Understanding the New ADV Part 2

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Presenters

Jarrod JamesVice-PresidentRIA Compliance Consultants

Tammy EmsickSenior Compliance ConsultantRIA Compliance Consultants

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Agenda• Overview• Timeline for Implementation• New Part 2 Format and Content• Delivery Requirements• Amendments• Filing Requirements

Overview• On July 21, 2010 the SEC voted unanimously to adopt the long

awaited amendments to the Form ADV Part 2 and related rules under the Investment Advisers Act of 1940.

• These changes will require investment advisers registered with the SEC to provide new and prospective clients with a brochure and brochure supplements written in plain English.

• These amendments are designed to provide new and prospective advisory clients with clearly written, meaningful, current disclosure of the business practices, conflicts of interest and background of the investment adviser and its advisory personnel.

• SEC advisers must begin filing their brochures electronically through the IARD system and they will be made available to the public through the IAPD system.

Overview

• The current ADV Part II format requires advisors to respond to a series of multiple-choice and fill-in-the-blank questions organized in a check-the-box format. The advisor is then required to provide additional disclosure on the Schedule F based on the items marked in the Part II.

Overview• The new Part 2 will require a plain English

narrative brochure.• According to the SEC, 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 advisors

Overview– 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 clients.

Timeline for Implementation

• The effective date of the changes will be October 12, 2010.

• The following compliance dates will apply:– Each advisor applying for SEC registration

after January 1, 2011 will be required to submit the new Form ADV Part 2A as part of the advisor’s registration and must deliver the Part 2A and Part 2B to its clients and prospective clients.

Timeline for Implementation– Each advisor registered with the SEC whose

fiscal year ends on or after December 31, 2010, must include in its next annual updating amendment to its Form ADV a brochure or brochures that meet the requirements of the amended form. Accordingly, each adviser with a fiscal year end of December 31, 2010 must file an annual updating amendment with the new brochures no later than March 31, 2011.

Timeline for Implementation– Within 60 days of filing such amendment, the

advisor must deliver to its existing clients a brochure and brochure supplement (Part 2A and 2B) that meet the requirements of amended Form ADV. Each adviser must, after the initial filing of the brochures, begin to deliver to new clients and prospective clients a new brochure and brochure supplements in order to satisfy its obligations under the brochure rule.

New ADV Part 2 Format

• New Part 2 includes 2 sub-parts:– Part 2A- Contains 18 disclosure items about

the advisory firm that must be included in an advisor’s brochure

– Part 2B- Referred to as the “brochure supplement” which includes information about certain advisory personnel on whom the clients rely for investment advice

Part 2A- Format and Content• Narrative brochure written in plain English• Information must be provided in the specified format• Advisors must respond to each item in the brochure and

must present the information in order of the items in the form, using the headings provided by the form– If an item is inapplicable to an advisor, the advisor must include

the heading and an explanation that the information is inapplicable

– If the information provided to one item is also responsive to another item, the advisor may cross-reference the information in the other item

Part 2A- Format and Content• Advisors must use short sentences; definite,

concrete, everyday words; and the active voice.• An advisor’s brochure should discuss only

conflicts the advisor has or is reasonably likely to have and practices in which it engages in or is reasonably likely to engage in.

• If a conflict arises or the advisor decides to engage in a practice that it has not disclosed, supplemental information must be provided to the client.

2A- Brochure Items• 18 different required disclosure items,

each covering a different disclosure topic:– Item 1- Cover Page– Item 2- Material Changes– Item 3- Table of Contents

2A- Brochure Items– Item 4- Advisory Business– Item 5- Fees and Compensation– Item 6- Performance-Based Fees and

Side-by-Side Management– Item 7- Types of Clients– Item 8- Methods of Analysis, Investment

Strategies, and Risk of Loss

2A- Brochure Items• Item 9- Disciplinary Information• Item 10- Other Financial Industry Activities

and Affiliations• Item 11- Code of Ethics, Participation or

Interest in Client Transactions, and Personal Trading

• Item 12- Brokerage Practices

2A- Brochure Items• Item 13- Review of Accounts• Item 14- Client Referrals and Other

Compensation• Item 15- Custody• Item 16- Investment Discretion• Item 17- Voting Client Securities• Item 18- Financial Information

Additional State Disclosure Requirements

• Item 19- Additional Requirements for State-Registered Advisors– Identify each principal executive officer and

management person, describe their formal education and business background.

– Describe any business in which you are actively engaged (other than giving investment advice) and the approximate amount of time spent on that business.

Additional State Disclosure Requirements

– If you or a supervised person are compensated for advisory services with performance-based fees, explain how these fees will be calculated. Disclose specifically that performance-based compensation may create an incentive for the adviser to recommend an investment that may carry a higher degree of risk to the client.

– Additional disclosures required regarding certain arbitration, civil, self-regulatory, or administrative proceedings claims.

– Any relationship or arrangement that the advisor or any of its management persons have with any issuer of securities that is not already listed in Item 10.

Part 2A- Appendix 1: The Wrap Fee Program Brochure

• Advisors that sponsor wrap fee programs continue to be required to prepare a separate, specialized firm brochure for clients of the wrap fee program in lieu of the sponsor’s standard brochure

Delivery Requirements• Initial Delivery- Before or at the time the advisor

enters into an advisory contract with the client• Annual Delivery- No later than 120-days after

the advisor’s fiscal year end an advisor must provide to each client to whom they must deliver a brochure either: – A copy of the current (updated) brochure that includes

or is accompanied by the summary of material changes; or

– A summary of material changes that includes an offer to provide a copy of the current brochure

Delivery Requirements• Interim Delivery- Whenever the advisor

amends its brochure to add a disciplinary event or to change material information already disclosed in response to Item 9 of Part 2A, an updated brochure or a document describing the material facts relating to the amended disciplinary event must be promptly delivered to the client.

Amendments• Similar to the existing requirements, Advisors

are required to keep the brochures current by updating them at least annually, and updating them promptly when any information in the brochures (except the summary of material changes and the amount of assets under management, which only has to be updated annually) becomes materially inaccurate.

Part 2B: The Brochure Supplement

• Each Advisor’s brochure must be accompanied by brochure supplements providing information about the advisory personnel on whom the particular client receiving the brochure relies for investment advice

Part 2B Format• Advisors are required to write the brochure supplements

in plain English but offers flexibility in presenting information in a format that is best suited to the advisory firm. Advisors may include supplement information within the firm’s brochure. Advisors may elect to prepare a supplement for each supervised person. Alternatively, they can prepare separate supplements for different groups of supervised persons (e.g., all supervised persons in a particular office or work group). However, a brochure supplement must be organized in the same order, and contain the same headings, as the items appear in the form, whether provided in a brochure or separately.

Part 2B-Supplemental Items

• Item 1- Cover Page• Item 2- Educational Background and

Business Experience• Item 3- Disciplinary Information• Item 4- Other Business Activities• Item 5- Additional Compensation• Item 6- Supervision

Additional 2B Disclosures for State Registered Firms

• Item 7- Additional disclosure events required for state registered firms

Part 2B- Delivery• Each client must be given a brochure supplement

for each supervised person who: (i) formulates investment advice for that client and has direct client contact; or (ii) makes discretionary investment decisions for that client’s assets, even if the supervised person has no direct client contact. If investment advice is provided by a team comprised of more than five supervised persons, brochure supplements need only be provided for the five supervised persons with the most significant responsibility for the day-to-day advice provided to the client.

Part 2B-Delivery

• The supervised person’s supplement initially must be given to each client at or before the time when that specific supervised person begins to provide advisory services to that specific client.

Part 2B- Updating

• Advisors are required to deliver an updated supplement to clients only when there is new disclosure of a disciplinary event, or a material change to disciplinary information already disclosed, in response to Item 3 of Part 2B.

Delivery Requirements• Part 2A and Part 2B can be delivered

using electronic media so long as it meets the regulatory requirements for electronic delivery. The SEC has published interpretive guidance on delivering documents electronically, which can be found at www.sec.gov/rules/concept/33-7288.txt

Filing Requirements• Advisors are required to file their new brochures

(Part 2A) electronically through the IARD system. SEC advisors are not required to file brochure supplements (Part 2B) or supplement amendments with the SEC, and they will not be available on the SEC’s public website. Advisors are required to maintain copies of all. supplements and amendments in their files.

• State registered firms will be required to file the brochures through the IARD system.

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Copy of Slides

To access a copy of the slides from today’s presentation please go to:

http://www.RIA-Compliance-Consultants.com/New_ADV_Part2.html

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Thank You

Tammy EmsickSenior Compliance Consultant

RIA Compliance Consultants, Inc.877-345-4034 x 102

temsick@ria-compliance-consultants.com