The United States Securities and Exchange Commission (“SEC”) recently adopted the long-awaited amendments to Part 2 of Form ADV and related rules under the Investment Advisers Act of 1940. The Form ADV Part 2 amendments will require all investment advisors registered with the SEC to prepare and file plain English narrative brochures and supplements. SEC registered advisors will now be required to file these narrative brochures electronically through the IARD system in a text searchable PDF format. This filing process for the new Form ADV Part 2 is a task that state registered investment advisor firms have been required to do for sometime now but this will be a new process for SEC registered investment advisor firms.
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.