SEC’s New Form ADV Part 2 Rule Now Effective

October 13, 2010

The U.S. Securities and Exchange Commissions (SEC) recently adopted amendments to the Form ADV Part 2 and related rules under the Investment Advisers Act of 1940.  These changes are now effective.  If your investment advisor has not already started the process of becoming familiar with the requirements of these changes, it should begin to do so in the very near future.  New investment advisors requesting registration with the SEC will be required to submit the New Form ADV Part 2 after January 1, 2011.  Existing SEC investment advisors will be required to submit the New Form ADV Part 2 with their first fiscal year end update after December 31, 2010.  Since many investment advisors have a fiscal year end of December 31, this will mean that an investment advisor will need to file its New Form ADV Part 2 by March 31, 2011.  While not all state securities regulators have determined what their plans are regarding the New Form ADV Part 2, most have indicated that they will eventually require the new format and many have indicated that they will currently accept it and will follow a timeline similar to the SEC.

This may seem like a long time to familiarize your investment advisor with the new requirements, but RIA Compliance Consultants strongly recommends that your investment advisor begin preparing for the new requirements well in advance of the compliance deadline.  The new format is very different than the existing format of check-the-box pages followed by additional disclosures on the Schedule F.  The New Form ADV Part 2 will require each investment advisor to develop a narrative plain English brochure that describes the investment advisor’s business, conflicts of interest, disciplinary history, and other important information that would help clients make an informed decision about whether to hire or retain that investment adviser.  This new format requires more disclosure information.  The SEC has indicated that they estimate it will take most advisors 15-60 hours to complete the new brochure.

In order to prepare for drafting the New Form ADV Part 2, investment advisors will need to gain a clear understanding of what the SEC means by “plain English.”  The SEC’s Office of Investor Education and Advocacy has published a Plain English Handbook (Handbook) which can be found on the SEC’s website at http://www.sec.gov/pdf/handbook.pdf.  Some of the guidelines provided include instructing investment advisors to use short sentences; definite, concrete, everyday words; and the active voice.  The Handbook indicates plain English means creating a document that is visually inviting, logically organized, and understandable on the first reading.  When writing in plain English an investment advisor should take into consideration the level of sophistication of its clients and present the information in an order that is easily understood.  Investment advisors must avoid legal and highly technical business terms; vague boilerplate; excerpts from legal documents; repetition; multiple negatives; and legalistic, overly complex presentations.  The Handbook provides a lot of information and guidance on the requirements of writing in plain English, including information on the format and the font size and type.

Although the submission deadline is not until next year, RIA Compliance Consultants encourages investment advisors to begin preparing the New Form ADV Part 2 now.  The SEC and many state securities regulators have indicated that they will accept the new format now.  For more information regarding the changes to the Form ADV Part 2 and related rules, register to attend the webinar, Understanding the New ADV Part 2, that will be presented by RIA Compliance Consultants on October 21, 2010 at 12:00 pm CDT.  To register, click here.

If your investment advisor needs help developing a plain English version of your current Form ADV Part II or would like help reviewing a draft of the New Form ADV Part 2, any of our Compliance Consultants would be happy to assist your firm.  To schedule a time for someone to contact you to further discuss your needs click here.

Posted by Bryan Hill
Labels: Form ADV, SEC