SEC Votes to Change Form ADV

The SEC has voted unanimously to adopt changes to the Form ADV, Part 2, the principal disclosure document that SEC-registered investment advisers must provide to their clients and prospective clients.

The brochure in its current format requires advisers to respond to a series of multiple-choice and fill-in-the-blank questions organized in a “check-the-box” format that the SEC says “frequently does not correspond well to an adviser’s business”. In some cases, the required disclosure may not describe the adviser’s business or conflicts in a way that is truly accessible to the investor, according to the SEC.  Of course the Form ADV, commonly referred to as the “brochure” is supposed to outline an investment adviser’s qualifications, investment strategies, and business practices.

“These changes are designed to provide clients with greater information about the individuals who will provide them with investment advice,” said SEC Chairman Mary L. Schapiro. “These amendments will help transform the brochure into a plain English narrative that is well-suited to serve investors’ needs and describes the adviser’s conflicts, compensation, business activities, and disciplinary history.”

The SEC says that the amendments adopted will:

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

In announcing the change, the SEC noted that many state-registered investment advisers also currently file Form ADV with their regulators, and has therefore authorized its staff to delay publication of the revised Form ADV, Part 2 for five business days “in order to work with the states to accommodate technical, state-specific changes to the items and instructions of the form”. This process would enable publication of Form ADV, Part 2 as a uniform SEC-state form, according to the SEC.

The amended rules and forms will be effective 60 days after publication in the Federal Register. Most investment advisers will begin distributing and publicly posting new brochures in the first quarter of 2011, according to the SEC.