Nearly ten years after its initial proposal, the SEC announced it has adopted changes to Form ADV, Part 2, which are designed to provide a plain English disclosure document that investors can use to better evaluate investment advisers’ qualifications, strategies and business practices.
The amendments substantially change the format of the document, backing away from the traditional check-the-box, fill-in-the-blank form to a narrative, plain English brochure. The new Form ADV, Part 2 will be presented in a consistent, uniform manner to make it easier for investors to compare different advisers’ brochures.
The brochure will include 18 specific areas of disclosure, including:
- Advisory services
- Fees and compensation
- Methods of analysis, investment strategies and risk of loss
- Disciplinary information
- Code of Ethics and personal transactions
- Principal transactions
- Brokerage practices
The initial delivery requirements are the same, in that advisers must deliver the brochure to new or prospective clients before or at the time the client signs an investment management agreement with the adviser. Annually, advisers are required to send a summary of material changes, and either deliver or offer to deliver an updated brochure to the client. The amendments contain certain interim delivery requirements as well, including if there are material changes to a disciplinary event or a new disciplinary event is reported.
The amendments also require advisers to include a supplement to the Form ADV, Part 2, which must contain résumé-like information regarding the individuals at an advisory firm who provide investment advice to the client. The client must receive this supplement at or before the time the individual provides investment advisory services to that client. The information required in the supplement includes the individual’s education, business experience, outside business activities, fees and disciplinary history.
Lastly, the SEC now requires advisers to electronically file these brochures, which will be publicly available on the SEC’s website. While advisers are not required to file the supplements with the SEC, they must be retained as a record that an examiner can review.
Registered advisers whose fiscal year ends on or after December 31, 2010 must file the new brochure when they file their next annual updating amendment to their Form ADV, and deliver the brochure to clients within 60 days of filing such amendment.
You can find the new rule on the SEC's website. Please call Vista360 if you have any questions regarding the new Form ADV, Part 2.