident general partners or managing agents or registered advisers, which could lead to such entities being required to file Form ADV-NR to appoint agents for service or process.
1 An adviser that is a “separately identifiable department or division” of a bank is not required to include general information about the bank or its business practices in the Brochure.
2 An adviser must include the following disclaimer (or clear and concise language conveying the same information) on the Cover Page:
This brochure provides information about the qualifications and business practices of [your name]. If you have any questions about the contents of this brochure, please contact us at [telephone number and/or email address]. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority.
Additional information about [your name] also is available on the SEC’s website at www.adviserinfo.sec.gov.
3 Pursuant to Rule 204A-1(e)(10), a reportable security is generally any security (as defined in Section 202(a)(18) of the Advisers Act) except for: (i) direct obligations of the Government of the United States; (ii) bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; (iii) shares issued by money market funds; (iv) shares issued by open-end funds other than reportable funds (as defined in Rule 204A-1(e)(9)); and (v) shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are reportable funds.
4 Note that an adviser with custody of the assets of a pooled investment vehicle is not required to ensure that the qualified custodian holding such assets distributes quarterly account statements to investors in the pool if the pool (i) is audited annually by an independent public accountant that is registered with and subject to regular inspection by the Public Company Accounting Oversight Board and (ii) distributes annual audited financial statements (prepared in accordance with GAAP) to investors in the pool within 120 days of the end of the pool’s fiscal year (or, in the case of “funds of funds,” within 180 days of the end of the pool’s fiscal year).
5 This disclosure is not required if the adviser is also a qualified custodian (as defined under Rule 206(4)-2) or an insurance company.
6 SEC interpretive guidance on delivering documents electronically can be found at http://www.sec.gov/rules/concept/33-7728.txt.
7 The same interpretation of “client” applies to the delivery requirements for Wrap Fee Program Brochures and Brochure Supplements.
8 An adviser is only required to include the statement directing clients to the SEC’s website if the supervised person is an investment adviser representative required to register with state securities authorities.
9 The SEC has published A Plain English Handbook, which is available at http://www.sec.gov/news/extra/handbook.htm.