SEC Plans Historic and Profound Changes to Form ADV

Form ADV is the primary disclosure document that investment advisers provide to clients and prospective clients. It contains information about the adviser's business, backgrounds of advisory personnel, disciplinary information and conflicts of interest.

The SEC has proposed amendments to Part 2 of Form ADV not once but twice. The comment period on the reproposal ended on May 16th, 2008 and the SEC staff is considered the many weighty comments from the usual heavyweights. According to SEC Director of Investment Management Andrew Donohue, the revision of Part 2 of Form ADV is a major event in the regulation of the advisory industry. The proposed changes to Form ADV are designed to give clients disclosure that is more meaningful, more effective, and easier to understand. Part 2 plays such an important role in the regulation and compliance programs of advisers, and the proposal is intended to result in more client-friendly disclosures.

The proposed amendments would substantially improve advisers' disclosure to clients in Part 2 of Form ADV. As you know, Part 2 is the primary disclosure document that investment advisers provide to clients and prospective clients. It contains information about the adviser's business, backgrounds of advisory personnel, disciplinary information and conflicts of interest. The goal of Part 2 is to allow investors to make an informed choice in selecting an investment adviser and to evaluate any conflicts an adviser may have.

Unlike other countries that regulate investment advisers by imposing qualification and other requirements on advisers, the US allows clients to make their own determinations when selecting advisers and evaluating any conflicts an adviser may have. However, in the view of the SEC, this process only works if clients and prospective clients have the information necessary to allow them to make informed decisions regarding the advisers they choose to hire. This is where Form ADV comes in.

Thus, Form ADV is especially important because the federal securities laws do not prescribe minimum experience or qualification requirements for persons providing investment advice. They do not establish maximum fees that advisers may charge. They generally do not prohibit advisers from having substantial conflicts of interest that might adversely affect the objectivity of the advice they provide.

Instead, investors have the responsibility in selecting their adviser to negotiate their own fee arrangements and evaluate their adviser's conflicts. As a result, it is critical that investors receive sufficient information about the adviser and its personnel to permit them to make an informed decision about whether to engage an adviser, and having engaged the adviser, how to manage that relationship.

The Commission's substantial amendments to Part 1 of Form ADV in 2000, along with the institution of the IARD electronic registration system and the establishment of the Investment Adviser Public Disclosure website, was the first step in revolutionizing, not only the content of advisers' disclosures, but also the process by which investors could access information about investment advisers. There have been major benefits from these amendments in terms of enhanced disclosure and transparency and ease of access to information.

In the reproposal, the SEC responds to comments on the original proposal. The goal is to provide advisory clients and prospective clients clear, current, and more meaningful disclosure of the adviser's business practices, conflicts of interest, and background of advisory personnel. The SEC rejects the current check-the-box approach in favor of more meaningful disclosure. In addition, following the success of Part 1 and the public disclosure website, the SEC wants advisers to be able to electronically file their brochures with the Commission; and they would be available to the public through the Commission's website, which would greatly enhance access to this important information.