Alert February 19, 2008

SEC Votes to Propose Amendments to Form ADV Part II and to Require Electronic Filing

At its open meeting on Wednesday, February 13, the SEC voted to propose amendments to the content and presentation requirements of Part II of Form ADV, the registration form for advisers registered with the SEC under the Investment Advisers Act of 1940, as amended.  The proposal would also require registered advisers to file Part II electronically with the SEC, which would make the filings publicly available on its website.  In 2000, the SEC proposed amendments to both Parts 1 and II of Form ADV, and proposed that Form ADV be filed electronically, but adopted amendments and the electronic filing requirement only with respect to Part 1. 

The proposed amendments, if adopted, will eliminate the current check-the-box format of Form ADV and will instead require a registered adviser to provide clients with a narrative brochure containing plain English descriptions of the adviser’s business practices, services, and conflicts of interest.  Charts, graphs and glossy pictures would be permitted in the brochure, which could be filed in pdf format with the SEC and delivered electronically to clients.  Aside from annual amendments, updates would only be required for disciplinary history changes.  (Currently, Form ADV Part II must be updated to reflect changes in the responses to a number of the Form’s items.)

The brochure would have to contain expanded soft dollar disclosure, making clear to clients that (1) the adviser would otherwise have to pay for soft dollar benefits out of its own resources, (2) soft dollars create an incentive to direct brokerage and (3) the client may pay more for brokerage due to the adviser’s use of soft dollars.  Advisers would also have to specify in the brochure the types of products and services they received in exchange for soft dollars.  The proposal would mandate additional discussion of the conflicts of interest created for an adviser that manages accounts with performance fees at the same time as accounts without them.  The SEC’s proposal would require an adviser’s brochure to disclose any receipt of compensation, such as sales awards from non-clients, that created incentives to recommend particular products.  The proposal would also require a brochure supplement containing key information on advisory personnel, including education, disciplinary history, and non-advisory business activities. 

Comments on the proposed amendments will be due no later than 60 days after a formal proposing release is published in the Federal Register.  The description of the proposed amendments in this article is based on the SEC press release announcing them and remarks made at the open meeting.  The Alert will provide more detailed coverage once the formal release is posted on the SEC website.