The Implementation of the New Form ADV 2:

• U.S. Securities and Exchange Commission (“SEC”) registered investment advisors and most state registered investment advisors were required to prepare and electronically submit the new Form ADV Part 2 Brochure.  An SEC registered investment advisor was required to begin providing the new ADV Part 2A Brochure to all new and perspective clients upon submission of the revised document through the IARD system and was required to deliver a copy of the ADV Part 2A to existing clients within 60 days of filing it through the IARD system.  The SEC issued an extension for some SEC registered investment advisors regarding the delivery of the Form ADV Part 2B supplemental brochures.  An SEC investment advisor that was registered with the SEC as of 12/31/2010 and had a fiscal year end between 12/31/2010 and 4/30/2011 had until 7/31/2011, to prepare and begin delivering the new Brochure Supplements to new and prospective clients.  These SEC registered investment advisors had until 9/30/2011 to deliver the appropriate Brochure Supplements to all existing clients. Additionally, investment advisors that were newly registered with the SEC from 1/1/2011 through 4/30/2011 had until 5/1/2011 to prepare and begin delivering brochure supplements to new and prospective clients and had until July 1, 2011 to deliver the Brochures Supplements to existing clients.  All other investment advisors registered with the SEC were required to meet the delivery requirements specified in the initial adopting release. State registered investment advisors should review the state’s Form ADV delivery requirements to determine if any revisions were made and to ensure that they are complying. Investment Advisors must keep Form ADV Part 2 brochures current by updating them at least annually and promptly when any information in the brochure becomes materially inaccurate.

The “Switch” For Mid-Sized Investment Advisors:

• On July 21, 2011 the adopted rules and form changes to implement the transition of mid-sized investment advisors (between $25 and $100 million in assets under management) from SEC to State regulation became effective. All investment advisors that are SEC registered as of 12/31/2011 must file a Form ADV Part 1 amendment (regardless of the investment advisor’s fiscal year end) by March 30, 2012 to confirm the investment advisor’s eligibility to remain SEC registered or to begin the transition to state registration.  Amendments will be made to the Form ADV to reflect the regulatory changes related to the transition of regulation for mid-sized investment advisors.  Additional revisions to the Form ADV will also be implemented.

Exemptions for Advisors to Venture Capital Funds, Private Fund Advisors With Less Than $150 Million in Assets Under Management, and Foreign Private Advisors:

• On July 21, 2011, the SEC adopted rules to implement new exemptions from the investment advisor registration requirements for advisors to certain private funds.  The new rules defined a “venture capital fund,” provide an exemption from registration for advisors with less than $150 million in private fund assets under management in the United States, and clarifies the meaning of certain terms included in a new exemption from registration for “foreign private advisors.”

Whistleblower Provision:

• A provision under the Dodd-Frank Act gives the SEC the authority to reward whistleblowers and enhances the retaliation penalties and procedures that protect whistleblowers.

Additional, noteworthy changes made include:

• The dollar amount that must be met before performance fees can be charged by investment advisors was raised to adjust for inflation.

• Adopted rules defining the term “family office” as it relates to investment advisors and those managing their own family’s financial portfolios.

For more information regarding regulatory changes made in 2011, register for our webinar, “2011 Review – Are You Aware of the Changes in 2011 and Is Your Investment Advisor on Track for 2012?,” hosted Thursday, November 10^th at 12:00 Central. The cost for this webinar will be $59.95. To register, please click here.

RIA Compliance Consultants can help you with updating your compliance program to comply with the new regulatory requirements or can assist you with switching from SEC to state registration.  If you are an existing client of RIA Compliance Consultants interested in discussing how we can assist your investment advisor, please contact your consultant. If you are a new client that would like to speak with us regarding the services we can provide, please click here to schedule a time to speak with one of our consultants.

SEC Rule 204-3 requires an investment advisor registered with the SEC to deliver the disclosure brochure and brochure supplement(s) to perspective clients prior to or at the time the investment advisor enters into an advisory contract with the client.  Typically this means that the investment advisor will deliver the Form ADV Part 2A and Form ADV Part 2B supplement(s).  If your investment advisor sponsors a wrap-fee program, the investment advisor may need to provide the clients with the Form ADV Part 2A-Appendix 1 Wrap-Fee Brochure (formerly known as the Schedule H of the Form ADV) and the required Form ADV Part 2B brochure supplement(s).

As an SEC registered investment advisor transitions to the new Form ADV Part 2, the investment advisor must deliver the new Form ADV Part 2 to existing clients within 60 days of the date that the investment advisor was required to file it.  Going forward, SEC Rule 204-3 requires an investment advisor to make an annual delivery to its clients if there are material changes to its brochure since its last annual updating amendment.  Within 120-days of an investment advisor’s fiscal year end, the investment advisor must deliver either (1) a current brochure or (2) the summary of material changes to its brochure with an offer to provide a copy of the brochure upon request.  This is different than the past requirement that on an annual basis at approximately the same time each year, an investment advisor must simply offer its clients a copy of its brochure.  There are additional requirements under this SEC Rule that may necessitate deliveries more frequently than annually.

Although there has been an extension for SEC registered investment advisors for delivering the new Form ADV Part 2B supplement brochure(s), investment advisors are going to need to familiarize themselves with the new Form ADV Part 2B supplement brochure delivery requirements as well.  Generally, an investment advisor must deliver to each client a brochure supplement for a supervised person at or before the time that supervised person begins providing advisory services to the client.  It is important to note that the extension only applied to the Form ADV Part 2B supplement brochures and not the Form ADV Part 2A or the Form ADV Part 2A Appendix 1 Wrap-Fee Brochure.

An investment advisor registered with one or more state regulators will need to check with the state securities regulator to determine the delivery requirements.  Many state securities regulators will have to update their state rules and regulations in order to require a state registered investment advisor to follow new delivery requirements.  Some state securities regulators have recommended that a state registered investment advisor comply with the SEC requirements until the state securities regulator’s new rules are released.  In contrast, some state securities regulators do not want a state registered investment advisor using or delivering the new Form ADV Part 2 to clients until it has been reviewed by the state securities regulator and the state securities regulator has granted approval for the investment advisor to deliver the new Form ADV Part 2.

Regardless of whether your investment advisor is registered with the SEC or a state securities regulator, the filing of the new Form ADV Part 2 will result in new delivery requirements.  It is important you’re your investment advisor understand the new requirements to ensure that it is making proper delivery of the Form ADV Part 2A and Form ADV Part 2B brochure supplement(s).  For more information on the new delivery requirements and other guidance on how regulatory changes may affect your investment advisor, please register to attend RIA Compliance Consultants’ webinar, “My ADV Part 2 is Filed – Now What?”, which will be presented on April 19, 2011 at 12:00 pm CDT.  A fee of $59.95 will be charged for this webinar.  To register (click here).

For more information or to speak with someone regarding the services provided by RIA Compliance Consultants (click here) to access an on-line calendar and schedule a time for a consultant to call you.

The new Form ADV Part 2 adopted by the U.S. Securities and Exchange Commission (“SEC”) became effective in October 2010. Each investment advisor currently registered with the SEC is required to file a new Form ADV Part 2 or disclosure brochure meeting the new requirements with its annual updating amendment, which is required within 90 days of the investment advisor’s fiscal year end.  Most state securities regulators have adopted the same or similar requirements. If your investment advisor is registered with a state securities regulator, you should contact each state securities regulator with jurisdiction over your firm to determine the deadlines for submitting your investment advisor’s new Form ADV Part 2. For most investment advisors with a fiscal year end of December 31, this means that the new Form ADV Part 2 or disclosure brochure should be filed by no later than March 31, 2011.

It is anticipated that there will be a number of investment advisors that will not meet the upcoming deadline. RIA Compliance Consultants has assisted more than 250 investment advisors with drafting the new Form ADV Part 2 in order to comply with the March 31 deadline. Due to the volume of engagements with a March 31 deadline, RIA Compliance Consultants was forced earlier this year to stop accepting any new Form ADV Part 2 engagement with a deadline of March 31.  According to various reports, there were many compliance professionals forced to take this approach due to the number of investment advisors that were looking for assistance with preparing the new Form ADV Part 2.  Nonetheless, the calls still keep coming into RIA Compliance Consultants from investment advisors looking for a compliance professional to assist them. 

Unfortunately, an investment advisor missing the filing deadline for the new Form ADV Part 2 likely will be in violation of several investment advisory rules. It is not clear what will happen to those investment advisors that do not file the new Form ADV Part 2 by the deadline.  There are a wide range of possible actions availabe to the securities regulator such as a warning to the investment advisor and a demand that the appropriate submission be made within a limited number of days, a fine of the investment advisor, the suspension of the investment advisor until the appropriate filing is made, and/or the revocation of the investment advisor’s registration.  At a minimum, an investment advisor should be aware that not filing the new Form ADV Part 2 by the required deadline may flag the investment advisor as lacking strong compliance controls and requiring heightened scrutiny by the securities regulator.  It is also important to note that the regulatory response will vary among the securities regulators.

What should your investment advisor do if it has a March 31 deadline and is not prepared to file the new Form ADV Part 2 by that date?  Obviously, you should use your best efforts in the next few days to prepare an accurate new Form ADV Part 2 and file it by March 31.  To the extent that your investment advisor prepared and filed the new Form ADV Part 2 without the assistance of a compliance profession, we recommend that you hire RIA Compliance Consultants to review and revise this already submitted new Form ADV Part 2. 

We will be available in April to start working on such projects, which will be handled on a first-in/first-out basis. While we still have availability to assist investment advisors in April, we do not anticipate this availability will last for very long. 

If you need assistance with preparing and filing your new Form ADV Part 2 or any other upcoming projects, please click here to access an online calendar to schedule a time for a senior compliance consultant to contact you to discuss your needs. You can also contact us directly at 877-345-4034 extension 109 or extension 110.

However, the compliance date for when currently registered Colorado investment advisers must begin using the new Form ADV Part 2 was not included in Colorado’s public notice. To view the full public notice, click here.

If your investment advisor still 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, our Compliance Consultants would be happy to assist your investment advisor firm. To schedule a time for someone to contact you to further discuss your needs click here.

Stay tuned to RIA Compliance Consultants for further updates regarding Form ADV Part 2 compliance dates.

The SEC estimates that it will take most investment advisers between 15 and 60 hours to complete the new Form ADV Part 2.  Therefore, RIA Compliance Consultants strongly recommends that investment advisers registered with the State of Nebraska start to prepare the new Form ADV Part 2 as soon as possible.  If your investment adviser 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, RIA Compliance Consultants would be happy to assist your firm.  To schedule a time for our consultant to contact you to discuss your needs and our services, please click here.

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.  The new Form ADV Part 2 will have two sub-parts: Part 2A and Part 2B.  Form ADV Part 2A will contain 18 disclosure items about the investment advisory firm that must be included in the narrative brochure.  Form ADV Part 2B, which is being referred to as the “brochure supplement”, will include information about certain investment advisory personnel on whom the clients rely for investment advice.

Pursuant to the new rule, SEC registered investment advisors must respond to each of the disclosure items required in Form ADV Part 2A.  Information must be provided in order of the items in the form, using headings provided by the form.  Investment advisors are instructed to use short sentences; definite, concrete, everyday words; and the active voice.  In addition to many new disclosure requirements, Form ADV Part 2A must contain a cover page, summary of material changes since the advisor’s last annual update, and a table of contents.  Form ADV Part 2B, the supplemental brochure, will require for investment advisory personnel on whom clients rely for investment advice disclosures regarding: educational and business background information; disciplinary information; other business activities; additional compensation arrangements; and information regarding how and by whom the individual is supervised.  A cover page will also be required for Form ADV Part 2B.

Under the new requirements, an SEC registered investment advisor must deliver the brochure to perspective clients before or at the time the client enters into an agreement with the advisor.  Additionally, an SEC registered investment advisors must annually within 120 days of the firm’s fiscal year end deliver either: (1) a copy of the current brochure that includes or is accompanied by the summary of material changes; or (2) a summary of material changes that includes an offer to provide a copy of the current brochure upon request.

New investment advisors applying for registration with the SEC after January 1, 2011 will be required to file brochures meeting the requirements of the new Form ADV Part 2.  Each investment advisor currently registered with the SEC will be required to file a brochure or brochures meeting the new Form ADV Part 2 requirements with its annual updating amendment which is required within 90 days of the firm’s fiscal year end.  For most investment advisors, the fiscal year end is December 31, which means that the new Form ADV Part 2 brochures will need to be filed no later than March 31, 2011.  Each SEC registered investment advisor must deliver a copy of the new Form ADV Part 2 brochure to its existing clients within 60 days of the investment advisor filing its annual amendment.

For more information on the new Form ADV Part 2 requirements of the SEC, please register for our complimentary webinar, Understanding the New ADV Part 2, scheduled for Thursday, August 19 at 12:00 CDT.  Register now for this free webinar by clicking here.

Under current SEC regulations, the Form ADV Part II, along with Schedule F (or a document containing the same information as Part II and Schedule F), serves as the required disclosure statement that must be given to a client initially and offered annually thereafter.  In past comments, Chairman Mary Shapiro described the current Form ADV Part II as a “1960s check-the-box, paper-based approach,” where as the proposed amendments would require more of a “plain English narrative discussion of an adviser’s conflicts, compensation, business activities, and disciplinary history.”  Finally, the proposed amendment would require this same information to be available through the SEC’s Investment Adviser Public Disclosure (IAPD) website, so that investors, as well as the general public, would have access to this information.  

The SEC is  delaying the publication of the revised Form ADV Part 2 for five business days in order to work with state securities regulators on  technical, state-specific changes to items and instructions.  Ideally, all issues will be resolved and the same Form ADV Part 2  can  be used by both SEC and state registered investment adviser firms.   

According to the SEC’s press release, “[t]he 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.”  Based upon the explanation during today’s open meeting,  it appears that an SEC registered investment adviser firm will be required to submit the new Form ADV Part 2 through Web IARD when filing its Form ADV Part 1 Annual Amendment submitted for the fiscal year ending on or after December 31, 2010.  Form ADV Part 1 Annual Amendments must be filed no later than 90 days after a firm’s fiscal year ends.  The SEC registered investment adviser will then be required to deliver the new brochure to all clients within 60 days after filing the new brochure on IARD.  It appears an SEC registered investment adviser may choose to begin using the new Form ADV Part 2 before the compliance date. Investment advisers seeking initial registration with the SEC will be allowed to use the old Form ADV Part II through the end of the year, but new investment adviser firms seeking initial registration after January 1, 2011 will be required to use the new Form ADV Part 2.

Stay tuned to RIA Compliance Consultants for more information regarding the new Form ADV Part 2.

Although a registered investment adviser is held to a fiduciary standard, and consequently has an obligation to  disclose or avoid conflicts of interest and to advise a client in a manner that is in the client’s best interest, a broker-dealer is subject to a different regulatory regime and does not have to meet the same fiduciary standard as an investment adviser. Chairman Shapiro commented that she believes that broker-dealers and investment advisers who provide the same services should “meet the same high fiduciary standard” and indicated that she hopes that any regulatory reform will address this issue.

Under SEC regulations, the Form ADV Part II, along with Schedule F, serves as the required disclosure statements that must be given to a client initially and only offered annually thereafter.  Chairman Shapiro described the current Form ADV Part II as a “1960s check-the-box, paper-based approach,” where as, the proposed amendments would require more of a “plain English narrative discussion of an adviser’s conflicts, compensation, business activities, and disciplinary history.”  Finally, the proposed amendment would require this same information to be provided through the SEC’s website, so that investors, as well as the general public, would have access to this information.

In its March 2008 release, the SEC proposed exhaustive changes to Form ADV Part II including the use of a table of contents, the use of a plain-English brochure, the specific requirement to disclose all material arrangements and potential/real conflicts of interest.  Investment adviser firms would also be required to deliver a complete copy of the brochure to all clients at least annually. Currently, investment adviser firms are required to only offer Form ADV Part II.  The proposal also requires a supplement intended to provide information about the qualifications and background of personnel be providing the investor with personalized investment advice.  The proposed rule overhauls the Schedule H brochure as well.  A Schedule H must be prepared by wrap-fee program sponsors.

Form ADV is used as the official application document to register as an investment adviser firm. Both the SEC and the state securities regulators require use of the Form ADV as an investment advisor registration document. Once investment advisor registration is granted, the Form ADV must be amended at least annually and whenever material changes occur. More importantly, the Form ADV Part II and Schedule F serve as the required disclosure statement that an investment adviser must provide to its clients. Investment advisers that use a disclosure statement other than the Form ADV Part II and Schedule F must ensure that the disclosure statement contains the same information as the Form ADV Part II and Schedule F.

Stay tuned to RIA Compliance Consultants as we continue to follow this story.

As we have previously discussed, the SEC originally proposed material changes to the disclosure and format requirements of the Form ADV Part 2 for a registered investment adviser in April 2000. That proposal was never adopted and in March of this year the issue was re-proposed. If the SEC adopts the proposed new Form ADV Part 2 in whole or part, it undoubtedly will take a significant amount of effort by a registered investment adviser over relatively short time period to meet the proposed requirements. However, a registered investment adviser can begin preparing for this possible regulatory change by taking the time now to more fully understand the likely changes and impact of a new Form ADV Part 2. RIA Compliance Consultants encourages registered investment advisor firms to read the proposed rule, particularly the new Form ADV Part 2 instructions. You can view the proposed rule by clicking here. The proposed instructions begin on page 123.

Take the opportunity to better understand the details of the SEC’s proposed new Form ADV Part 2 by attending our complimentary webinar, Understanding the SEC’s Proposed New Form ADV Part 2, on Wednesday, November 19, 2008 from 12:00 p.m. to 1:00 p.m. CST. Please click on the link below if would you like to attend this free webinar. For more information about this webinar, you may also call Annie Dilocker at 877-345-4034.