Proposed Rule: Amendments To Form ADV

Friday,
March 14, 2008
Part II
Securities and
Exchange
Commission
17 CFR Parts 275 and 279
Amendments to Form ADV; Proposed
Rule
sroberts on PROD1PC70 with PROPOSALS
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13958 Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules
SECURITIES AND EXCHANGE review your comments more efficiently, Text of Rule and Form Amendments
COMMISSION please use only one method. I. Background
The Commission will post all
17 CFR Parts 275 and 279 comments on the Commission’s Internet Investment advisers provide a wide
Web site (http://www.sec.gov/rules/ range of investment advice to numerous
[Release No. IA–2711; 34–57419; File No. types of clients. From individuals and
S7–10–00] proposed.shtml). Comments are also
available for public inspection and families seeking to save for college and
RIN 3235–AI17 plan for retirement to multinational
copying in the Commission’s Public
institutions managing billions of dollars,
Amendments to Form ADV Reference Room, 100 F Street, NE.,
clients seek the services of investment
Washington, DC 20549 on official
AGENCY: Securities and Exchange advisers to help them evaluate their
business days between the hours of 10
Commission. investment needs, plan for their
a.m. and 3 p.m. All comments received
economic future, develop and
ACTION: Proposed rule and form will be posted without change; we do
implement investment strategies, and
amendments. not edit personal identifying
cope with the ever-growing
information from submissions. You
SUMMARY: The Securities and Exchange complexities of the financial markets.
should submit only information that
Commission is reproposing Today, the more than 10,000 advisers
you wish to make available publicly. registered with us provide advice to
amendments to Part 2 of Form ADV, and FOR FURTHER INFORMATION CONTACT:
related rules under the Investment nearly 20 million clients.2
David W. Blass, Assistant Director, Unlike the laws of many other
Advisers Act, to require investment Daniel S. Kahl, Branch Chief, or Vivien
advisers registered with us to deliver to countries, the U.S. federal securities
Liu, Senior Counsel, at (202) 551–6787 laws do not prescribe minimum
clients and prospective clients a or IArules@sec.gov, Office of Investment
brochure written in plain English. These experience or qualification requirements
Adviser Regulation, Division of for persons providing investment
amendments are designed to require Investment Management, U.S. Securities advice. They do not establish maximum
advisers to provide clients and and Exchange Commission, 100 F fees that advisers may charge. Nor do
prospective clients with clear, current, Street, NE., Washington, DC 20549– they preclude advisers from having
and more meaningful disclosure of the 5041. substantial conflicts of interest that
business practices, conflicts of interest
SUPPLEMENTARY INFORMATION: The might adversely affect the objectivity of
(including those related to soft dollar
Securities and Exchange Commission the advice they provide. Rather,
practices), and background of
(‘‘Commission’’) is proposing investors have the responsibility, based
investment advisers and their advisory
amendments to rules 203–1, 204–1, on disclosure they receive, for selecting
personnel. Advisers would file their
204–2, and 204–3 [17 CFR 275.203–1, their own advisers, negotiating their
brochures with us electronically, and
275.204–1, 275.204–2, and 275.204–3]; own fee arrangements, and evaluating
we would make them available to the
and amendments to Form ADV [17 CFR their advisers’ conflicts. Therefore, it is
public through our Web site. The
279.1] under the Investment Advisers critical that clients and prospective
Commission also is proposing to
Act of 1940 [15 U.S.C. 80b] (‘‘Advisers clients receive sufficient information
withdraw, as duplicative, the Advisers
Act’’ or ‘‘Act’’).1 The Commission is also about the adviser and its personnel to
Act rule requiring advisers to disclose
proposing to withdraw rule 206(4)–4 [17 permit them to make an informed
certain disciplinary and financial
CFR 275.206(4)–4] under the Advisers decision about whether to engage an
information.
Act. adviser, and having engaged the adviser,
DATES: Comments should be received on how to manage that relationship.
or before May 16, 2008. Table of Contents Since 1979, the Commission has
ADDRESSES: Comments may be I. Background required investment advisers registered
submitted by any of the following II. Discussion Of Form Adv, Part 2 with us to provide clients and
methods: A. Part 2A: The Firm Brochure prospective clients with a disclosure
1. Proposed Format statement providing information about
Electronic Comments 2. Brochure Items the adviser, its business practices, the
• Use the Commission’s Internet 3. Delivery and Updating of Brochures
fees it charges, and its conflicts of
B. Part 2B: The Brochure Supplement
comment form (http://www.sec.gov/ 1. Delivery and Updating interest.3 Part 2 of Form ADV, the form
rules/proposed.shtml); or 2. Format advisers use to register with us under
• Send an e-mail to rule- 3. Supplement Items the Advisers Act, sets out the
comments@sec.gov. Please include File C. Filing Requirements, Public requirements for the disclosure
Number S7–10–00 on the subject line; Availability, and Transition statement.4 Today, Part 2 requires
or III. Amendments to Form ADV Instructions
• Use the Federal eRulemaking Portal and Glossary 2 These figures are based on data derived from
(http://www.regulations.gov). Follow the IV. Amendments to Rule 204–2 investment advisers’ responses to questions on Part
instructions for submitting comments. V. General Request for Comment 1A of Form ADV reported through the Investment
VI. Paperwork Reduction Act Adviser Registration Depository (‘‘IARD’’) as of
Paper Comments VII. Cost-Benefit Analysis January 31, 2008.
3 Investment Adviser Requirements Concerning
VIII. Initial Regulatory Flexibility Analysis
• Send paper comments in triplicate IX. Efficiency, Competition, And Capital Disclosure, Recordkeeping, Applications for
to Nancy M. Morris, Secretary, Formation
Registration and Annual Filings, Investment
Securities and Exchange Commission, Advisers Act Release No. 664 (Jan. 30, 1979) [44 FR
X. Statutory Authority
7870 (Feb. 7, 1979)] (adopting rule 204–3 requiring

100 F Street, NE., Washington, DC brochure delivery to advisory clients and
20549–1090. 1 Unless otherwise noted, when we refer to rule prospective clients).
All submissions should refer to File 203–1, 204–1, 204–2, or 204–3, or any paragraph of 4 Advisers use Form ADV to apply for registration
these rules, we are referring to 17 CFR 275.203–1, with us or with state securities authorities, and
Number S7–10–00. This file number 275.204–1, 275.204–2, or 275.204–3, respectively, must keep it current by filing periodic amendments
should be included on the subject line of the Code of Federal Regulations in which these as long as they are registered. See rules 203–1 and
if e-mail is used. To help us process and rules are published. 204–1. Form ADV has two parts. Current Part 2
Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules 13959
advisers to respond to a series of continue to believe that we need a better and their potential effect on the firms’
multiple-choice and fill-in-the-blank approach to client disclosure than the services.
questions organized in a ‘‘check-the- current ‘‘check-the-box’’ approach. In Commenters supported the narrative
box’’ format, supplemented in some light of the time that has passed since format we proposed in 2000 and agreed
cases with brief narrative responses. the original proposal, and in order to that it would promote more effective
Advisers have the option of providing provide all persons who are interested client communications.10 One stated
information in an entirely narrative in this matter an opportunity to that it would give an adviser ‘‘sufficient
format in lieu of the ‘‘check-the-box’’ comment on some of the modifications, flexibility to present and explain its
approach, although we believe few do. we have made in response to comments business practices in a meaningful
In April 2000, we proposed to require on our 2000 proposal, we are today way.’’ 11 Another stated that the new
each adviser registered with us to give reproposing amendments to Part 2 of narrative format would eliminate a
clients a narrative brochure that Form ADV and related rules under the number of problems identified with the
describes the adviser’s business, Advisers Act.8 In light of the changes we current form.12
conflicts of interest (including conflicts are proposing to Part 2, the Commission We request further comment on the
resulting from the adviser’s receipt of also is proposing to withdraw rule proposed narrative format, including
‘‘soft dollar’’ benefits), disciplinary 206(4)–4 (requiring advisers to disclose comment on whether it is the right
history, and other important certain financial and disciplinary approach. Will the flexibility of the form
information necessary to make an information to clients). allow advisers to present clear and
informed decision about whether to rely meaningful disclosure to their clients?
II. Discussion of Form ADV, Part 2 Will this flexibility minimize the
on the adviser for advice.5 Our proposal
was designed to require advisers to A. Part 2A: The Firm Brochure burden on advisers in preparing their
disclose this information in a clearer, brochures? In considering our proposed
1. Proposed Format amendments to Part 2 in their entirety,
more meaningful format than the
current check-the-box approach.6 We We are proposing to require registered commenters should consider whether
received more than 70 comments in advisers to provide prospective and there are disclosures that are best made
response to our 2000 proposal.7 We existing clients with a narrative in a tabular or other non-narrative
brochure written in plain English.9 The format and whether our proposal
contains the requirements for the disclosure brochure would describe the adviser’s provides sufficient flexibility to permit
statement that advisers must provide to prospective services, fees, business practices, and that type of disclosure.
clients and offer to clients annually. Part 2 currently conflicts of interest with clients.
is designated as ‘‘Part II.’’ For ease of reference, we 2. Brochure Items
Advisers would file their brochures
refer to the second part of Form ADV as ‘‘Part 2’’ We are proposing a Part 2A for
throughout this release. Part 1 of Form ADV
electronically through the IARD, and the
provides us with information that we need to public would benefit by having access advisers that would contain nineteen
process registrations and to manage our regulatory to these brochures through the separate items, each covering a different
and examination programs. Commission’s Web site. We believe that disclosure topic.13 The topics covered
5 Electronic Filing by Investment Advisers;
the amendments we are proposing today are generally the same as proposed in
Proposed Amendments to Form ADV, Investment 2000.14 Much of the information that
Advisers Act Release No. 1862 (Apr. 5, 2000) [65 will greatly improve the ability of
FR 20524 (Apr. 17, 2000)] (‘‘Proposing Release’’) at clients and prospective clients to
10 See, e.g., Comment Letter of Consumer
Section II.D.2. We noted in the Proposing Release evaluate firms offering advisory services
that in some cases an adviser’s response to a Federation of America (June 22, 2000) (‘‘CFA
and the firms’ personnel, and to Letter’’); Comment Letter of Teachers Insurance and
question using a check-the-box approach may be
accurate but a client may, because of the mandated
understand relevant conflicts of interest Annuity Association and College Retirement
format of the disclosure, not accurately perceive the that the firms and their personnel face Equities Fund (June 13, 2000) (‘‘TIAA–CREF
adviser’s practices. Letter’’).
6 In the Proposing Release, we also proposed 11 Comment Letter of Association for Investment
available at http://www.sec.gov/rules/extra/
extensive amendments to Part 1 of Form ADV, iardsumm.htm. Management and Research, Advocacy Advisory
including changes necessary to permit advisers to 8 In addition, we note that Form ADV is used by Committee (June 13, 2000) (‘‘AIMR Letter’’).
12 TIAA–CREF Letter.
file that part of the form with us electronically. In advisers both to register with the Commission and
September 2000, we adopted amendments to Part with state regulatory authorities. In general, this 13 Part 2A would have a main body and an
1A and related rules, but, as we noted at the time, Release discusses the Commission’s proposed rules appendix, Appendix 1. Appendix 1 contains the
we deferred adoption of amendments to Part 2 so and amendments that would affect advisers requirements for a specialized type of firm
that we could consider more fully the many registered with the Commission. We understand brochure—a wrap fee program brochure—and
comments we received on Part 2. Electronic Filing that the state securities authorities intend to make would require disclosure similar to current
by Investment Advisers; Amendments to Form ADV, similar changes that affect advisers registered with Schedule H of Part 2 of Form ADV. We are
Investment Advisers Act Release No. 1897 (Sept. the states. The draft form accompanying today’s reproposing Appendix 1 with changes described
12, 2000) [65 FR 57438 (Sept. 22, 2000)] reproposal contains certain proposed items and below.
(‘‘Electronic Filing Adopting Release’’). Today, all instructions for Part 2 (proposed Item 20 of Part 2A, 14 Today’s proposal does not include an item
SEC-registered advisers must file Part 1A (as well proposed Item 11 of Appendix 1 to Part 2A, and (which we proposed as Item 17 in 2000) that would
as amendments) electronically through IARD. IARD proposed Item 7 of Part 2B) that would be have required advisers that advertise or report their
was built and is maintained for the Commission applicable only to state-registered advisers. State- investment performance to describe any standards
and the state securities administrators by the registered advisers would be required by state, they use to calculate or present that performance.
Financial Industry Regulatory Authority (‘‘FINRA’’). rather than federal law, to respond to these items. The Securities Industry Association (‘‘SIFMA’’)
In September 2001, we launched a Web site Completion of these items, therefore, would not be argued that the disclosure would be voluminous
(http://www.adviserinfo.sec.gov), which provides an SEC requirement, and these items are not because many advisers use different types of
free public access to information that advisers file included in this Release as a proposed SEC rule. We composites. Comment Letter of the Securities
on Part 1A. As we discuss in more detail in Section will accept any comments and forward them to the Industry Association (June 13, 2000) (‘‘SIFMA
II.C below, firms’ brochures would be available on North American Securities Administrators Letter’’) (the Securities Industry Association has
the Commission’s Web site. Association (‘‘NASAA’’) for consideration by the since changed its name to the Securities Industry
7 The comment letters and a summary of the state securities authorities. We request that you and Financial Markets Association). The Financial
comments prepared by Commission staff are clearly indicate in your comment letter which of Planning Association (‘‘FPA’’) argued that the
available for public inspection and photocopying in your comments relate to these items. Commenters disclosure of calculation standards may not be
the Commission’s Public Reference Room, 100 F. alternatively may send comments relating to these helpful to investors (Comment Letter of the
Street, NE., Washington, DC (File No. S7–10–00). items directly to NASAA at the following e-mail Financial Planning Association (June 13, 2000)
Comments submitted to us electronically are address: part2comments@nasaa.org. (‘‘FPA Letter’’)), and the Investment Counsel
available at http://www.sec.gov/rules/proposed/ 9 Proposed General Instructions 1 and 2 to Part 2 Association of America (‘‘IAA’’) argued that clients
s71000.shtml. The summary of comments is of Form ADV. Continued
would be required in the brochure incorporated into our proposed Part 2A avoid unnecessary detail while also
concerns conflicts between an adviser’s many suggestions from commenters for providing clients and prospective
own interests and those of its clients improving the form, including omitting clients with enough information to
and is disclosure the adviser already some information that commenters make an informed decision about
must make to clients, as a fiduciary, convinced us is not necessary.20 whether to hire or retain an adviser or
under the Act’s anti-fraud provisions.15 Third, we have re-written several whether to rely on the investment
Thus, many of the proposed disclosure items to require advisers to explain advice provided by the adviser? If not,
requirements are designed to give succinctly how they address the commenters should suggest alternative
advisers guidance on fulfilling their conflicts of interest they identify, rather approaches.
statutory disclosure obligations to than disclosing their ‘‘policies and Below, we discuss each of the items
clients.16 procedures’’ as we originally in our proposed form and the more
Some commenters applauded our proposed.21 As commenters noted, significant changes we have made from
2000 proposal as appropriately requiring disclosure of policies and our 2000 proposal. In addition to our
identifying information that advisers procedures could result in disclosure specific requests for comment detailed
should disclose to clients.17 Others, that would be lengthy, technical in below, we also request comment
however, maintained that the proposed nature, difficult to read, and that generally on each of the proposed items.
form contained too many items and ultimately may not help clients Item 1. Cover Page. We would require
would require too much detailed understand how firms address their an adviser to disclose on the cover page
information, in particular with respect conflicts.22 As re-written, we believe of its brochure the name of the firm, its
to advisers’ policies and procedures.18 these items would give advisers the business address and telephone number,
These commenters raised legitimate flexibility to give clients a general and the date of the brochure. The cover
concerns, which we have addressed in understanding of how they address their page also would include a statement
three ways. First, our instructions to conflicts. For example, an adviser with that the brochure has not been approved
Part 2A would clarify that an adviser an affiliated financial service provider by the Commission or any state
must respond only to the items that might simply explain that it does not securities authority.24 This information
apply to its business.19 Second, we have recommend investment products sold already is required by current Part 2 of
by its affiliate, or an adviser with an Form ADV.
are not interested in this type of information. affiliated broker-dealer might explain In addition, we would require
Comment Letter of the Investment Counsel that it executes client securities
Association of America (June 13, 2000) (‘‘June 2000 advisers to disclose on the cover page
IAA Letter’’) (the Investment Counsel Association of transactions through its affiliated the name and telephone number of a
America has since changed its name to the broker-dealer only if it believes that, in person or service center that a client or
Investment Adviser Association). In response to the doing so, it would obtain best execution prospective client could contact for
concerns raised by commenters, we are not of client transactions.23
reproposing that item. Today’s proposal does, further information. At the suggestion of
however, include a new item on performance fees We request comment on whether our
commenters, we revised our 2000
and side-by-side management (Item 6). revisions to proposed Part 2A
proposal to permit an adviser to identify
Additionally, at the request of state securities adequately respond to commenters’
regulators, the form we are proposing today a service center, rather than only an
concerns about our 2000 proposal.
includes a separate item containing additional individual, as a contact for further
requirements for state-registered advisers (Item 20). Specifically, we request comment on
information.25 Other commenters
15 Under the Advisers Act, an adviser has an our new approach regarding disclosure
suggested that advisers be required to
affirmative obligation of utmost good faith and full of policies and procedures that would
and fair disclosure of all material facts to its clients, present a home page URL to assist
require advisers to explain generally
as well as a duty to avoid misleading them. See SEC investors using electronic search
how they address conflicts of interest,
v. Capital Gains Research Bureau, Inc., 375 U.S. methods.26 While we recognize the
180 (1963); In the Matter of Arleen W. Hughes, instead of requiring them to describe
value of this information, we
Exchange Act Release No. 4048 (Feb. 18, 1948). See their policies and procedures. Also, we
also Advisers Act section 206 [15 U.S.C. 80b–6]. understand that not all advisers
request comment on our general
16 The items in proposed Part 2A will not cover maintain Web sites. Thus, we are
instructions that clarify that an adviser
every possible conflict. As a result, delivering a proposing to require advisers to disclose
brochure prepared in accordance with Part 2 may need not repeat information in its
a Web site address on the brochure
not fully satisfy an adviser’s disclosure obligations. brochure simply because that
cover page only if they have one.
We make this point clear in both the proposed form information is responsive to more than
and the brochure rule. See proposed General one item. Will our proposed instruction Item 2. Material Changes. We are
Instruction 3 to Part 2; proposed rule 204–3(g).
give advisers sufficient flexibility to proposing a requirement that advisers
17 See, e.g., CFA Letter; TIAA–CREF Letter.
provide clients with a summary of any
18 See, e.g., June 2000 IAA Letter; Comment Letter
all information about the services and fees that are
material changes to their brochures
of the Investment Company Institute (June 13, 2001)
(‘‘ICI Letter’’). applicable to that client. See proposed rule 204–3(f) since the last annual update.27 This
19 Proposed General Instruction 1 to Part 2 of and proposed Instruction 6 to Part 2A. Each
Form ADV. An adviser whose business is solely brochure may omit information that does not apply 24 If the adviser holds itself out as being
financial planning, for example, would not need to to the advisory fees and services it describes. For ‘‘registered,’’ the cover page also must explain that
discuss how it manages client assets in response to example, an adviser’s brochure describing a registration with the SEC does not imply that the
Items 4.D and 4.E of Part 2A. An adviser that particular advisory service need not include the fee adviser possesses a certain level of skill or training.
receives only asset-based fees need not discuss schedule for a different advisory service that is not We have observed that the emphasis on SEC
conflicts resulting from commission-based discussed in that particular brochure. registration, in some advisers’ marketing materials,
20 For example, in response to comments, we are appears to suggest that registration either carries
compensation payments in response to Item 5.E of
Part 2A. An adviser without disciplinary proposing to omit the requirement that advisers list some official imprimatur or indicates that the
information would not need to respond to Item 9 all the wrap fee programs in which they participate. adviser has attained a particular level of skill or
ability. Section 208(a) of the Advisers Act [15
21 See, e.g., Proposed Items 5, 6, and 11 of Part

of Part 2A. An adviser that does not have custody
of client funds or securities would not need to 2A. U.S.C. 80b–8(a)] makes such suggestions unlawful.
25 See FPA Letter; Securities America Advisors,
respond to Item 15 of Part 2A. 22 June 2000 IAA Letter; ICI Letter; Comment
Additionally, as currently permitted by existing Letter of Wellington Management Company, LLP Inc. and Securities America, Inc. (June 12, 2000)
rule 204–3(d), an adviser that offers substantially (June 22, 2000) (‘‘Wellington Letter’’). (‘‘Securities America Letter’’).
26 See, e.g., CFA Letter.
different types of advisory services to different 23 By giving these examples we do not mean to
advisory clients, would retain the option to prepare suggest that these are the only ways for an adviser 27 As discussed in more detail in Section II.A.3
separate brochures so long as each client receives to address these conflicts of interest. below, we are proposing to require advisers to
requirement is the same as the one we a uniform format so that investors could choose a different method for their
proposed in 2000, and would help compare brochures of multiple advisers brochure disclosure, we also are
clients identify information that has more easily. We are of the initial view proposing to require such advisers to
changed since the prior year’s brochure that the wide variety of business keep records describing the method
and that may be important to them.28 activities of the large number of advisers used.35 We request comment on this
The summary would appear on the registered with us makes it impractical provision and on the proposed
cover page of the brochure or to develop a uniform format. We request recordkeeping requirement. We also
immediately thereafter, or could be comment on whether our view is request comment as to whether we
included in a separate communication correct. Is there a uniform brochure should require such advisers to disclose
that would accompany the brochure.29 format that would be useful to clients why they have elected to use a different
One commenter strongly supported and prospective clients of all the types method.
the required summary.30 Others of advisers registered with us? If we Commenters largely supported the
expressed concern that the summary were to mandate a uniform format, how proposed item, to which we propose to
might be too long.31 One commenter, should it look? For example, should we make two revisions.36 First, we are not
the IAA, supported the option of having require advisers to present information proposing to require advisers to list all
the summary be a separate letter to in their brochures in a standardized wrap fee programs in which they
existing clients rather than part of the order? Should we adopt standardized participate. Commenters persuaded us
brochure. We request comment on our titles for each separate section of a that this requirement likely would
proposed approach to highlighting brochure? Do commenters have other lengthen brochures unnecessarily.37
material changes to an adviser’s suggestions for making the brochures Second, we are eliminating the
brochure. If we do not adopt this easier for clients and prospective clients proposed requirement that advisers list
approach, how else could clients know to compare? and describe all periodicals or periodic
of potentially significant changes to the Item 4. Advisory Business. Proposed reports that they issue about securities.
services they receive or the risk of new Item 4 would require an adviser to While Part 2 currently requires this, we
conflicts? Should we require that it be describe its advisory business, including believe that clients and prospective
included in an adviser’s brochure? the types of advisory services offered, clients should be able to understand the
Commenters who believe a summary of whether it holds itself out as nature of an adviser’s services without
material changes would result in specializing in a particular type of knowing the names of each of its
disclosure that is too lengthy should advisory service, and the amount of publications.38
suggest other methods for ensuring that client assets that it manages. In Some commenters urged the
clients are made aware of important computing the amount of client assets Commission not to require advisers to
changes from one year to the next. that it manages, an adviser would be make additional disclosure if they hold
Item 3. Table of Contents. We propose permitted, as originally proposed, to use themselves out as specializing in a
to require advisers to include in their a method that differs from the method particular type of advisory service,
brochures a table of contents detailed used in Part 1A of Form ADV to report asserting that this could mislead clients
enough to permit clients and ‘‘assets under management.’’ 33 We into believing that advisers who
prospective clients to locate topics believe that because the Part 1A specialize pose a greater risk than other
easily.32 In response to our 2000 methodology for calculating assets is advisers.39 Our reason for requiring
proposal, one commenter, the Consumer designed for a particular purpose (i.e., advisers to identify their specialized
Federation of America (‘‘CFA’’), for making a bright line determination advisory services, however, is not that
supported the use of a table of contents as to whether an adviser should register we believe that those specialties
but urged that the Commission mandate with the Commission or with the states), inherently pose additional risks to
permitting a different methodology for clients, although we would expect the
deliver an updated brochure annually within 120 Part 2 disclosure may be appropriate to adviser to disclose specific risks if a
days after the end of the adviser’s fiscal year. enable advisers to make disclosure that specialized advisory service poses those
28 See Proposing Release at Section II.D.2.a.
is more indicative to clients about the risks. Instead, our proposal simply
29 An adviser would not be required to provide
nature of their business.34 Although we acknowledges that a client likely would
this information to a client or prospective client want to know whether an adviser
who has not received a previous version of the
are proposing to permit advisers to
adviser’s brochure. See proposed Note to Item 2 of provides specialized advisory services
Part 2A. Additionally, an adviser would not be 33 One commenter suggested that advisers be before engaging that adviser.40 The
required to file the summary with us, and therefore required to use the same methodology in their
it would not be available on our public disclosure brochures as is required in Part 1A. See June 2000 35 Proposed rule 204–2(a)(14)(ii) and proposed
Web site, if the summary is included in a separate IAA Letter.
34 For example, in calculating ‘‘assets under
Note to Item 4.E of Part 2A.
communication to clients. This is because the 36 Current Part 2 presently requires disclosure of
information contained in such a summary is management,’’ for purposes of Part 1A, an adviser
similar information to that we are now proposing
intended to provide existing clients with means to may include the entire value of a managed
except in a different format, including information
easily identify changes from one annual brochure portfolio, but only if at least 50 percent of the
regarding advisory services provided, types of
update to the next. We do not believe that such a portfolio’s total value consists of securities. See
investments that advice is offered on, and
summary would be relevant to persons who do not current Form ADV: Instructions for Part 1A. Thus,
investment strategies used. See current Form ADV,
have the previous version of an adviser’s brochure. for Part 1A purposes an adviser would not include
Part 2, Item 1 and Item 3.
We are, however, proposing an amendment to our other assets (including securities) that it manages in 37 See Crist Letter; June 2000 IAA Letter.
recordkeeping rule that would require the adviser a ‘‘non-securities’’ portfolio. The Part 1A formula
38 See Item 1.D of current Part 2 (requiring all
to preserve a copy of the communication, so that for calculating assets under management was
designed based on considerations related to the advisers to name any publication or report they
our staff has access to such separately provided issue for a fee or on a subscription basis).
summaries. See proposed rule 204–2(a)(14)(i). See National Securities Markets Improvement Act of
39 See Comment Letter of Greenville Capital
Section IV below. 1996 (‘‘NSMIA’’) division of responsibility for
regulation of advisers between the Commission and Management (May 12, 2000) (‘‘Greenville Letter’’).
30 CFA Letter.
state securities regulatory authorities. Pub. L. 104– See also Comment Letter of DE Shaw & Co. (July
31 Comment Letter of the Consortium (June 12,
290, 110 Stat. 3416 (1996) (as a result of NSMIA, 6, 2000) (‘‘DE Shaw Letter’’); Comment Letter of
2000) (‘‘Consortium Letter’’); Comment Letter of advisers with less than $25 million of assets under Thomson Financial (June 22, 2001) (‘‘Thomson
Jane Katz Crist (June 12, 2000) (‘‘Crist Letter’’); June management generally are regulated by one or more Letter’’).
2000 IAA Letter. state securities authority, while the Commission 40 We note that one commenter objected to our
32 Current Part 2 of Form ADV also includes a generally regulates those advisers with at least $25 characterizing financial planning as a specialized
table of contents. million of assets under management). Continued
proposal was designed to reflect be required to disclose to clients that the third-party fees, while not disclosing the
disclosure that we understand most client may purchase the same securities range of those fees, adequately inform
advisers typically provide to or investment products from brokers clients that they will bear other costs in
prospective clients. The proposal also that are not affiliated with that addition to advisory fees?
was intended to recognize the adviser.43 Some commenters argued that Item 6. Performance Fees and Side-
impracticality of having an adviser that an adviser that receives commissions or By-Side Management. New Item 6
offers multiple services describe each other payments for sales of securities to would require an adviser that charges
one. We request comment on this clients does not necessarily have a performance fees (or who has a
proposed item generally. Does the item conflict of interest with its clients.44 supervised person who manages an
accurately reflect the disclosure most This practice, however, gives the account that charges such fees) to
advisers typically provide? Are there adviser and its personnel an incentive to disclose this fact.50 If such an adviser
other disclosures we should include? base investment recommendations on also manages accounts that are not
Have we included disclosures that are the amount of compensation they will charged a performance fee, the item also
not reflective of those typically receive rather than on the client’s best would require the adviser to discuss the
provided by most advisers? interests.45 Moreover, disclosure conflicts that arise from its (or its
Item 5. Fees and Compensation. Item regarding commissions and other supervised persons’) simultaneous
5 would require an adviser to describe similar economic benefits already is management of these accounts, and to
how it is compensated for providing required by current Part 2.46 describe generally how the adviser
advisory services and to describe the We are not proposing a requirement addresses those conflicts.51
types of other costs, such as brokerage, that advisers must disclose the amount An adviser charging performance fees
custody fees, and fund expenses, that or range of mutual fund fees or other to some accounts faces a variety of
clients may pay in connection with the third-party fees that clients may pay.47 conflicts because the adviser can
advisory services provided to them by Commenters explained that these potentially receive greater fees from its
the adviser.41 As we proposed in 2000, expenses vary so greatly that attempts to accounts having a performance-based
the adviser would be required to quantify them or describe their range compensation structure than from those
disclose its fee schedule and whether its likely would not be useful to clients.48 accounts it charges a fee unrelated to
fees are negotiable, discuss whether the Several of these commenters further performance (e.g., an asset-based fee).
firm bills clients or deducts fees directly argued that these fees are typically As a result, the adviser may have an
from the clients’ accounts, and explain negotiated directly between the client incentive to direct the best investment
how often the firm assesses fees. An and the other service providers, the ideas to, or to allocate or sequence
adviser charging fees in advance also adviser does not always know the trades in favor of, the account that pays
would be required to explain how it amount of the fees, and that the third a performance fee. Additionally,
calculates and refunds prepaid fees conflicts stemming from their clients’
party often discloses the fees directly to
when a client contract terminates. differing investment strategies (e.g.,
the client.49 Would our proposed
We are also proposing in Item 5 a clients that pay performance fees who
requirement that advisers disclose
requirement that advisers that receive engage in significant short selling) may
information about mutual fund or other
compensation attributable to the sale of put an adviser at odds with other clients
a security or other investment product from a non-client (which would be disclosed in
(e.g., clients who hold long positions).52
(e.g., brokerage commissions), or whose response to proposed Items 5 and 12). As noted The growth in the number of hedge
personnel receive such compensation, above, a brochure would not need to repeat funds, which typically pay
information simply because the information is performance-based fees to advisers that
must disclose this practice and the responsive to more than one item. Proposed General
conflict of interest it creates and Instruction 1 to Part 2.
may have other advisory clients, makes
describe how the adviser addresses this 43 Proposed Item 5.E.2 of Part 2A. In addition, an
50 Proposed Item 6. ‘‘Performance fees’’ would be
conflict.42 Such an adviser also would adviser that receives more than half of its revenue
from commissions and other sales-based any fees an adviser receives that are based on a
compensation would be required to explain that share of the capital gains on, or capital appreciation
advisory service. Comment Letter of Certified Board of, the assets of a client. Current Form ADV, Part
commissions are the firm’s primary (or, if
of Financial Planners (June 13, 2000) (‘‘CFP Board 2 does not specifically require similar disclosure of
applicable, exclusive) form of compensation.
Letter’’). By proposing to include financial planning performance fees, although an adviser who offers
Proposed Item 5.E.3 of Part 2A. An adviser that
as an example of a specialized service we are not advisory services in exchange for such fees would
charges both advisory fees and commissions would
suggesting in any way that it is a limited service— be required to respond accordingly by marking
disclose whether it reduces its fees to offset the
in fact, we recognize its most marked characteristic ‘‘Other’’ in response to current Form ADV, Part 2,
commissions. Proposed Item 5.E.4 of Part 2A.
is that it seeks to address a wide spectrum of 44 E.g., Comment Letter of American Express Item 1.C(6).
clients’ financial needs. However, we note that 51 As fiduciaries, advisers must disclose all
financial planning has become a distinct profession, Financial Advisors (June 12, 2000) (‘‘AmEx Letter’’);
CFP Board Letter; Comment Letter of Richard E. material information regarding any proposed
and as such, we believe it merits detailed performance fee arrangements as well as any
description in the adviser’s brochure. See, e.g., Vodra (Apr. 29, 2000).
45 Because of this conflict of interest, advisers are
material conflicts posed by the arrangements. See
Conrad S. Ciccotello et al., Will Consult For Food! Exemption To Allow Investment Advisers To
Rethinking Barriers To Professional Entry In The required by the anti-fraud provisions of the
Charge Fees Based Upon a Share of Capital Gains
Information Age, 40 AM. BUS. L. J. 905 (2003) at 921 Advisers Act to disclose their receipt of transaction- Upon or Capital Appreciation of a Client’s Account,
(‘‘Personal financial planning as a distinct based compensation to clients. See Proposing Investment Advisers Act Release No. 1731 at n 13–
profession is quite new’’). Release at n. 137–38 and accompanying text. 14 and accompanying text (July 15, 1998) [63 FR
41 Proposed Items 5.A and 5.C of Part 2A. Part 2 46 See current Form ADV, Part 2, Item 13.
39022 (July 21, 1998)].
47 The current version of Part 2 does not require
currently requires similar disclosure regarding an 52 ‘‘Another concern is the risk that mutual fund
adviser’s fee schedule, how fees are charged, disclosure of this information. [not paying a performance fee] trades may appear
whether fees are negotiable, and when and how 48 E.g., AmEx Letter; Consortium Letter; Comment
to benefit a hedge fund [paying a performance fee],
compensation is payable. See Item 1 of current Letter of Davis Polk & Wardwell (June 13, 2000) such as where mutual fund long positions in a
Form ADV. (‘‘DP&W Letter’’); ICI Letter; June 2000 IAA Letter; security are sold after the hedge fund sells the same
42 Proposed Item 5.E of Part 2A. Advisers may Comment Letter of National Regulatory Services security short, or where large mutual fund
engage in practices that would be required to be (June 12, 2000); SIFMA Letter; Comment Letter of purchases of a security are made after a hedge fund
disclosed under multiple items. For example, an T. Rowe Price Associates (June 12, 2000) (‘‘T. Rowe has purchased the same security.’’ Kenneth R.
adviser may have a financial interest in securities Price Letter’’). Gerstein, Alternative Investments in the Mutual
that it recommends to clients (which would be 49 See Greenville Letter; DE Shaw Letter; DP&W Fund World, Materials prepared for ICI/IBA 2001
disclosed in response to proposed Items 5 and 10) Letter; June 2000 IAA Letter; ICI Letter; SIFMA Mutual Funds and Investment Management
or the adviser may receive an economic benefit Letter. Conference, at XII–8.
it likely that more advisers today will investment strategies.56 In addition, to which frequent trading is appropriate
need to address this conflict.53 It is proposed Item 8 would require an in the context of their business? Also,
important to note that the conflicts of adviser to discuss the risks clients face two commenters recommended that the
interest that result from the in following the adviser’s advice or Commission define the term ‘‘frequent
simultaneous management of permitting the adviser to manage assets. trading of securities.’’ 61 We have not
performance fee accounts and other Advisers that offer a wide variety of proposed a definition, but instead
accounts are not limited to hedge fund advisory services could simply explain propose to permit firms some flexibility
advisers. For example, an adviser would that investing in securities involves a in determining whether strategies they
face conflicts of interest if it were to risk of loss. Advisers that use primarily employ involve frequent trading. As
manage a proprietary account that paid a particular method of analysis, strategy, those commenters pointed out, the term
performance fees side-by-side other or type of security would be required to ‘‘frequent’’ is relative both to the client
client accounts that did not pay explain the specific material risks (i.e., an investment strategy involving
performance fees. involved, with more detail if those risks frequent trading that is inappropriate for
We request comment on our approach are significant or unusual. one type of client may be appropriate
requiring disclosure of conflicts arising Some commenters supported this for another), and to the security being
from side-by-side management of proposed disclosure requirement as traded. We are concerned that a
accounts that pay performance fees and central to the adviser’s fiduciary definition of the term ‘‘frequent trading’’
those that do not. Would our proposed relationship with the client.57 Others may not be sufficiently flexible to
requirement elicit sufficient information questioned why multi-strategy firms accommodate different types of
to allow a client to understand the would not be required to make the same securities or the different types of
conflicts that arise when an adviser level of disclosure.58 Multi-strategy advisory clients. We request comment
manages performance fee accounts advisers must already disclose the risks on our concern. Should we define the
alongside accounts that do not charge associated with strategies that they term ‘‘frequent trading’’? If so,
performance fees? If not, what recommend to clients, but the brochure commenters are invited to submit
additional information would be may not be the best place to make that suggested text for such a definition.
helpful? disclosure. For example, disclosure of Finally, our proposed Item 8 would
Item 7. Types of Clients. We are this information may lengthen the require advisers to discuss their
proposing Item 7 in the same form as we brochure unnecessarily given that practices regarding cash balances in
proposed it in 2000.54 The one different clients would be pursuing client accounts. The IAA commented
commenter that addressed this item, the different strategies, each of which poses that these practices vary depending on
FPA, commented favorably on it. As specific and different risks, and clients the types of accounts and directions
proposed, the brochure would describe may only need to understand the risks from clients and that meaningful
the types of advisory clients the firm to which they are exposed.59 disclosure about these practices would
generally has, as well as the firm’s Accordingly, we would not require be difficult. Our proposal does not
requirements for opening or maintaining these advisers to list in the brochure the require exhaustive disclosure about, for
an account, such as minimum account risks involved in each type of security example, all possible directions that all
size.55 We request comment on this or trading strategy. In such cases, of an adviser’s clients may give it.
approach. required risk disclosure with respect to Instead, the proposal would require a
Item 8. Methods of Analysis, particular strategies could be made concise, general explanation of the
Investment Strategies and Risk of Loss. separately to those clients to whom such adviser’s practices with respect to
We also are proposing Item 8 in the disclosure is relevant. We request situations in which a particular client
same form as we proposed it in 2000. comment on our approach. Also, we has not provided the adviser specific
This item would require advisers to request comment on whether there are directions for handling cash balances.
describe their methods of analysis and particular risks associated with Does our proposal provide advisers with
particular strategies, analyses, or enough flexibility to explain their
53 In a 2003 report, our Division of Investment
securities that warrant specific practices in a meaningful manner? If
Management highlighted its concerns regarding
disclosure, and if so what are they? not, commenters are invited to suggest
disclosure of conflicts of interest by advisers that how to make the disclosures more
advise hedge funds at the same time they advise Item 8 also would require specific
other clients that do not pay a performance fee. See disclosure of how strategies involving meaningful.
Implications of the Growth of Hedge Funds, Staff Item 9. Disciplinary Information. We
frequent trading can affect investment
Report to the United States Securities and Exchange are proposing Item 9 to require an
Commission (‘‘Staff Report on the Implications of performance. Commenters on this
adviser to disclose in its brochure
Hedge Funds’’), available at http://www.sec.gov/ proposal in 2000 noted that an amount
material facts about any legal or
spotlight/hedgefunds.htm. The staff noted that of trading that is inappropriately
because performance fees paid to hedge fund disciplinary event that is material to a
frequent for one type of security or
advisers are significantly higher than the asset- client’s evaluation of the integrity of the
client may be appropriate in the context
based fees paid on traditional accounts, advisers adviser or its management. These
have additional incentives to favor their hedge fund of a different type of security or client.60
requirements are similar, though as
clients over other clients by allocating investment Does our proposal provide advisers discussed below, not identical to those
opportunities to a hedge fund. enough flexibility to explain the degree
54 As originally proposed, this was Item 6. we proposed in 2000, and they would
Because we have added a new proposed Item 6 56 Presently, Item 4 of current Part 2 requires
continue to incorporate into the
(described above), this and subsequent items have brochure the disciplinary disclosure
been renumbered. check-the-box disclosure of similar information
55 Proposed Item 7 of Part 2A. Current Part 2 regarding methods of analysis and investment currently required by rule 206(4)–4.
strategies used. See current Form ADV, Part 2 Item Under that rule, advisers can make
requires ‘‘check-the-box’’ disclosure regarding types

4. disciplinary disclosure to clients either
of advisory clients. See current Form ADV, Part 2 57 AIMR Letter; CFA Letter.
Item 2. Existing Part 2 currently also requires
58 DE Shaw Letter; Greenville Letter.
orally or in writing. Because of the
disclosure regarding whether an adviser providing importance of this information to
59 Advisers utilizing multiple strategies would, of
certain advisory services imposes a minimum dollar
value of assets or other conditions for starting or course, be free to disclose in their brochures the clients, we proposed in 2000 and now
maintaining accounts. See current Form ADV, Part risks associated with each strategy.
2 Item 10. 60 June 2000 IAA Letter; T. Rowe Price Letter. 61 June 2000 IAA Letter; T. Rowe Price Letter.
repropose to require advisers to make that we should list? Are there an indication of wrongdoing.70 We
this disclosure in their brochures.62 disciplinary events listed that we request further comment on whether we
As proposed (and as currently should remove or modify? Should we should require disclosure of arbitration
reflected in rule 206(4)–4), Items 9.A, B, expand the list to include disclosure of awards, settlements, or claims. Also,
and C would provide a list of all cease and desist and censure orders should we require disclosure of
disciplinary events that are entered against an adviser or its damages in a civil proceeding? Should
presumptively material if they occurred management persons? In addition, we we require disclosure of such damages,
in the previous 10 years.63 The list request comment on the terms we use in or arbitration claims, settlements, or
would include, among other events, any this item. For example, we propose to awards above a specified amount? If so,
convictions for theft, fraud, bribery, state in Item 9 that an adviser must would $10,000 be an appropriate
perjury, forgery, and violations of disclose if it (or any of its management amount? If not, what would be an
securities laws by the adviser or one of persons) has been involved in one of the appropriate threshold amount?
its executives. Disciplinary events such events listed in that item. We propose Because advisers would include
as these reflect the integrity of the to continue to define the term disciplinary disclosures in their
adviser and its management persons and ‘‘involved’’ using the same definition advisory brochures if this proposal is
therefore are presumptively material to that currently exists in Form ADV.67 We adopted, we propose to rescind rule
clients.64 The adviser would be request comment on the proposed use of 206(4)–4, which requires disclosure of
permitted to rebut this presumption, in the term ‘‘involved’’ in this item and our disciplinary information, but does not
which case no disclosure to clients proposed use of the current definition of specify the means of conveying this
would be required. We would, however, that term. disclosure.71 If we adopt our proposed
require an adviser rebutting a As proposed in 2000, this item also amendments to Item 9, we would expect
presumption of materiality to document would have required advisers subject to to make rescission of rule 206(4)–4
that determination in a memorandum a Commission administrative order to effective on the date by which advisers
and retain that record in order to better provide clients with a copy of that must deliver their narrative brochures to
permit our staff to monitor compliance order. Several commenters urged us not existing clients and begin delivering
with this important disclosure to require advisers to deliver copies of their brochures to prospective clients.
requirement.65 A note in Item 9 would Commission administrative orders to all Some advisers, however, may have
explain four factors the adviser should clients, arguing among other things, that clients to whom they are not required to
consider when assessing whether the not all orders would be material to deliver a brochure, for example certain
presumption can be rebutted.66 clients and that rather than imposing a clients receiving impersonal investment
We request comment with respect to blanket requirement, delivery of orders advice or registered investment
the list of disciplinary events that are should remain a subject of settlement companies and business development
presumptively material. Are there negotiation.68 We are not proposing this companies.72 For these advisers, their
additional types of disciplinary events requirement because we agree with fiduciary duty of full and fair disclosure
commenters’ suggestion that we are able would require them to continue to
62 Current Part 2 of Form ADV does not include to require, where appropriate, delivery disclose to all their clients any material
an item related to disciplinary issues, however, of orders in individual proceedings. disciplinary or legal events or inability
Item 11 in Part 1A of Form ADV does require Nonetheless, we request further to meet contractual commitments.73
disclosure of specified disciplinary events. Such
disclosure is filed with the Commission as part of comment as to whether we should Nonetheless, we request comment about
the firm’s filing on IARD, but may not in all cases require delivery of all or, alternatively, whether we should rescind rule 206(4)–
be provided to clients. some specific category of administrative 4. Should we retain the rule to clarify
63 The list of disciplinary events is similar to the
orders. Commenters supporting delivery the disclosure obligations of advisers in
list of events currently presumed material under situations in which they have no
existing rule 206(4)–4(b). Reproposed Item 9
of orders should explain how clients
cautions advisers, however, that the events listed in would benefit from delivery. brochure delivery obligations?
that item are those that are presumed to be material In the Proposing Release, we also Item 10. Other Financial Industry
and do not constitute an exhaustive list of material specifically requested comment about Activities and Affiliations. We are
disciplinary events.
whether we should require disclosure of proposing Item 10 to require advisers to
64 See Proposing Release at n. 145–150 and
certain arbitration awards or claims. describe material relationships or
accompanying text.
65 Proposed rule 204–2(a)(14)(iii), discussed Several commenters urged us to include arrangements the adviser (or any of its
below in Section IV. Proposed Item 3 of Part 2B, arbitration claims or awards in the list management persons) has with related
discussed below, requires a brochure supplement to of disciplinary events because that
contain disclosure of legal or disciplinary events 70 See, e.g., Amex Letter; DP&W Letter; Wilmer
involving the adviser’s supervised persons.

information could be useful to the Letter.
Proposed rule 204–2(a)(14)(iii) would require the evaluation of an adviser’s integrity,69 71 In addition to requiring disclosure of certain
same memorandum in the event the adviser does while others urged us not to require that disciplinary information, rule 206(4)–4 currently
not disclose an event described in Item 3 of Part 2B. disclosure at all, arguing that arbitration requires an adviser to disclose certain financial
66 These factors are: (1) The proximity of the
claims and awards are not necessarily information to clients. As with the disciplinary
person involved in the disciplinary event to the disclosure, this requirement would also be
advisory function; (2) the nature of the infraction incorporated into the new brochure. Similar to
67 The current Glossary to Form ADV defines the
that led to the disciplinary event; (3) the severity current rule 206(4)–4(a)(1), proposed Item 18.B of
of the disciplinary sanction; and (4) the time term ‘‘involved’’ to mean ‘‘Engaging in any act or Part 2A would require certain advisers to disclose
elapsed since the date of the disciplinary event. omission, aiding, abetting, counseling, any financial condition that is reasonably likely to
These are the same factors advisers use to assess commanding, inducing, conspiring with or failing impair their ability to meet contractual
materiality under current rule 206(4)–4. See reasonably to supervise another in doing an act.’’ commitments to clients. See note 125 below and
Financial and Disciplinary Information that 68 E.g., AmEx Letter; ICI Letter; Comment Letter accompanying text.
Investment Advisers Must Disclose to Clients, of PaineWebber Incorporated and Mitchell 72 Our proposed requirements for which clients
Investment Advisers Act Release No. 1083 (Sept. Hutchins Asset Management Inc. (June 19, 2000) an adviser must deliver a brochure are discussed in
25, 1987) [52 FR 36915 (Oct. 2, 1987)] (‘‘Rule (‘‘Paine Webber Letter’’); T. Rowe Price Letter; Section II.A.3 below.
206(4)–4 Adopting Release’’). We have removed, as Comment Letter of Wilmer, Cutler & Pickering (June 73 See generally Rule 206(4)–4 Adopting Release
unnecessary, a sentence from the note that was 13, 2000) (‘‘Wilmer Letter’’). (explaining that rule 206(4)–4 was designed to
contained in the Proposing Release that explained 69 AICPA Letter; CFA Letter; Comment Letter of ‘‘remind advisers of their obligation to disclose to
that an adviser’s determination is not binding on us the Pennsylvania Securities Commission (June 12, clients material facts about precarious financial
or a court. 2000) (‘‘Penn. Securities Commission Letter’’). conditions and certain disciplinary events’’).
financial industry participants, any or arrangements involving material presented, and how the adviser
material conflict of interest that the conflicts of interest. addresses the conflicts.81 The
relationships or arrangements create, We request further comment on our requirements of the proposed item are
and how they address the conflict.74 In proposed Item 10. Will the disclosure similar to the disclosures presently
addition, if an adviser selects or required by Item 10 be adequate to required under Item 9 of current Part
recommends other advisers for clients, allow a client to evaluate the conflicts 2.82
proposed Item 10 would require it to of an adviser, and therefore better We request that commenters consider
disclose any compensation manage its relationship with the the proposed item and evaluate whether
arrangements or other business adviser? If not, what additional or more it would require sufficient disclosure to
relationships between the two advisory specific information should an adviser address our concerns.
firms, as well as the conflicts created.75 be required to disclose? Personal Trading. Items 11.C and 11.D
The disclosure that Item 10 would Item 11. Code of Ethics, Participation would require disclosure regarding
require would help clients be more or Interest in Client Transactions and personal trading by the adviser and its
aware of advisers’ other financial Personal Trading. personnel. Because of the information
industry activities and affiliations that Code of Ethics. Proposed Item 11.A they have, advisers and their personnel
can create conflicts of interest and would require each adviser to describe are in a position to abuse clients’
impair the objectivity of investment briefly its code of ethics and to state that positions by, for example, placing their
advice. a copy is available upon request. In own trades before or after client trades
One commenter, the CFA, applauded 2004, we adopted rule 204A–1 77 under are executed in order to benefit from
the disclosure required by this proposed the Advisers Act and amended current any price movements due to the clients’
item, stating that it would ‘‘significantly Item 9, which, as a result, today requires trades.83 These practices not only may
enhance client understanding of these advisers to make this same disclosure.78 affect the objectivity of the adviser’s
relationships.’’ Others requested The description of an adviser’s code of recommendations, but also can harm
clarification about, among other things, ethics required by proposed Item 11.A clients by adversely affecting the prices
the interaction of the disclosure may include matters also responsive to at which their trades are executed. Item
required by this item and that required other items, including those discussed 11.C would require an adviser to
by other items, the amount of detail below and, in particular, personal disclose whether it or a related person
advisers must provide to clients about trading by advisory personnel. If so, the (e.g., advisory personnel) invests—or is
their internal procedures, and what disclosure need not be repeated.79 permitted to invest—in the same
constitutes a material relationship.76 Participation or Interest in Client securities that it recommends to clients,
Because of the considerable variety Transactions. If the adviser or a related or in related securities such as options
among the types of advisers registered person recommends to clients or buys or or other derivatives. If so, the brochure
with us and the diverse range of their sells for clients securities in which the must discuss the conflicts presented and
adviser or a related person has a describe how the firm addresses the
relationships and affiliations in the
material financial interest, Item 11.B conflicts. Item 11.D would require a
financial industry, we do not propose to
would require the brochure to discuss similar discussion, but focuses on the
define which relationships or
this practice and the conflicts specific conflicts an adviser has when it
arrangements are material. We request
presented.80 Conflicts could arise, for or a related person trades in the same
comment on whether, despite the
example, when an adviser recommends securities at or about the same time as
breadth of the financial industry, we
that clients invest in a pooled a client.84 In response to this item, an
should attempt to do so. If so,
investment vehicle that the firm advises
commenters are invited to provide
or serves as the general partner, or when 81 We are not proposing to require an adviser that
suggestions of how to craft such a relies on our recently adopted rule 206(3)–3T under
an adviser with a material financial
definition so as to capture relationships interest in a company recommends that the Advisers Act with respect to its principal trades
with its advisory clients to disclose in Part 2 of
74 Currently, Part 2 of Form ADV requires
a client buy shares in that company’s Form ADV the information required by paragraph
disclosure regarding an adviser’s other financial public offering. An adviser engaging in (a)(3) of that rule. Rule 206(3)–3T(a)(3) [17 CFR 275.
these practices may have an incentive to 206(3)–3T(a)(3)]. See also Temporary Rule
industry or affiliations, but does not specifically
Regarding Principal Trades with Certain Advisory
state that an adviser must describe the related base its advice on its own financial Clients, Investment Advisers Act Release No. 2653
conflicts of interest and how they are addressed. interests rather than the interest of (Sept. 24, 2007) [72 FR 55022 (Sept. 28, 2007)]. Rule
See current Form ADV, Part 2 Item 8.
75 In 2005, our Office of Compliance Inspections
clients, and the item is designed to help 206(3)–3T sets out an alternative means for advisers
clients understand that conflict. The that also are registered broker-dealers to comply
and Examinations issued a report of their targeted with their obligations under section 206(3) of the
exams of pension consultants that highlighted some item would require advisers to disclose Advisers Act with respect to principal trades with
of the conflicts faced by pension consultants who any practices giving rise to these their clients. One condition of the rule is that an
have business relationships with money managers conflicts, the nature of the conflicts adviser relying on it must provide its clients with
they recommend to their pension clients: Staff prospective written disclosure to the advisory client
Report Concerning Examinations Of Select Pension explaining (i) the circumstances under which the
77 17 CFR 275.204A–1.
Consultants (May 16, 2005), available at http:// investment adviser directly or indirectly may
78 Investment Adviser Codes of Ethics, Investment
www.sec.gov/news/studies/pensionexamstudy.pdf. engage in principal transactions, (ii) the nature and
The report noted that, for a number of pension Advisers Act Release No. 2256 (July 2, 2004) [69 FR significance of conflicts with its client’s interests as
consulting firms, compensation received from 41696 (July 9, 2004)] (‘‘Code of Ethics Adopting a result of the transactions, and (iii) how the
money managers comprised a significant part of Release’’). investment adviser addresses those conflicts.
their annual revenue but that pension consultants 79 Proposed General Instruction 1 to Part 2. Although we do not propose to require advisers to
often did not provide adequate disclosure of the 80 Proposed Item 11.B. This item incorporates disclose this information in their brochures, they
conflicts created by this practice to pension plan many of the disclosure requirements of current Item may do so if they wish.
clients. Proposed Item 10 recognizes that these 9 of Part 2 and is identical to the Item 10.B we 82 See current Form ADV, Part 2 Item 9.
potential conflicts of interest are not limited to proposed in 2000. An adviser’s related persons are: 83 This practice is known as ‘‘front-running.’’ See
pension consultants and thus, would require (1) The adviser’s officers, partners, or directors (or Investment Adviser Codes of Ethics, Investment
disclosure by any adviser to whom it is relevant. any person performing similar functions); (2) all Advisers Act Release No. 2209 (Jan. 20, 2004) [69
76 See, e.g., FPA Letter; June 2000 IAA Letter; persons directly or indirectly controlling, controlled FR 4040 (Jan. 27, 2004)] at n. 18 and accompanying
Thomson Letter. We note that Item 8 of current Part by, or under common control with the adviser; (3) text.
2 already requires an adviser to disclose certain all of the adviser’s current employees; and (4) any 84 Some situations, such as when an adviser owns
relationships with a related person ‘‘that are person providing investment advice on the shares in a company it recommends to clients, may
material to its advisory business or its clients.’’ adviser’s behalf. See Form ADV: Glossary. Continued
adviser might explain how its internal promoted by advisers, but are more Examinations that concluded that
controls, including its code of ethics, likely driven by client demands. We advisers’ disclosure often failed to
prevent the firm and its staff from request comment on our understanding provide sufficient information for
buying or selling securities of these practices. Should we require clients or prospective clients to
contemporaneously with client brochure disclosure in either instance? understand the advisers’ soft dollar
transactions.85 Similar disclosure is Soft Dollar Practices. Many advisers practices and the conflicts those
already required under Item 9.E of receive brokerage and research services practices present.92 In its report, OCIE
current Part 2. in reliance on section 28(e) of the noted that most advisers’ descriptions
We proposed a similar item in 2000 Exchange Act, as well as other ‘‘soft were simply boilerplate, and urged that
on which we received no comment. dollar’’ products and services, provided we consider amending Form ADV to
Since that time, advisers have adopted by particular brokers in connection with require better disclosure.93 We request
codes of ethics that must address client transactions.88 As we have comment on whether our proposed item
personal trading by certain advisory previously noted, use of client securities would achieve this goal.
personnel and thus must address, at transactions to obtain research and other Item 12 would require an adviser that
least in part, the concerns raised by this benefits creates incentives that can receives soft dollar benefits in
item. In light of this, should we further result in conflicts of interest between connection with client securities
revise the item? If so, how? advisers and their clients.89 Because of transactions to disclose its practices.94
Item 12. Brokerage Practices. these conflicts, we have long required The proposed item would require a
Proposed Item 12 would require advisers to disclose their policies and brochure’s description of soft dollar
advisers to describe how they select practices with respect to their receipt of practices to be specific enough for
brokers for client transactions and soft dollar benefits in connection with clients and prospective clients to
determine the reasonableness of brokers’ client securities transactions.90 Some understand the types of products or
compensation. The item also would commenters questioned the conflicts we services the adviser is acquiring and
require advisers to disclose how they identified and complained that the item permit them to evaluate conflicts.95
address conflicts arising from their would tend to cast aspersions on the use Disclosure must be more detailed for
receipt of ‘‘soft dollars,’’ i.e., the receipt of soft dollar arrangements that are products or services that do not qualify
of benefits such as research in commonplace, such as those that fit for the safe harbor in section 28(e) of the
connection with client brokerage. within the safe harbor established by Exchange Act, such as research that
This item, which we discuss in more section 28(e).91 Our intent is not to does not aid in the adviser’s investment
detail below, is largely the same as create a negative impression regarding decision-making process. Will the
originally proposed, but with two soft dollars arrangements, but rather to proposed disclosure be sufficient to
changes urged by commenters. First, we require full disclosure of arrangements adequately inform clients?
have omitted a proposed requirement that we believe involve significant Item 12 also would require an adviser
that advisers disclose in their brochures conflicts of interest. to describe the types of conflicts it has
whether they negotiate commissions.86 Our 2000 proposal responded to a when it accepts soft dollar benefits 96
Commenters informed us that few 1998 report from our Office of and to disclose how it addresses those
advisers ‘‘negotiate’’ commission rates Compliance Inspections and conflicts.97 The item would require the
in the literal sense suggested by the adviser to explain whether it uses soft
Proposing Release.87 Second, we have 88 Nearly 60 percent of advisers registered with dollars to benefit all client accounts or
omitted the proposed requirement that the Commission report on Form ADV, Part 1A, Item only those accounts whose brokerage
8.E that they or a related person receive soft dollar
advisers disclose whether they benefits in connection with client transactions.
‘‘pays’’ for the benefits, and whether the
participate in commission recapture (IARD Data as of Sept. 30, 2007). adviser seeks to allocate the benefits to
programs. We understand that these 89 Commission Guidance Regarding Client client accounts proportionately to the
programs are not typically sponsored or Commission Practices Under Section 28(e) of the soft dollar credits those accounts
Securities Exchange Act of 1934, Exchange Act generate. The item also would require
Release No. 54165 (July 18, 2006) [71 FR 41978
be covered by both proposed Items 11.B and 11.C, (July 24, 2006)] (‘‘2006 Soft Dollar Release’’) (‘‘[u]se
as well as others, such as Item 5. Other situations, of client commissions to pay for research and 92 Inspection Report on the Soft Dollar Practices
such as when an adviser sells its holdings of a brokerage services presents money managers with of Broker-Dealers, Investment Advisers and Mutual
security it purchases for clients, would come under significant conflicts of interest, and may give Funds (Sept. 22, 1998), available at http://
proposed Item 11.C, and potentially 11.D. Further, incentives for managers to disregard their best www.sec.gov/news/studies/softdolr.htm.
some of these control procedures may be included execution obligations when directing orders to 93 Id.
in the adviser’s code of ethics and in the obtain client commission services as well as to 94 The soft dollar benefits covered include any
description of the code. A brochure would not need trade client securities inappropriately in order to research, or other products or services, whether
to repeat disclosure simply because it is responsive earn credits for client commission services’’). created or developed by the broker-dealer itself or
to more than one item. Section 28(e) of the Exchange Act provides a by a third party. See note to proposed Item 12.A.1
85 Advisers would not be required to provide this limited ‘‘safe harbor’’ for advisers with of Part 2A.
disclosure with respect to securities that are not discretionary authority in connection with their 95 In this regard, the proposed item would
‘‘reportable securities’’ under rule 204A–1, such as receipt of soft dollar benefits. Under section 28(e), incorporate the standard for advisers we set out in
shares in unaffiliated mutual funds. See rule 204A– a person who exercises investment discretion over our 1986 Soft Dollar Release. Our 2006 Soft Dollar
1. Such securities are not reportable under rule a client account has not acted unlawfully or Release preserved this provision of the 1986 Soft
204A–1 because they appear to present little breached a fiduciary duty solely by causing the Dollar Release. See 2006 Soft Dollar Release, above
opportunity for front-running. See Code of Ethics account to pay more than the lowest commission note 89, at n. 68 and accompanying text.
Adopting Release, above note 78, at n. 42 and rate available, so long as that person determines in 96 An adviser accepting soft dollar benefits would
accompanying text. good faith that the commission amount is have to explain that (a) the adviser benefits because
86 See Proposing Release at n. 178–179 and reasonable in relation to the value of the brokerage it does not have to produce or pay for the research
accompanying text. and research services provided. Advisers must or other products or services acquired with soft
87 June 2000 IAA Letter; SIFMA Letter. Of course, disclose their receipt of soft dollar benefits to dollars, and (b) the adviser therefore has an
advisers must consider commission rates as part of clients, regardless of whether the benefits fall inside incentive to select or recommend brokers based on
their duty to seek best execution. See Interpretive or outside of the safe harbor. See 1986 Soft Dollar the adviser’s interest in receiving these benefits,
Release Concerning the Scope of Section 28(e) of Release, above note 87, at n. 33. rather than on the client’s interest in getting the best
90 Item 12 of current Part 2. execution.
the Securities Exchange Act of 1934 and Related
Matters, Exchange Act Release No. 23170 (Apr. 23, 91 Comment Letter of the Alliance In Support of 97 See proposed Item 12.A.1.f of Part 2A, which
1986) [51 FR 16004 (Apr. 30, 1986)] (‘‘1986 Soft Independent Research (June 13, 2000) (‘‘Alliance is substantively the same as Item 12.B of current
Dollar Release’’) at Section V. Letter’’); ICI Letter; SIFMA Letter. Part 2.
the adviser to explain whether it ‘‘pays for execution. Clients may initiate this disclosure is similar to that presently
up’’ for soft dollar benefits.98 As we type of arrangement for a variety of required by Item 11 of current Part 2.109
noted above, some commenters to our reasons, such as favoring a family Commenters who addressed this item
2000 proposal questioned our member or friend or compensating the supported it as being helpful to
description of the conflicts of interest broker-dealer indirectly for services it clients.110 We are proposing this item
identified in the item.99 We ask provides to the client. But the with no change from the 2000 proposal
commenters to consider these arrangement may also be initiated by the and we request further comment on it.
descriptions. adviser, who may benefit, for example, Item 14. Payment for Client Referrals.
Client Referrals. If an adviser uses when brokerage is directed to its Item 14 would require an adviser to
client brokerage to reward brokers for affiliated broker-dealer. In either case, describe any cash or other payment that
client referrals, it also would be clients directing (or agreeing to direct) it or a related person makes for client
required to disclose this practice, the brokerage need to understand the referrals. The brochure also would
conflict it creates, and any procedures consequences of directing brokerage, disclose whether the adviser receives
the adviser used to direct client including the possibility that their any benefit, including sales awards or
brokerage to referring brokers during the accounts will pay higher commissions prizes, from a non-client for providing
last fiscal year, i.e., the system of and receive less favorable execution.104 advisory services to clients.111 This item
controls used by the adviser when If an adviser permits clients to direct is the same as we proposed it in 2000
allocating brokerage.100 This practice brokerage, we would require the and we request further comment on it.
presents advisers with significant brochure to explain that the adviser may Similar disclosure is already required by
conflicts of interest because they may be unable to obtain best execution, and
current Part 2 which requires an adviser
have a bias towards referring brokers.101 that directing brokerage may cost clients
to disclose whether it has any
Part 2 currently requires advisers to more money.105 If, however, the adviser
arrangements where it directly or
disclose these arrangements, but does routinely recommends, requests or
indirectly compensates any person for
not specifically require that such requires clients to direct brokerage, the
client referrals and to describe such
description discuss the conflicts of adviser also would be required to
arrangements.112 Current Part 2 also
interest created.102 describe in its brochure the adviser’s
requires an adviser to disclose whether
Proposed Item 12.A.2 is substantially practice, to disclose that not all advisers
it receives a cash payment or some
the same as we proposed in 2000. The require directed brokerage, and to
economic benefit from non-clients in
one commenter that addressed it— discuss any broker-dealer relationship
that creates a material conflict of connection with giving advice to
CFA—expressed support for the item as
interest.106 clients.113 We request further comment
proposed, and we request further
Commenters favored the item.107 One on our proposed Item 14.
comment.
Trade Aggregation. Clients engaging pointed out, however, that many clients Item 15. Custody. We have updated
an adviser can benefit when the adviser direct brokerage subject to best this item from our 2000 proposal to
negotiates lower commissions or execution.108 In such situations, the reflect subsequent amendments to rule
‘‘bunches’’ trades to obtain volume disclosure required by proposed Item 206(4)–2 (our investment adviser
discounts on execution costs.103 Item 12 12.A.3.b is not relevant because the custody rule).114 The protections
would require the adviser to describe adviser would be required to seek best afforded clients as a result of
whether and under what conditions it execution. To avoid disclosure that may compliance with the amended rule
engages in these practices. If the adviser not be helpful to clients, we have reduce the need for much of the
does not bunch trades when it has the modified the item to permit advisers to disclosure requirements we proposed in
opportunity to obtain discounts, the omit the disclosure if the adviser only 2000. Today, most advisers that have
adviser would be required to explain in permits clients to direct brokerage custody of client securities or funds
the brochure that clients may pay higher subject to the adviser’s ability to obtain comply with the rule by maintaining
brokerage costs. We request comment on best execution. We request further these client assets with a qualified
this requirement. Should we also comment on the proposed disclosures custodian (such as a broker-dealer or
require an adviser to discuss whether regarding directed brokerage. bank) that directly sends account
and under what conditions it breaks up Item 13. Review of Accounts.
large orders to purchase or sell Proposed Item 13 would require an 109 See current Form ADV, Part 2, Item 11.
securities (e.g., to mitigate the impact of adviser to disclose whether, and how 110 CFA Letter; FPA Letter.
111 Proposed Item 14 would require advisory
the transaction on the market value of often, it reviews clients’ accounts or
firms to disclose economic benefits they receive. As
the securities)? financial plans, and to identify who discussed below in Section II.B.3 of this Release,
Directed Brokerage. Clients sometimes conducts the review. An adviser that Part 2B would require advisers to disclose
instruct their adviser to send reviews accounts, but not regularly, economic benefits a supervised person receives.
transactions to a specific broker-dealer would explain what circumstances 112 See current Form ADV, Part 2, Item 13.B.
113 See current Form ADV, Part 2, Item 13.A.
trigger an account review. This
114 See Custody of Funds or Securities of Clients
98 ‘‘Paying up’’ refers to a manager causing a
client account to pay more than the lowest available 104 1986 by Investment Advisers, Investment Advisers Act
Soft Dollar Release, above note 87 at n.
commission rate in exchange for soft dollar Release No. 2176 (Sep. 25, 2003) [68 FR 56692 (Oct.
44.
products or services. Item 12 of current Part 2 105 Proposed
1, 2003)] (‘‘Custody Rule Release’’). ‘‘Custody’’
Item 12.A.3.b of Part 2A. would have the same meaning as it currently has
requires advisers to disclose ‘‘whether clients pay 106 Proposed Item 12.A.3.a of Part 2A. Currently,
commissions higher than those obtainable from in Form ADV and is based on the term as defined
Item 12 of Part 2 requires disclosure of similar in rule 206(4)–2. See Form ADV: Glossary. An
other brokers in return for * * * products and information in cases where an adviser or a related
services.’’ adviser has custody if it, directly or indirectly,
person suggests brokers to clients and where an holds client funds or securities, has any authority
99 See above note 91 and accompanying text.
adviser has authority to determine the broker or to obtain possession of them, or has the ability to
100 Proposed Item 12.A.2 of Part 2A.
dealer to be used. appropriate them. For example, an adviser has
101 See Proposing Release at n. 177 and 107 CFA Letter; Comment Letter of the Florida
custody if it has a general power of attorney over
accompanying text. State Board of Administration (June 13, 2000) a client’s account or signatory power over a client’s
102 See current Form ADV, Part 2, Item 13.B. (‘‘Florida Board Letter’’); June 2000 IAA Letter. checking account. For a more detailed discussion of
103 Broker-dealers may, for example, offer lower 108 Comment Letter of Frank Russell Securities what activity constitutes ‘‘custody,’’ see Custody
commission costs. (June 13, 2000). Rule Release, at Section II.A.
statements to the adviser’s clients.115 to disclose certain information about services, including possibly
These advisers would be required only their proxy voting practices.120 We also accommodating one client by hiring a
to explain that clients will receive these have added a new requirement, proxy voting service to influence the
account statements from their discussed below, to describe voting of another client’s securities.
custodians and should review them information about an adviser’s use of Several commenters favored the item
carefully. If, however, clients do not third-party proxy voting services. when we proposed it in 2000.121 We
receive, from one or more qualified Item 17 would require advisers to request comment on our proposed
custodians, account statements covering disclose whether they will accept revisions. Rule 206(4)–6 already
all of the funds and securities over authority to vote client securities and, if requires advisers to disclose much of
which an adviser has custody, Item 15 so, to briefly describe the voting policies the information that the proposed item
would require the adviser to disclose they adopted under rule 206(4)–6. In would require. Thus, one principal
that it has custody and to explain the addition, each adviser must describe effect of the item would be to require
risks that clients will face as a result.116 whether (and how) clients can direct the the rule 206(4)–6 disclosure in the
We request comment on this proposed advisers to vote in a particular brochure. Should any of that disclosure
disclosure item. In particular, we solicitation, how the adviser addresses not be required in the brochure?
request comment about whether we conflicts of interest when it votes Should we require disclosure of the
should further revise this item in light securities, and how clients can obtain circumstances relating to an adviser’s
of the amended investment adviser information from the adviser on how the use of third-party proxy voting services?
custody rule. adviser voted their securities. Item 17 Specifically, would clients be interested
Item 16. Investment Discretion. Item also would require an adviser to explain in knowing the identity of the proxy
16 would require advisers with that clients may obtain a copy of the voting services that are utilized by their
discretionary authority over client adviser’s proxy voting policies and advisers and how these services are
accounts to disclose these arrangements procedures upon request. Advisers that selected? Would clients be interested in
in their brochure,117 and any limitations do not have authority to vote securities knowing whether advisers permit their
clients may (or customarily do) place on would have to disclose how clients will clients to direct the use of particular
this authority.118 This item is the same receive their proxies and other proxy voting services? Would clients be
as originally proposed. Both of the solicitations. interested in knowing the amounts that
commenters who addressed the Finally, we have added a new advisers pay third-party proxy voting
proposed item supported it.119 We paragraph B of Item 17. If advisers services? Would clients be interested in
request further comment on our routinely rely on one or more third- knowing whether their advisers are
proposed Item 16. party proxy voting services to advise paying for the services directly or
Item 17. Voting Client Securities. Item them in connection with voting client through soft dollars? 122
17 would require advisers to disclose securities, then the advisers would be Item 18. Financial Information. This
their proxy voting practices. We have required to list the proxy voting services item would require disclosure of certain
revised the item to reflect the adoption that the advisers use and to describe financial information about the adviser
of rule 206(4)–6 under the Advisers Act, how they select the proxy voting when material to clients. Proposed Item
which, among other things, requires services. The paragraph also would 18 of Part 2A would continue to require
advisers registered with the Commission require disclosure of whether these each adviser that requires prepayment
advisers permit clients to direct the use of fees to give clients an audited balance
115 Rule 206(4)–2 defines a ‘‘qualified custodian’’ of a particular proxy voting service with sheet showing the adviser’s assets and
as a bank, a savings association, a broker-dealer, a respect to the securities held in the liabilities at the end of its most recent
futures commission merchant (but only with clients’ accounts. An adviser would not fiscal year.123 Prepayment of fees
respect to clients’ funds, security futures, and other need to identify a proxy voting service
securities incidental to transactions in futures), or
a foreign financial institution that customarily
that a client directs the adviser to use 121 See Comment Letter of Professor Aaron
unless the adviser uses the service for Brown, Yeshiva University (May 10, 2000);
holds financial assets for its customers and Comment Letter of Council of Institutional Investors
segregates the advisory clients’ assets from its the purpose of voting the securities of (June 12, 2000); Florida Board Letter; Comment
proprietary assets. Under the rule, a registered other clients. Finally, the new paragraph Letter of The Corporate Monitoring Project (June 3,
adviser with custody must either have a reasonable
basis for believing that the qualified custodian
would require advisers to disclose how 2000); Comment Letter of James McRitchie (May 24,
they pay for proxy voting services. 2000); Comment Letter of Paul Nissenbaum (May 9,
sends quarterly account statements directly to the 2000). Four commenters were concerned about the
client or send its own quarterly account statements We believe that clients are interested length of the disclosure that a description of proxy
to the client, in which case the adviser must also in knowing whether their adviser is procedures would entail. See AmEx Letter; June
undergo an annual surprise examination by an outsourcing its proxy analysis or IAA 2000 Letter; Comment Letter of Charles
independent public accountant to verify client Schwab & Co. (June 14, 2000) (‘‘Schwab Letter’’);
funds and securities. otherwise using third-party proxy voting
Thomson Letter; Wellington Letter. We note in
116 We note that current Part 2 of Form ADV does services, whether it is doing so in response to these commenters’ concerns that the
not have an equivalent to Item 15 of reproposed response to direction from another proposed item would only require a brief
Part 2A. client, and how the adviser is paying for description of an adviser’s policies and procedures
117 Currently, Items 12.A and 12.B of Part 2 and not verbatim incorporation of them.
those services. We believe that clients
require information about the adviser’s investment 122 For a discussion of whether proxy voting
discretion and any limitations on it. We propose to
would want to know of potential
services and other proxy services are within the safe
continue requiring this information but to clarify, conflicts of interest that may arise from harbor under section 28(e) of the Exchange Act, see
through our proposed definitions in Form ADV, an adviser’s use of proxy voting 2006 Soft Dollar Release, above note 89, at section
that an adviser has ‘‘discretionary authority’’ if it is III.C.5.
authorized to make purchase and sale decisions for 120 See Proxy Voting by Investment Advisers, 123 Currently, Item 14 of existing Part 2 requires
client accounts. This definition of discretionary Investment Advisers Act Release No. 2106 (Jan. 31, (through Schedule G) an audited balance sheet if
authority is derived from section 3(a)(35) of the 2003) [68 FR 6585 (Feb. 7, 2003)]. Rule 206(4)–6 the adviser requires prepayment of more than $500
Exchange Act [15 U.S.C. 78c(a)(35)]. An adviser also requires advisers to adopt and implement written in fees per client and six or more months in
has discretionary authority if it is authorized to voting policies and procedures. Advisers are also advance. We would increase the threshold amount
select other advisers for the client. required to keep certain records relating to their from $500 to $1,200 to reflect the effects of
118 For example, clients may not understand that
voting. Advisers that exercise voting authority over inflation, based upon the Personal Consumption
they may ask the adviser not to invest in securities client securities must describe their voting policies Expenditures Chain-Type Price Index as published
of particular issuers. and procedures to clients and furnish clients with by the U.S. Department of Commerce, since we
119 CFA Letter; FPA Letter. a complete copy upon request. adopted Form ADV in 1979. As in the 2000
exposes clients to the risk that the firm subject to capital and regulatory items in proposed Appendix 1 to Part
may become insolvent and unable to requirements, designed to guard against 2A would contain the requirements for
refund unearned fees. The proposed insolvency, that eliminate the need for a wrap fee program brochure, and
item also would require each adviser to an adviser to deliver a balance sheet. would be substantially similar to those
disclose any financial condition Are there other circumstances in which currently in Schedule H. However, as
reasonably likely to impair the adviser’s it would be unnecessary for an adviser we did in 2000, today we are proposing
ability to meet contractual commitments to deliver a balance sheet to its clients? some changes from current Schedule H
to clients if the adviser has discretionary Alternatively, are there additional to incorporate many of our proposed
authority over client assets, has custody circumstances in which it would be amendments to the Part 2A firm
of client funds or securities, or requires appropriate for us to require an adviser brochure. We also are proposing an
or solicits prepayment of more than to deliver a balance sheet? additional disclosure requirement to the
$1,200 in fees per client and six months Item 19. Index. The brochure filed wrap fee brochure.
or more in advance.124 These clients are with us would be required to include an We propose to require an adviser to
exposed to the risk that their assets may index of the items required by Part 2A disclose whether any of its related
not be properly managed if the adviser indicating where in the brochure the persons are portfolio managers in the
becomes insolvent and ceases to do adviser addresses each item.129 This program and to describe the conflicts
business.125 Finally, proposed Item 18 index is intended to facilitate review by that may be present.133 For example, an
would require an adviser that has been our staff for compliance with the adviser may have an incentive to select
the subject of a bankruptcy petition requirements of Part 2A. The adviser a related person to participate as a
during the past ten years to disclose that would not be required to provide the portfolio manager based on the person’s
fact to clients.126 index to its clients. The index would, affiliation with the adviser, rather than
This item is largely the same as the however, be required to be appended to based on expertise or performance. The
one we proposed in 2000, which the brochure as filed through the IARD. item would require advisers to disclose
commenters generally supported.127 We proposed the same index whether related person portfolio
However, we have made revisions to requirement in 2000.130 We request managers are subject to the same
reflect subsequent amendments to Form further comment on our proposal to selection and review as the other
ADV that were made in conjunction require advisers to include an index in portfolio managers who participate in
with changes to the adviser custody their brochures. the wrap fee program and, if they are
rule.128 As a result, Item 18 no longer Part 2A Appendix 1: The Wrap Fee not, how they are selected and
would require an adviser to supply Program Brochure. Advisers that reviewed.
clients with an audited balance sheet sponsor wrap fee programs 131 would We request comment on this proposed
solely because the adviser has custody. continue to be required to prepare a modification to Appendix 1 to Part 2A.
separate, specialized firm brochure (a Wrap fee programs have evolved in the
Moreover, we now propose to exclude
‘‘wrap fee program brochure’’ or ‘‘wrap marketplace, resulting in many different
advisers from the balance sheet
brochure’’) for clients of the wrap fee models that all meet the definition of
requirement if they require prepaid fees
program in lieu of the sponsor’s wrap fee program.134 As a result of these
but are qualified custodians or
standard advisory firm brochure.132 The various structures, are there other
insurance companies. These firms are
disclosures that we should consider
proposal, we also propose to require an audited
129 Although an index is not required by current including in Appendix 1 that would
Part 2 of Form ADV, the requirement in Proposed enhance a client’s ability to understand
balance sheet from advisers that solicit clients to Item 19 is similar to the index that current Schedule
prepay fees over $1,200. H now requires.
the conflicts of interest in wrap fee
124 This disclosure is currently required by rule
130 In their comments responding to the 2000 programs? Are there disclosure items in
206(4)–4. In its release adopting rule 206(4)–4 the proposal, the ICI and IAA opposed this item, proposed Appendix 1 that are
Commission noted that a determination about what arguing that requiring both an index and a table of
constitutes financial condition reasonably likely to
unnecessary or would not be useful to
contents seemed redundant. See ICI Letter; June clients?
impair an adviser’s ability to meet contractual 2000 IAA Letter. The CFA, however, endorsed the
commitments is inherently factual in nature but requirement. See CFA Letter.
would generally include insolvency or bankruptcy. 3. Delivery and Updating of Brochures
131 Under wrap fee programs, which are also
See Rule 206(4)–4 Adopting Release, above note 66 sometimes referred to as ‘‘separately managed The Commission also is proposing
at n. 6.
125 As discussed above, we propose to rescind
accounts,’’ advisory clients pay a specified fee for amendments to rule 204–3, our rule
investment advisory services and the execution of under the Advisers Act that requires
rule 206(4)–4. We caution advisers, however, that transactions. The advisory services may include
their fiduciary duty of full and fair disclosure may portfolio management and/or advice concerning registered advisers to update and deliver
require them to continue to disclose any material selection of other advisers, and the fee is not based their brochures to clients and
legal event or precarious financial condition directly upon transactions in the client’s account. prospective clients.
promptly to all clients, even clients to whom they 132 We adopted the requirement for a separate
may not be required to deliver a brochure or brochure for wrap fee clients in 1994. See a. Delivery to Clients
amended brochure. See Rule 206(4)–4 Adopting Disclosure by Investment Advisers Regarding Wrap
Release, above note 66 at n. 2–3 and accompanying Fee Programs, Investment Advisers Act Release No.
Initial Delivery. Similar to the existing
text. 1411 (Apr. 19, 1994) [59 FR 21657 (Apr. 26, 1994)] requirements, an adviser would be
126 This requirement conforms with our already
(adopting rules to require wrap fee sponsors to give required to deliver a current firm
stated position that bankruptcy generally wrap fee clients separate brochures). As proposed
constitutes a ‘financial condition reasonably likely
brochure before or at the time it enters
in 2000, advisers whose entire advisory business is
to impair the adviser’s ability to meet contractual sponsoring wrap fee programs would prepare a
into an advisory contract with the
commitments to clients’ requiring disclosure under wrap brochure but would not be required to prepare
rule 206(4)–4. See Rule 206(4)–4 Adopting Release, a standard advisory firm brochure. See proposed 133 Proposed Item 6.B of Appendix 1. We propose
above note 66 at n. 6. Instruction 7 to Part 2A of Form ADV. An adviser to redesignate the item originally proposed as Item
127 See, e.g., CFA Letter; June 2000 IAA Letter. 6.B (requiring additional disclosures if the wrap fee
would have to prepare both a standard firm
Although some commenters to our 2000 proposal brochure and a wrap fee brochure if it both sponsor or any of its employees act as a portfolio
raised concerns regarding exceptions to delivery of sponsors a wrap fee program and provides other manager for a wrap fee program described in the
balance sheets, the Commission subsequently types of advisory services, and would deliver both wrap brochure) as new Item 6.C.
considered and addressed this issue in adopting its a standard and a wrap brochure to a client who 134 For example, some wrap fee program sponsors
changes to the custody rule. See Custody Rule receives both types of services. Wrap fee sponsors have begun to transition from platforms offering a
Release, above note 114. would, like other advisers, be required to provide selection of individual portfolio managers to those
128 See Custody Rule Release, above note 114. brochure supplements to their wrap fee clients. instead offering a selection of model portfolios.
client.135 As provided under the current proposed to require advisers to deliver the end of the adviser’s fiscal year.146
rule, advisers would not be required to an updated brochure, or a ‘‘sticker’’ Thus, clients would receive an updated
deliver brochures to certain advisory identifying the stale information and brochure about the same time each year
clients receiving only impersonal including the updated information, (identifying changes from the previous
investment advice 136 or to clients that whenever information in the brochure year’s brochure) shortly after the date by
are investment companies registered became materially incorrect during the which advisers are already required to
under the Investment Company Act of year.141 We expressed concern that few file their amended Form ADV with
1940 (‘‘Company Act’’).137 We propose clients requested an updated brochure us.147
expanding the latter exception to cover and were instead relying on ‘‘stale’’ We are proposing to require an
advisers to business development brochures. We analogized our updating adviser to deliver an interim update to
companies (‘‘BDCs’’) that are subject to proposal to the obligations of mutual clients only when the adviser amends
section 15(c) of the Company Act. That funds to update their prospectuses and its brochure to add a disciplinary event,
section requires the boards of directors expressed the view that the additional or to materially change information
to request, and the adviser to furnish, costs the proposed updating already disclosed, in response to Item 9
information to enable the board to requirements might impose could be of Part 2A.148 We believe that such
evaluate the terms of the proposed reduced by electronic delivery of the circumstances warrant a formal delivery
advisory contract.138 Because of this updating information. We also pointed requirement because of the importance
safeguard, we believe that proposing a out that, as fiduciaries, advisers must of disciplinary information to clients.149
separate obligation for those types of already provide their clients with We believe such disciplinary events are
entities to deliver a brochure is not updated information to comply with important because, unlike some of the
necessary. We note that an adviser their obligations under the anti-fraud other disclosure items, they are more
would not have to prepare a brochure if provisions of the Advisers Act. likely to reflect directly upon an
it does not have any clients to whom a adviser’s integrity and may affect a
brochure would have to be delivered, Several commenters supported our client’s trust and confidence in the
thus saving advisers time and proposal, particularly the proposal to adviser.
expense.139 require advisers to update their We request comment generally on our
Annual and Interim Delivery. brochures throughout the year.142 Other proposed delivery requirement and, in
Currently, rule 204–3 requires advisers commenters objected, primarily citing particular, on the proposed
to annually deliver, or offer to deliver the burden on advisers.143 Some requirements regarding delivery of
upon request, a written disclosure commenters argued that advisers updates. Should we require delivery of
statement (either a copy of the adviser’s currently meet their obligations under interim updates of the brochure in
Part 2 or a brochure containing the the anti-fraud provisions through additional circumstances besides those
information required by Part 2) to each different types of communications with involving disclosure of disciplinary
of its advisory clients.140 In 2000, we clients, some of which are informal, and information in response to Item 9?
urged us not to impose a formal Should we require brochure delivery
135 Proposed rule 204–3(b)(1). Rule 204–3
updating requirement.144 One
currently requires a registered adviser to furnish commenter, the IAA, expressed 146 Proposed amended rule 204–3(b) and
each client and prospective client with a written
agreement with our concern that clients proposed Instruction 2 to Part 2A.
disclosure statement which may be either a copy of 147 As discussed below, rule 204–1 requires an
the adviser’s completed Part 2 or a written may be relying on stale information and
document containing the information required by adviser registered with the Commission to annually
urged a compromise approach under revise its Form ADV, including its brochure, within
Part 2. Currently, such delivery must occur at least
48 hours before entering into the advisory which the Commission would require 90 days of its fiscal year end. Advisers typically
agreement, or at the time of entering into the advisers to deliver their brochure to provide clients with reports quarterly, and the
agreement if the client has the right to terminate the clients annually, but would not specify proposed 120-day period is designed to provide
agreement without penalty within five business sufficient flexibility to allow advisers to include the
days thereafter. We are proposing to simply require
the means of updating information updated brochure in a routine quarterly mailing to
that the adviser deliver the brochure before or at the between the annual updates.145 clients. We expect that permitting an adviser to
time of entering into the agreement. send the brochure together with these routine
136 Proposed rule 204–3(c)(1) and proposed
Today, we are proposing an approach mailings could substantially reduce delivery costs.
Instruction 1 to Part 2A. Advisers would not be similar to the one suggested by the IAA, See Section VII below. Advisers may, of course,
required to deliver brochures to advisory clients which we believe may strike an deliver updated brochures electronically with client
receiving only impersonal investment advice for appropriate balance between our consent, in which case they would bear
which the adviser charges less than $500 per year. significantly lower delivery costs. Proposed
Currently, the dollar amount threshold to trigger
concerns and those expressed by Instruction 3 to Part 2A. See also Use of Electronic
this exception is $200. See rule 204–3. We are commenters. In addition to the initial Media by Broker-Dealers, Transfer Agents, and
proposing to increase this threshold to $500 to delivery requirement, the proposed Investment Advisers for Delivery of Information,
reflect the effects of inflation, based upon the amendments would require each Investment Advisers Act Release No. 1562 (May 9,
Personal Consumption Expenditures Chain-Type 1996) [61 FR 24644 (May 15, 1996)] (publishing
Price Index as published by the U.S. Department of registered adviser to deliver its current Commission interpretive guidance with respect to
Commerce, since rule 204–3 was adopted in 1979. brochure to existing clients at least once use of electronic media to fulfill investment
137 Proposed rule 204–3(c)(1) and proposed
each year no later than 120 days after advisers’ disclosure delivery obligations).
Instruction 1 to Part 2A. This does not suggest, 148 Proposed rule 204–3(e). Nonetheless, as
however, that investment company directors would fiduciaries advisers have an ongoing obligation to
141 See Proposing Release at Section II.D.2.
no longer receive the disciplinary and financial inform their clients of any material information that
142 See, e.g., AIMR Letter; CFA Letter; Comment
information that the fund’s adviser currently could affect the advisory relationship. As a result,
provides under existing rule 206(4)–4, which we are Letter of Yasmin Mansoor (May 28, 2000); Penn. advisers may be required to disclose material
proposing to move into the brochure. Section 15(c) Securities Commission Letter; Securities America changes to clients between annual updating
of the Investment Company Act [15 U.S.C. 80a– Letter. amendments even if those changes do not trigger
15(c)] separately requires fund directors to request 143 See, e.g., AmEx Letter; Crist Letter; DP&W
delivery of an interim update. See Note to Proposed
and evaluate information about the adviser in Letter; ICI Letter; SIFMA Letter. Instruction 2 to Part 2A; see also Form ADV:
connection with annual renewal of the advisory 144 See, e.g., Comment Letter of Merrill Lynch, General Instruction 4.
contract, and requires the adviser to provide it. Pierce, Fenner & Smith, Inc. (June 22, 2000) 149 Currently, existing rule 206(4)–4 requires
138 See note 137 above.
(‘‘Merrill Letter’’); Paine Webber Letter; Schwab disclosure of such disciplinary events. The
139 Proposed Instruction 5 to Part 2A. Letter. proposed requirement of interim updates to the
140 Rule 204–3(c). An adviser’s offer to deliver the 145 Comment Letter of the IAA (May 24, 2001) brochure would require that such disclosure be
disclosure statement must be in writing. (‘‘May 2001 IAA Letter’’). written.
more frequently than annually? We also public disclosure Web site.152 The information about the advisory
request comment with respect to the purpose of the public disclosure Web personnel on whom clients rely for
timing of annual delivery. Is the site is to provide the public with current investment advice. A brochure
proposed provision to require annual information about advisers, rather than supplement ordinarily would be less
delivery no later than 120 days after the historic information.153 than a page long and would contain
end of the adviser’s fiscal year We request comment generally with information about the educational
reasonable? Does it adequately enable respect to our proposed requirements background, business experience, and
advisers to minimize costs by making for updating brochures. We request disciplinary history (if any) of the
delivery in conjunction with existing comment specifically about the proposal supervised person who provides
mailings? to require ongoing updating. Should we advisory services to that client.156
develop different updating requirements We received a large number of
b. Updating Part 2 of Form ADV for the different disclosure items of the comments on the brochure supplement
Similar to the existing requirements, brochure in a manner similar to the proposal. Several commenters,
the proposed rules would require updating requirements for Form ADV, including those representing financial
advisers to keep the brochures they file Part 1A (e.g., require more frequent planners, investment consultants, and
with us current by updating them at updating with respect to changes to an consumer groups, praised the
least annually, and updating them adviser’s listed fee schedule)? We also supplement as a highly practical and
promptly when any information in the request comment about whether we beneficial tool for informing clients
brochures becomes materially should make advisers’ historical about the qualifications and background
inaccurate.150 In the case of both annual brochure filings available via the of the individuals on whom they rely for
and interim updates, advisers will be Commission’s public disclosure Web investment advice.157 Several others,
able to make changes to their brochures site. including a number of investment
using their own computers and then advisers, argued that ensuring proper
B. Part 2B: The Brochure Supplement
simply submit the revised versions of distribution of supplements at large
their brochures through IARD.151 In In 2000, we expressed our concern firms would be costly and
some cases, an adviser will be required that, because the information in current burdensome.158 Some maintained that
to submit an annual updating Part 2 concerns the advisory firm, clients do not want the information that
amendment, but may not have any clients may not receive information they would be contained in a supplement.159
changes to make to its brochure want and need about the firm’s Another commenter, the IAA,
(because the currently filed brochure employees with whom they have acknowledged that consumers hiring
does not contain any materially contact and on whom they rely for professionals in any field often inquire
inaccurate information). The IARD investment advice.154 In the case of about the individuals’ credentials in
system will give the adviser the option smaller advisers, the current disclosure addition to the firm’s reputation, but
of indicating on IARD that its current requirements, which focus on the senior urged that we narrow the rule so as not
brochure does not contain any executives of the advisory firm, may be to require advisers to deliver the
materially inaccurate information and adequate. But in large advisory firms, supplement to institutional clients.160
that the adviser is not attaching another which account for a significant number We continue to believe that
brochure. Although previously-filed of SEC-registered advisers, clients may information contained in the brochure
versions of an adviser’s brochures will never meet the firm’s senior executives, supplement may be very important to
remain stored as Commission records in who may be located in a different city clients. In response to commenters’
the IARD system, as with an adviser’s and may have only an indirect effect on concerns, however, we have made a
Part 1A filings, only the most recent the advice given to the client.155 We number of changes that are intended to
version of an adviser’s brochure will be believe clients of these firms also are reduce burdens on advisers subject to
available through the Commission’s interested in the background, the rule. As discussed in more detail
disciplinary record (if any), and below, we would modify the delivery
150 See proposed amended rule 204–3(g), and qualifications of the individuals with requirement, reduce the number of
proposed Instruction 4 to Form ADV, Part 2A. As whom they are dealing. types of clients to whom advisers would
discussed above, the proposed updating Therefore, we proposed in 2000, and be required to provide supplements,
requirement would be similar to the existing are today reproposing, a requirement clarify the format of the supplements to
standard. See current rule 204–1 and Form ADV: that adviser brochures be accompanied
General Instruction 4. Additionally, proposed maximize the amount of flexibility
Instruction 4 to Part 2A and a proposed Note to by brochure supplements that provide advisers have in preparing a
Item 4.E would state that an adviser does not need supplement, and limit the information
to update its brochure solely because the amount 152 See note 6 above. In the case of an adviser that
of its client assets has materially changed. This prepares, files and delivers to clients separate 156 156
proposed instruction reflects our understanding brochures for the various different advisory services Proposed rule 204–3(b)(2).
157 E.g., AIMR Letter; CFA Letter; Consortium
that in most cases the amount of an adviser’s assets it offers, the most recent version of each of its
under management will likely continually change brochures would be available via the public Letter; FPA Letter; Comment Letter of the
over the course of a year due to market fluctuations, disclosure Web site. Investment Management Consultants Association
and that requiring advisers to update their brochure 153 Advisers’ historic brochure filings would be (June 12, 2000).
158 E.g., AmEx Letter; June 2000 IAA Letter; ICI
in each instance would be burdensome and of available for public inspection and copying in the
limited value. This approach is similar to that we Commission’s Public Reference Room, 100 F Street, Letter; Comment Letter of Legg Mason, Inc. (June
currently take with respect to advisers’ obligations NE., Washington, DC 20549. 13, 2000) (‘‘Legg Mason Letter’’); Merrill Letter;
to update assets under management reported in 154 For example, current Part 2 requires Paine Webber Letter; Comment Letter of Salomon
Item 5 of Form ADV, Part 1A. See Form ADV: background information only on firm executives Smith Barney Inc. (June 13, 2000) (‘‘Salomon
General Instruction 4. For similar reasons, proposed and members of the firm’s ‘‘investment committee.’’ Letter’’); Schwab Letter; SIFMA Letter; TIAA–CREF
Instruction 4 to Part 2A also would state that an Item 6 of Part 2 of Form ADV. Letter; T. Rowe Price Letter; Comment Letter of
adviser does not need to update its brochure solely 155 Based on advisers’ responses to questions on United Services Planning Association, Inc. and
because its fee schedule has changed. Advisers Part 1A of Form ADV as of September 30, 2007, Independent Research Agency for Life Insurance,
would, however, be required to update their more than 475 of the investment advisers registered Inc. (June 12, 2000) (‘‘USPA Letter’’); Wellington
brochure to reflect material changes with respect to with the Commission report on Part 1A of their Letter.
listed assets and fee schedules if they are otherwise Form ADV that they have more than 50 employees 159 Merrill Letter; Salomon Letter; Schwab Letter;
updating their brochure for a separate reason. who perform investment advisory functions on SIFMA Letter.
151 Proposed rule 204–1(b). behalf of the firm. (IARD Data as of Sept. 30, 2007). 160 May 2001 IAA Letter.
that would have to be included in the required disclosure of the backgrounds have clients to whom the adviser must
supplement. of client service representatives who deliver a supplement.
transmit investment advice to clients, The first two categories of clients
1. Delivery and Updating were included in our 2000 proposal.
but who have no influence on the
We originally proposed to require that advice given. To limit disclosure about Commenters did not address these
each adviser provide its clients with a employees with whom a client may exceptions to the supplement delivery
brochure supplement for each have no contact or about employees requirement. We propose to add the
supervised person who provides who do not influence the advice given latter two exceptions in response to
advisory services to that client.161 In to the client, we have more narrowly several commenters’ arguments that
response to comments, we are limiting tailored the proposed supplement certain institutional and sophisticated
the circumstances in which an adviser delivery requirements so that a clients do not need the protections of
would be required to deliver the particular client would receive the brochure supplement requirement
supplement.162 disclosure specifically about those because they are in a position to obtain,
The proposed amendments would persons on whom he relies for and frequently do obtain, information
require that a client be given a brochure investment advice. about the advisory personnel on whom
supplement for each supervised person they rely for investment advice.168
who (i) formulates investment advice for As reproposed, an adviser generally We request comment on our
that client and has direct client would be required to provide its clients assumption that some clients do not
contact,163 or (ii) makes discretionary with a brochure supplement for each need the protections afforded by a
investment decisions for that client’s supervised person who provides requirement that an adviser deliver a
assets, even if the supervised person has advisory services as described above. brochure supplement even though we
no direct client contact.164 We believe However, advisers would not be would continue to require delivery of
that requiring supplements for these required to deliver supplements to four the brochure. Should we use a higher
categories of supervised persons would types of clients: (i) Clients to whom an threshold to exclude clients, such as
provide clients with the information adviser is not required to deliver a firm ‘‘Qualified Institutional Buyers?’’ 169
they want and need about the particular brochure (e.g., registered investment Should we use a lower one, and exclude
individuals on whom they will rely for companies and business development all clients who are ‘‘qualified clients’’
investment advice. We originally companies); (ii) clients who receive only under rule 205–3, rather than just those
proposed, but have eliminated, a impersonal investment advice; 165 (iii) qualified clients that are officers,
provision requiring delivery of a clients who are ‘‘qualified directors and employees of the
supplement for a supervised person purchasers;’’ 166 and (iv) certain adviser? 170 In December 2006, the
who merely communicates investment ‘‘qualified clients’’ who also are officers, Commission proposed, but has not
advice. Commenters pointed out that directors, employees and other persons adopted, new rules 509 and 216 under
our original proposal would have related to the adviser.167 An adviser that the Securities Act of 1933, that would
does not have any clients to whom a define the term ‘‘accredited natural
161 See Proposing Release at Section II.D.2. supplement would have to be delivered person.’’ 171 We ask for comment on
162 See note 158 above. A number of commenters would not have to prepare any whether we should create an exclusion
argued that advisers should only be required to supplements. Similarly, an adviser from supplement delivery for accredited
deliver brochure supplements of supervised would not have to prepare a supplement natural persons. In particular, with
persons who actually formulated investment
advice. Crist Letter; June 2000 IAA Letter; ICI Letter;
for any supervised person who does not respect to natural persons, we request
TIAA–CREF Letter; T. Rowe Price Letter. Nine comment on whether ‘‘accredited
commenters argued that brochure supplements 165 This exception from the supplement delivery
should not be required of supervised persons who requirement differs slightly from the exception from 168 See DE Shaw; Federated Letter; June 2000 IAA
act as solicitors. Crist Letter; DP&W Letter; the brochure delivery requirement, in that it does Letter; T. Rowe Price Letter; Wellington Letter.
Comment Letter of Federated Investors Inc. (June not depend on the cost of the impersonal advisory 169 ‘‘Qualified Institutional Buyer,’’ as defined
13, 2000) (‘‘Federated Letter’’); FPA Letter; June services involved. This is because in situations under rule 144a of the Securities Act of 1933 [17
2000 IAA Letter; ICI Letter; TIAA–CREF Letter; T. involving impersonal advisory services, the nature CFR 230.144a], includes entities that own and
Rowe Price Letter; USPA Letter. Some commenters of the services are such that supervised persons of invest on a discretionary basis at least $100 million
urged limiting delivery to certain types of clients, the adviser are unlikely to be directly providing in securities.
such as ‘‘retail’’ clients, but not to sophisticated or advisory services to clients. As a result, we believe 170 ‘‘Qualified client,’’ as defined under rule 205–
institutional clients. that in such situations requiring supplement 3 of the Advisers Act [17 CFR 275.205–3], includes
163 An adviser would not have to provide a delivery would result in an unnecessary expense natural persons with $750,000 under management
supplement for a third-party solicitor because with little appreciable benefit. We believe, however, with the adviser and individuals who have a net
solicitors already must deliver a disclosure that delivery of a firm brochure would be useful worth of $1.5 million.
document to potential advisory clients. Rule where the cost of the impersonal advisory services 171 Proposed new rules 509 and 216 under the
206(4)–3 [17 CFR 275.206(4)–3]. is significant, that is $500 or above. Securities Act of 1933 would add to the existing
164 An adviser would not, however, have to 166 ‘‘Qualified purchasers,’’ as defined under
definition of ‘‘accredited investor’’ and apply to
provide a supplement for a supervised person who section 2(a)(51)(A) of the Investment Company Act private offerings of certain unregistered investment
provides discretionary advice only as part of a team of 1940 [15 U.S.C. 80a–2(a)(51)(A)], include, among pools. As proposed, these rules would define the
and has no direct client contact as we believe that others, natural persons who own $5 million or more term ‘‘accredited natural person’’ under Regulation
when investment advice is formulated by a team, in investments and persons who manage $25 D and Section 4(6) of the Securities Act.
specific information about each individual team million or more in investments for their account or ‘‘Accredited natural person’’ would be any natural
member takes on less importance. Proposed other accounts of other qualified purchasers. person who meets either the net worth or income
Instruction 1 to Part 2B. 167 Rule 205–3(d)(1)(iii) defines certain related test specified in rule 501(a) or rule 215, as
The supervised person’s supplement must be persons of an adviser as ‘‘qualified clients,’’ applicable, and who owns at least $2.5 million in
given to the client at or before the time that including: (i) Any executive officers, directors, investments. See Prohibition of Fraud by Advisers
supervised person begins to provide advisory trustees, general partners, or persons serving in a to Certain Pooled Investment Vehicles; Accredited
services to that client. Proposed rule 204–3(b)(2) similar capacity, of the advisory firm; and (ii) any Investors in Certain Private Investment Vehicles,
and proposed Instruction 3 to Part 2B. Although the employees of the advisory firm (other than Investment Advisers Act Release No. 2576 (Dec. 27,
amendments we are proposing today would require employees performing solely clerical, secretarial or 2006) [72 FR 400 (Jan. 4, 2007)]. In August 2007,
the advisory firm to deliver the brochure administrative functions) who, in connection with we proposed further general amendments to the
supplement, we recognize that in most cases their regular functions or duties, participate in the definition of accredited investor. See Revisions of
advisers’ supervised persons will actually deliver investment activities of the firm and have been Limited Offering Exemptions in Regulation D,
the required supplements to clients on behalf of the performing such functions or duties for at least 12 Securities Act Release No. 8828 (Aug. 3, 2007) [72
advisory firm. months. FR 45116 (Aug. 10, 2007)].
natural person’’ or ‘‘qualified client’’ is permitted to include supplement person either has no formal education
the appropriate standard to use or information in the firm’s brochure, an after high school or has no business
whether it would be more appropriate to approach that may be attractive to background, the adviser would have to
use the higher ‘‘qualified purchaser’’ smaller firms with few persons for disclose this fact in the supplement.
standard.172 whom they would be required to We are not, as originally proposed,
In 2000, we proposed to require that prepare supplements.176 Advisers could including the requirement to describe
advisers promptly deliver to existing also elect to prepare a supplement for professional designations or
clients a revised supplement (or a each supervised person, or alternatively, attainments. Advisers would be
sticker) whenever information in the they could prepare separate permitted, however, to include
supplement became materially supplements for different groups of information about professional
inaccurate.173 Today, we propose to supervised persons (e.g., all supervised designations and attainments in the
reduce the frequency with which persons in a particular office or work supplement if they so choose.180 We are
advisers would have to deliver clients group). We request comment generally concerned that in light of the already
an updated supplement so that they on the proposed format for brochure large number and variety of existing
would only deliver them to existing supplements. designations, requiring such
clients when new disclosure of a information may encourage the
disciplinary event, or a material change 3. Supplement Items
proliferation of fictitious and
to disciplinary information already Most commenters who addressed the meaningless designations. In addition,
disclosed, in response to proposed Part proposed items supported the proposed our staff and other securities regulators
2B, Item 3, which we believe is critical content of the brochure supplements.177 have warned that investors may be
information for clients. As we noted As we are proposing it today, Part 2B confused by some professional
above, we believe disciplinary would consist of six items. We are designations, such as those that imply
information is important because it proposing to omit two that we originally expertise in providing services to
reflects upon the supervised person’s proposed in 2000. We would omit seniors.181 We request comment about
integrity and may affect a client’s trust originally proposed Item 7, which this approach. Should we require
and confidence in that person. would have required disclosure if the disclosure about professional
As with the brochure, advisers would supervised person had been the subject designations and attainments? Are there
have to amend a brochure supplement of a bankruptcy petition during the past additional items related to educational
promptly if information in it becomes 10 years.178 Commenters asserted that a background and business experience
materially inaccurate, and any new personal bankruptcy is not necessarily that we should include? Have we
clients who would be required to indicative of a supervised person’s included disclosure items that are not
receive that supplement must be given investment advisory skills and thus relevant?
the amended version (or the ‘‘old’’ need not be disclosed in the brochure
supplement and a sticker). Item 3. Disciplinary Information. Item
supplement. In light of these comments, 3 would require disclosure of any legal
Supplements, like brochures, could be we have eliminated this item. Should
delivered on paper or electronically.174 or disciplinary event that is material to
we require disclosure of personal a client’s evaluation of the supervised
However, unlike the delivery bankruptcies in supplements and, if so, person’s integrity. Many commenters
requirement for firm brochures, and why? We are proposing most of the supported our 2000 proposal.182 One
because we believe most information in other items, each of which we discuss
the supplement is less likely to become commenter, the United Services
below, as originally proposed. In Planning Association, opposed it, saying
materially inaccurate over time, advisers addition to our specific requests for
would not be required to deliver that such disclosure would be punitive
comment, we request comment and unnecessary. Some others suggested
supplements to existing clients generally on each of these items.
annually. We request comment that the scope of the required
Item 1. Cover Page. The supplement’s disciplinary disclosure be narrowed, or
generally on the proposed updating and cover page would include information
delivery requirements for brochure that advisers might not have the
identifying the supervised person and information about their supervised
supplements. We also request comment the advisory firm.
on our proposal to require advisers to persons’ disciplinary history.183 Two
Item 2. Educational Background and
deliver updated supplements to clients Business Experience. Item 2 would who determine general investment advice on behalf
describing changes to disciplinary require the supplement to describe the of the adviser.
information. Should we also require supervised person’s formal education 180 Some commenters, however, supported
updated supplements to be delivered if and his or her business background for disclosure of professional designations (AIMR
other information changes? the past five years.179 If the supervised
Letter; CFP Board Letter; FPA Letter).
181 See Protecting Senior Investors: Report of
2. Format Securities Firms Providing ‘‘Free Lunch’’ Sales
176 IARD data as of September 30, 2007 indicate
Seminars, Joint Report by the Staff of the
The proposed amendments would that nearly 82 percent of advisers registered with us Commission’s Office of Compliance Inspections and
require advisers to write their have 10 or fewer employees performing investment Examinations, NASAA, and FINRA (available at
supplements in plain English, but advisory functions on their behalf. Over 67 percent http://www.sec.gov/spotlight/seniors/
would give advisers considerable have five or fewer employees performing advisory freelunchreport.pdf); Staff Update, ‘‘Senior’’
functions. Specialists and Advisors: What You Should Know
flexibility in presenting information in a 177 E.g., AIMR Letter; CFA Letter; CFP Board About Professional Designations (available at
format that best suits their firms.175 This Letter. http://www.sec.gov/investor/pubs/senior-
flexibility is designed to reduce the cost 178 In 2000, we proposed disclosure of bankruptcy profdes.htm). While we acknowledge that a number
of preparing and delivering filings of supervised persons. We are, as discussed of well-regarded professional designations and
above, proposing Item 18 of Part 2A, which would attainments exist, the required credentials, training,
supplements. Advisers would be and experience associated with different
require the firm’s brochure to disclose whether the
advisory firm has been the subject of a bankruptcy designations varies widely.
172 See note 166 above. petition during the past 10 years. 182 AIMR Letter; CFA Letter; CFP Board Letter;
173 Proposing Release at n. 215. 179 Currently, Item 6 of Part 2 of Form ADV FPA Letter.
174 Proposed Instruction 4 to Part 2B.
requires this information about the adviser’s 183 E.g., AmEx Letter; ICI Letter; Greenville Letter;
175 See Proposed Instruction 6 to Part 2B. principal executive officers and about individuals Legg Mason Letter; Securities America Letter.
commenters, SIFMA and the FPA, In response to comments, we have creates an incentive for the supervised
recommended limiting the disclosure to clarified that an adviser would be person to base investment
events that are the subject of a final required to disclose a proceeding that recommendations on his own
order or judgment, and not requiring revoked or suspended the supervised compensation rather than on clients’
disclosure if the supervised person is person’s professional attainment, best interests.191 We are also proposing,
named in a pending criminal designation, or license only if the action with some revisions, a requirement to
proceeding. Four commenters supported was a result of a violation of rules disclose other business activities or
our proposal to require disclosure if a relating to professional conduct.187 We occupations that the supervised person
supervised person’s professional also added a proposed requirement that engages in for pay.192 Clients may have
designations are suspended or revoked, the supplement describe any event over different expectations of an individual
arguing that consumers would benefit which the supervised person has ever whose sole business is providing
from having full disclosure of all resigned or otherwise relinquished a investment advice than of an individual
relevant information.184 Three professional attainment, designation or who is engaged in other substantial
commenters opposed that disclosure, license in anticipation of it being business activities.
arguing among other things, that suspended or revoked (other than for One commenter, the CFA,
suspension or revocation proceedings suspensions or revocations for failure to enthusiastically supported our proposal,
do not ‘‘guarantee due process’’ and pay membership dues). We believe stating that clients would benefit greatly
could occur for ‘‘mundane’’ reasons clients would wish to know about these from disclosures about a supervised
(e.g., failure to pay dues).185 kinds of events as they may reflect on person’s other business activities. Two
In general, we believe that advisory the integrity of the supervised person. others, T. Rowe and the IAA, argued
clients would consider the listed We believe our proposal strikes an that disclosure of other business
disciplinary events critically important appropriate balance among the concerns activities should be limited to
in determining whether to hire or retain raised by commenters. We request substantial investment-related activities
an adviser or any specific supervised comment on whether it does. Are there that provide a major source of that
person of that adviser. We believe it is listed disciplinary events that we person’s income. We would continue to
important that clients have information should remove or modify? Are there require disclosure of other business
concerning disciplinary events that additional types of disciplinary events activities because we believe that, as
involve the persons who are that we should list? For example, reflected in the CFA’s comments,
substantially responsible for the should we require disclosure of all cease investors would find this information
investment advice that clients receive. and desist and censure orders? Are there helpful in assessing the conflicts created
Thus, we are proposing Item 3 largely as other events, such as arbitration claims by those activities. We are not limiting
we proposed it in 2000 to require or awards, which could be characterized the proposed disclosure of other
substantially the same disclosure as disciplinary and should be disclosed investment-related activities to those
requirements for the supervised in a supplement? If we were to require characterized as ‘‘substantial,’’ because
person’s disciplinary history as we are advisers to make disclosure regarding we believe the client is in the best
proposing for the firm’s disciplinary arbitration claims or awards, should we position to assess the significance of any
history.186 require such disclosure only if the other business activities and the impact
award or claim exceeds a specified that they may have on their advisory
184 AIMR Letter; CFA Letter; CFP Board Letter;
amount? If so, what should that amount relationship.
FPA Letter. be? 188 Is any of the proposed We are, however, proposing to require
185 AmEx Letter; June 2000 IAA Letter; T. Rowe information not useful to advisory disclosure about only those non-
Price Letter. clients? investment-related business activities or
186 As in proposed Item 9 of Part 2A, proposed
Item 4. Other Business Activities. Item occupations that provide a substantial
Item 3 of Part 2B would include a list of events that 4 would require an adviser to describe source of the supervised person’s
are presumptively material if they occurred in the
prior 10 years. The list parallels the proposed list other business activities of its income or that involve a substantial
of legal and disciplinary events in Item 9 of Part 2A supervised person. The item specifically amount of the supervised person’s time.
that must be disclosed in the firm brochure and would require disclosure with respect to We believe this responds to
which are derived from the existing disclosure other capacities in which the supervised commenters’ concerns by eliminating
requirements set out in rule 206(4)–4. The list also
is substantially similar to the list of disciplinary person participates in any investment- unnecessary disclosure about relatively
events advisers are already required to disclose in related business and any conflicts of insignificant other business activities,
response to Item 11 of Form ADV, Part 1A. With interest such participation may while still requiring important
respect to commenter’s concerns regarding the create.189 In addition, we would require disclosures that inform clients of the
burdens of requiring disclosure of ‘‘pending
criminal proceedings,’’ the required disclosure is the supplement to include information supervised person’s primary business
narrow, as it would not include other about any compensation, including activities. We request comment as to
investigations, or arrests or similar charges effected bonuses and non-cash compensation, this approach. We request comment
in the absence of a formal criminal indictment or the supervised person receives based on specifically with regard to whether this
information (or equivalent formal charge). See Form
ADV: Glossary. the sales of securities as well as an information would be useful to a client’s
As under proposed Item 9 of Part 2A, proposed explanation of the incentives this type evaluation of a supervised person’s
Item 3 of Part 2B would permit an adviser to rebut of compensation creates.190 As we noted competence. Further, we have not
the presumption with respect to a particular event, in the Proposing Release, this practice defined ‘‘substantial’’ for purposes of
in which case no disclosure to clients about the
event would be required. We would, however,
this item, preferring instead to leave
require an adviser rebutting a presumption of
187 See CFP Board Letter; T. Rowe Price Letter. some flexibility for advisers to
188 Determining whether to include disclosure of

materiality to document that determination in a determine whether their supervised
memorandum and retain that record in order to arbitration proceedings in brochure supplements
raises the same issues as would be involved in
person’s non-investment-related
better permit our staff to monitor compliance with
this important disclosure requirement. The same requiring such disclosure in firm brochures. See business provides a substantial source
standard as under Item 9 would apply, and discussion above at notes 69–70 and accompanying
similarly, a note in Item 3 would explain four text. 191 See Proposing Release at n. 219 and
189 Proposed Item 4.A of Part 2B. accompanying text.
factors the adviser should consider when assessing
whether the presumption can be rebutted. 190 Proposed Item 4.A.2 of Part 2B. 192 Proposed Item 4.B of Part 2B.
of income or involves a substantial C. Filing Requirements, Public whether advisers currently have access
amount of time. Is our approach Availability, and Transition to PDF conversion software. We also
appropriate? We propose to amend our rules to request comment, however, on whether
Item 5. Additional Compensation. require advisers to file their new we should permit advisers to file their
This proposed item would require that brochures with us electronically brochures in other electronic formats. If
the supplement describe arrangements through the IARD system, which would so, which ones and why? Should we
in which someone other than a client permit us to make them publicly consider requiring advisers to file
gives the supervised person an available through our Web site.197 Part brochure information that makes use of
economic benefit (such as a sales award 1 of Form ADV has been filed data tagging technologies and
or other prize) for providing advisory electronically and the information taxonomies such as eXtensible Business
services.193 The proposed item would contained in it publicly available since Reporting Language (‘‘XBRL’’)? 202
specify that regular salary need not be 2001. At the time we adopted the The IARD will provide advisers with
disclosed. amendments to Part 1, we exempted access to the Part 2 Items and
advisers from submitting Part 2 to us instructions. Instead of completing Part
One commenter, the CFA, strongly
because the IARD was not ready to
supported this proposed item, while 2 on-line, advisers will create their
accept those filings.198 The required
two others objected, arguing that it brochure on their own computers and
system functionality is now available,
would require disclosure of confidential and we therefore propose to reinstate then attach the completed document to
and proprietary business information of the filing requirement so that we, and their filing on IARD, much like
the adviser.194 While we understand members of the public, may have ready attaching a document to an e-mail. To
that firms may wish to keep sales access to adviser brochures. update brochures, advisers will make
awards or prizes, and similar incentive The IARD is able to accept brochure the necessary changes on their own
structures, confidential, these types of filings using the Adobe Portable computers and then attach the revised
arrangements can create significant and Document Format (‘‘PDF’’), which versions to an IARD filing. The IARD
material conflicts of interest that may would allow advisers to capture will not accept an annual updating
bias the advice being presented. We information from any application on amendment without an updated
believe clients need to know about these any computer system.199 Utilizing PDF brochure. However, if no changes are
arrangements in order to assess the format would promote accessibility to necessary when an adviser is submitting
advisory services of a firm’s supervised brochure filings by enabling users of our its annual updating amendment, an
person. Are we correct? In addition, we public disclosure Web site to access and adviser will have the option of
request comment on alternatives that read brochures filed on IARD without indicating on IARD that its current
might strike a different balance between having to possess the particular software brochure does not contain any
concerns about disclosure of advisers’ used by each adviser to prepare its materially inaccurate information. If an
confidential and proprietary business brochure.200 The PDF format, which adviser ceases to use a particular
information with clients’ need to be limits transferability of computer brochure, it will be able to eliminate it
informed of material conflicts of viruses, also permits full-text search from its current filing. Our Web site will
interest. features that make it easy to locate make only the firm’s current filings
Item 6. Supervision. This item would words, bookmarks, and data fields publicly available because that filing
require an adviser to explain how the within a brochure, and it permits the
firm monitors the advice provided by its IARD to accept brochures that include
access to such software, and thus would not need
supervised person.195 It also would graphics and charts, so that advisers to incur additional expense associated with filing
require a firm to provide the client with who choose to use more elaborate their brochure in PDF format were we to adopt this
the name, title and telephone number of brochures need not also prepare a plain proposal. We are currently exploring options with
text version solely for purposes of filing the FINRA for making PDF converter software
the person responsible for supervising available to those investment advisers that do not
it with the Commission. We believe that
the advisory activities of the supervised already have it.
the ability to accept PDF filings presents 202 Data tagging uses standard definitions (or data
person. This information would permit
the most flexible and cost-efficient tags) to translate text-based information into data
the client to contact other advisory
approach.201 We request comment about that is interactive, i.e., data that can be retrieved,
personnel when necessary to address searched, and analyzed through automated means.
any problems in the advisory 197 Proposed rule 204–1(b). In some cases an XBRL is a language for the electronic
relationship. We are proposing this item communication of business and financial data that
adviser will not have to file a brochure because it
was developed as an open source specification that
in the same form as we proposed it in is not required to deliver one. See above Section
describes a standard format for tagging financial
2000. Commenters who addressed the II.A.3 of this Release. When an adviser has not
and other information to facilitate the preparation,
submitted a brochure as part of its Form ADV filing,
item supported disclosure of the IARD system will generate an automated
publication, and analysis of that information by
software applications. In 2005 we adopted rules
information on the supervision of the message asking an adviser that has not attached a
instituting a program that permits certain filers, on
individual that is the subject of the brochure to its filing to confirm that it is not
a voluntary basis, to submit specified, supplemental
required to prepare a brochure.
supplement.196 198 See Note to current rule 204–1(c).
disclosure tagged in XBRL format as an exhibit to
certain filings on the Commission’s Electronic Data
199 IARD system functionality for electronic filing
193 Bonuses based (in part or whole) on sales,
Gathering, Analysis and Retrieval System
of brochures is currently operational and the state (‘‘EDGAR’’). See XBRL Voluntary Financial
client referrals or new accounts would trigger securities regulators have been running a voluntary Reporting Program on the EDGAR System,
required disclosure, but other bonuses would not. pilot program for advisers to file the current version Securities Act Release No. 8529 (Feb. 3, 2005) [70
194 DE Shaw Letter; DP&W Letter. of Part 2 using PDF. FR 6556 (Feb. 8, 2005)]. In July 2007, we extended
195 As we discuss in more detail above in Section 200 PDF reader software is widely available and is
the voluntary reporting program to enable mutual
II.B.1 of this Release, we have narrowed the scope a standard feature on most word processing funds to submit supplemental tagged information
of supervised persons who would need a software. Additionally, users may download this contained in the risk/return summary section of
supplement. As a result, we do not believe it is software for free from the Internet. their prospectuses. Extension Of Interactive Data
necessary to propose, as we did in 2000, to require 201 PDF converter software is already widely Voluntary Reporting Program On The EDGAR
the supplement to discuss who formulates the available and in many cases comes as a standard System To Include Mutual Fund Risk/Return
advice a supervised person gives to clients. feature on word processing software. We anticipate Summary Information, Securities Act Release No.
196 See AIMR Letter; CFA Letter. that most, if not all, investment advisers will have 8823 (July 11, 2007) [72 FR 39290 (July 17, 2007)].
should contain the most up-to-date prepare the new brochure and brochure brochure or wrap fee program
information about the adviser.203 supplements. Accordingly, we propose brochure.’’ 213 We also would update the
As proposed, advisers would not be to implement a transition schedule Glossary to reflect cross-references to
required to file brochure supplements or requiring advisers to comply with the these new terms, and cross-references to
supplement amendments with the new Part 2 requirements by the date existing Glossary entries used in the
Commission and therefore they will not they must make their next annual revised portions of the Form.
be available on the Commission’s public updating amendment to Form ADV We also are proposing to update the
disclosure Web site.204 We are not following the date the revised form Glossary to correct a discrepancy in the
proposing to require filing of becomes effective. In no case, however, definition of ‘‘Non-Resident’’ to make it
supplements so as to reduce the would any adviser be required to consistent with the definition in rule 0–
potential burdens on advisers and comply with the new requirements 2, the Advisers Act rule related to the
because the supplement disclosure earlier than six months after they procedures for serving process,
requirement is designed primarily to become effective.208 We request pleadings, and other papers on non-
provide advisers’ clients with comment on our proposed resident investment advisers, and
background information about the implementation plan. Would a six- advisers’ non-resident general partners
particular supervised persons with month period from the effective date of and managing agents. This proposed
whom they are dealing. We believe this the revised form provide enough time revision would properly effect the
information is less likely to be of for advisers to complete their new Commission’s intent at the time the
interest to the general investing brochures? If not, please explain why Glossary was originally adopted, that
public.205 Advisers would be required, and how much time advisers would the definition of ‘‘Non-Resident’’ in the
however, to maintain copies of all need to complete their new brochures. Glossary be the same as that in rule 0–
supplements and amendments in their Should implementation of the brochure 2.214 Although technical in nature, this
files.206 We request comment on our requirements be on a separate timetable amendment may potentially result in an
approach. Should we require brochure from implementation of the brochure increased number of corporate entities
supplements and amendments to supplement requirements? qualifying as non-resident general
brochure supplements to be filed with partners or managing agents of SEC-
us through the IARD system and be III. Amendments to Form ADV
Instructions and Glossary registered advisers. Certain entities
made to available to the public through would be required to file Form ADV–NR
our Web site? In conjunction with the proposed Part with the Commission to appoint agents
To provide adequate notice and 2 amendments, we are also proposing to for service of process because they
opportunity to comply with the make conforming amendments to the relied on the glossary definition and did
proposed brochure filing requirements, General Instructions and the Glossary of not previously file the form.
new applicants for registration with us Terms for Form ADV. We propose We request comment on these
as investment advisers would not be amending the General Instructions to proposed amendments.
required to include their brochures as Form ADV to include instructions
part of their initial application for regarding brochure filing requirements. IV. Amendments to Rule 204–2
registration until the date six months Similarly, we would amend the We also are proposing conforming
after the effective date of the Glossary of Terms to add the following amendments to Advisers Act rule 204–
amendments. After that date, however, five terms that are used in proposed Part 2, the rule that sets forth the
the Commission would not accept any 2: (i) ‘‘Brochure;’’ 209 (ii) ‘‘brochure requirements for maintaining and
initial application for registration as an supplement;’’ 210 (iii) ‘‘investment preserving specified books and records,
investment adviser that does not adviser representative;’’ 211 (iv) to require SEC-registered investment
include a brochure that satisfies the ‘‘supervised person;’’ 212 and (v) ‘‘wrap advisers to retain copies of each
requirements of Part 2A of Form brochure, brochure supplement, and
208 Proposed rule 204–1(b)(2).
ADV.207 each amendment to the brochure and
209 ‘‘Brochure’’ would mean: ‘‘A written
Similarly, we believe it would be supplements that are prepared as
disclosure statement that your firm is required to
helpful to provide sufficient time for provide to clients and prospective clients.’’ See required under the rule 204–3.215 This
advisers already registered with us to Form ADV: Glossary.
210 ‘‘Brochure supplement’’ would mean: ‘‘A
provides investment advice on your behalf and is
203 As discussed above, historical filings would written disclosure statement containing information subject to your supervision or control.’’ See Form
nonetheless be available for public inspection and about certain of your supervised persons that your ADV: Glossary.
copying in the Commission’s Public Reference firm is required by Part 2B of Form ADV to provide 213 ‘‘Wrap brochure or wrap fee program
Room. See above note 153. to clients and prospective clients.’’ See Form ADV: brochure’’ would mean: ‘‘The written disclosure
204 Proposed rules 203–1(b) and 204–1(c) and Glossary. statement that sponsors of wrap fee programs are
211 ‘‘Investment adviser representative’’ would
proposed Instruction 8 to Part 2B of Form ADV. required to provide to each of their wrap fee
Because brochure supplements would not be filed mean: program clients.’’ See Form ADV: Glossary.
with us, they would not be required as part of any Any of your firm’s supervised persons (except 214 This proposed amendment would change the
state notice filing. Section 307(a) of the National those that provide only impersonal investment definition of ‘‘Non-Resident’’ to include ‘‘a
Securities Market Improvement Act of 1996, Public advice) is an investment adviser representative, corporation incorporated in or having its principal
Law 104–290, 110 Stat. 3416 (1996) (state securities if — place of business in any place not subject to the
authorities may only require SEC-registered • the supervised person regularly solicits, meets jurisdiction of the United States.’’ (Emphasis
advisers to file with the states copies of those with, or otherwise communicates with your firm’s added). See rule 0–2(b)(2) [17 CFR 275.0–3(b)(2)].
documents advisers have filed with the clients, The current Glossary definition includes a
Commission). • the supervised person has more than five ‘‘corporation incorporated in and having its
205 We note that the disciplinary history of an clients who are natural persons and not high net principal place of business in any place not subject
adviser’s supervised persons is required to be worth individuals, and to the jurisdiction of the United States.’’ (Emphasis
reported as part of the adviser’s filing of Part 1 of • more than ten percent of the supervised added). See Form ADV: Glossary. Inclusion in the
Form ADV, and is available to the Commission person’s clients are natural persons and not high current Glossary definition of the conjunctive
through the IARD and to the public via the net worth individuals. See Form ADV: Glossary. ‘‘and’’ rather than the disjunctive ‘‘or’’ was
Commission’s public disclosure Web site. 212 ‘‘Supervised person’’ would mean: ‘‘Any of unintentional.
206 Proposed rules 203–1(b) and 204–1(c) and
your officers, partners, directors (or other persons 215 Proposed rule 204–2(a)(14)(i). The proposed
proposed Instruction 8 to Part 2B of Form ADV. occupying a similar status or performing similar rule also would require advisers to keep and
207 Proposed rule 203–1(a)(2). functions), or employees, or any other person who maintain a copy of any summary of material
proposed change is designed to update Management and Budget (‘‘OMB’’) for annually.220 As proposed, the
the books and records rule in light of review in accordance with 44 U.S.C. amendments to rules 203–1 and 204–1
our proposed changes to Part 2.216 3507(d) and 5 CFR 1320.11. The titles and to Part 2 of Form ADV also would
Additionally, the proposed amendments for these collections of information are require advisers registered with us to
would require SEC-registered advisers ‘‘Form ADV,’’ ‘‘Rule 204–2,’’ ‘‘Rule 204– prepare and electronically file firm
to prepare and preserve documentation 3,’’ and ‘‘Rule 206(4)–4,’’ all under the brochures required by Part 2A, and to
of the method they use to compute Advisers Act. These rules and forms maintain copies of brochure
managed assets for purposes of Item 4.E contain currently approved collection of supplements that they deliver to clients.
in Part 2A of Form ADV, if that method information numbers under OMB The information required by the
differs from the method used to control numbers 3235–0049, 3235–0278, proposed amendments to Form ADV is
calculate ‘‘assets under management’’ in 3235–0047, and 3235–0345, mandatory. Responses are not kept
Part 1A of Form ADV.217 The respectively. An agency may not confidential. Under section 204 of the
amendments also would require sponsor, conduct, or require response to Advisers Act, investment advisers
advisers to prepare and preserve a an information collection unless it required to register with the
memorandum describing any legal or displays a currently valid OMB number. Commission must make and keep
disciplinary event listed in Item 9 in The respondents to the collections of certain records, including those related
Part 2A and Item 3 in Part 2B of Form information are investment advisers to Form ADV, for prescribed periods,
ADV for the period the event is registered or applying for registration generally for a period of at least five
presumed material, if the event is not with us. We use the information to years, and must make and disseminate
disclosed in the adviser’s brochure or determine eligibility for registration certain reports. In 2000, when we
the relevant brochure supplement.218 with us and to manage our regulatory originally proposed revisions to Form
These records would be required to be and examination programs. Clients use ADV (including Part 2), we sought OMB
maintained in the same manner, and for certain of the information to determine approval of the increased burden
the same period of time, as other books whether to hire or retain an adviser. stemming from the revised form.221 The
and records required to be maintained The amendments to Form ADV we are collection of information was approved
under rule 204–2(a). We request proposing involve three distinct and has subsequently been amended.
comment on these proposed ‘‘collections of information’’ for The currently approved total annual
amendments. purposes of the Paperwork Reduction burden for all advisers completing,
Act. The first is the collection of amending, and filing revised Form ADV
V. General Request for Comment (Parts 1 and 2) with us, is 109,678
information connected with Form ADV
The Commission requests comment hours.222 Because of the passage of time
itself, specifically our proposed
on the amendments proposed in this and modifications to the original
amendments to Part 2 of Form ADV.
Release, suggestions for other additions proposal, we intend to resubmit the
to the amendments, and comment on The second collection of information
collection of information under Form
other matters that might have an effect involved is that under the proposed
ADV to OMB for approval.
on the proposals contained in this amendment to rule 204–2, which
Release. For purposes of the Small requires advisers to maintain and 1. Part 2 of Form ADV
Business Regulatory Enforcement preserve specified books and records. In the Proposing Release, we
Fairness Act of 1996, the Commission The third collection involved is that acknowledged that the proposed
also requests information regarding the related to a proposed amendment to rule amendments to Form ADV (including
potential impact of the proposed 204–3, which requires advisers to those to Part 2) would at first increase
amendments on the economy on an deliver certain of the information the then-current paperwork burden
annual basis. Commenters should required under Form ADV to their because most advisers would have to
provide empirical data to support their clients. redraft and disseminate a narrative
views. In addition, we are proposing to brochure and brochure supplements.
withdraw rule 206(4)–4, the rule We noted that most of the new
VI. Paperwork Reduction Act requiring advisers to disclose certain paperwork burden would be incurred in
Certain provisions of the rule and disciplinary and financial information, this initial preparation, specifically in
form amendments that we are proposing because that rule will become drafting the narrative text. We further
today contain ‘‘collection of duplicative if the amendments to Part 2 observed that once the adviser has
information’’ requirements within the of Form ADV are adopted. We redrafted its narrative brochure,
meaning of the Paperwork Reduction incorporate the discussion of our proposed Parts 2A and 2B were not
Act of 1995 (‘‘PRA’’).219 The proposed withdrawal of rule 206(4)–4 expected to result in any significant
Commission is submitting these into the discussion of Part 2 of Form burden increase over time (except for
proposed amendments to the Office of ADV below. changes to the brochure that are
A. Amendments to Form ADV (17 CFR necessitated by changes in the adviser’s
changes that is not included in the brochure or business). We continue to believe that
brochure supplements, as well as a record of the 275.203–1, 275.204–1, and 279.1)
dates that each brochure, supplement, amendment,
the initial paperwork burden will be
and summary of material change was given to any
We are proposing amendments to Part
client. See discussion above at notes 27–29 and 2 of Form ADV to provide advisory 220 Presently, advisers must submit Part 1 of Form
accompanying text. clients with clear, current, and more ADV to us through the IARD system, but are not
216 Currently, rule 204–2(a)(14) requires advisers
meaningful disclosure in a narrative, required to submit a copy of current Part 2 of Form
to maintain copies of written statements and ADV to the Commission if they maintain in their
plain English format. Rules 203–1 and
amendments given or delivered to any client or files a copy of their Part 2 (and of any brochure they
prospective client under existing rule 204–3. Thus, 204–1 already require every applicant deliver to clients). The copy they maintain in their
advisers already are required to maintain copies of for investment adviser registration with files is considered filed with the Commission.
their brochures. us to file Form ADV through the IARD 221 See Proposing Release, above note 5.
217 See discussion above at note 33. 222 The paperwork burdens associated with rules
218 See discussion above at notes 65–66 and
and require every investment adviser
203–1 and 204–1 are included in the approved
accompanying text, and note 186. registered with us to file amendments to annual burden associated with Form ADV and thus,
219 44 U.S.C. 3501 et seq. Form ADV through the IARD at least do not entail a separate collection of information.
higher and that the efficiencies of filing among advisers.226 The burdens adviser registration with the
through IARD, over time, are expected associated with preparing the new Commission. We estimate that
to reduce the initial burdens associated brochures will depend on the size of the approximately 1,000 new applicants
with completing the revised Form ADV. adviser, the complexity of its apply for registration as investment
The Commission staff previously operations, and the extent to which its advisers each year. Thus, in
estimated that during the first year that operations present conflicts of interest combination with the approximately
an adviser responds to Form ADV, with clients. Many of the new items 10,817 existing investment advisers
including amended Part 2, an average imposing the most rigorous disclosure registered with the Commission, we
investment adviser’s total collection of requirements may not apply to certain estimate that the total number of
information burden would be 22.25 small advisers because, for example, respondents under this collection of
hours per adviser.223 We estimated that those advisers may not have soft dollar information would be 11,817 advisers.
this average annual burden per adviser or directed brokerage arrangements, or Based on the estimated average
would apply to both new registrants may not have custody of client assets. collection of information burden of
applying for registration with us, as well Accordingly, based on our consultations 22.25 hours per adviser, the total initial
as to current registrants required to with industry representatives, we collection of information would amount
amend their Form ADVs as a result of estimate that the average initial annual to 22,250 hours for new registrants and
the proposed revisions. This estimate burden associated with Form ADV may 240,678.25 hours for currently
included time for preparation of range from as little as 5 hours for registered advisers that re-file Form
brochures and brochure supplements in smaller advisers, to approximately 50 ADV (including Part 2) through the
addition to the burden of preparing Part hours for medium-sized advisers, to as IARD system, for a total of 262,928.25
1A. A few commenters, particularly much as nearly 3,300 hours for larger hours.231 Amortizing this total burden
those representing large advisory firms, advisers.227 Based on IARD data, we imposed by Form ADV over a three-year
disagreed with the Commission staff’s estimate that there are approximately period would result in an average
estimate, arguing that it would take 8,835 small advisers, 1,952 medium- burden of an estimated 87,643 hours per
advisers much more time to complete sized advisers, and 30 large advisers.228 year,232 or of 7.42 hours per year for
and distribute their new narrative As such, we believe that 22.25 hours each new applicant and for each adviser
brochure and brochure supplements.224 remains an accurate reflection of the currently registered with the
Large firms asserted that they would time that it will take the average adviser Commission that would re-file through
have ‘‘thousands’’ of employees for to complete revised Form ADV the IARD.233
whom supplements would have to be (including both Parts 1 and 2).229 We further estimate that some
prepared. As under the currently approved advisers may incur a one-time initial
We appreciate the different costs that collection, the estimated initial burdens cost including outside legal fees in
small versus large firms may experience, associated with using the revised form connection with preparation of Form
and so we have made it clear that our would be amortized over the estimated ADV (including preparation of Part 2).
estimate is an average that takes into period that advisers would use their As we discuss above, advisers subject to
consideration the thousands of advisers revised brochure. Thus, we have the Form ADV requirements vary
that have a small number of employees amortized the paperwork burdens of the widely in terms of the size, complexity
as well as the few advisers that have revised form over a three-year period.230 and nature of their advisory business,
thousands of employees. As of Respondents under this collection of and thus, the amount of disclosure
September 30, 2007, there were 10,817 information would be advisers currently required, would vary substantially
investment advisers registered with the registered with the Commission as well among advisers. Accordingly, the
Commission, and nearly 82 percent of as new applicants for investment amount of time, and thus cost, required
these advisers have 10 or fewer for outside legal review is likely to vary
employees performing advisory 226 Additionally, since the 2000 proposal, we substantially among those advisers who
functions on their behalf compared to have made certain revisions to the proposed form elect to obtain outside legal assistance.
that scale back the types of clients for whom
less than one third of one percent of brochures and supplements must be delivered.
We estimate that the initial per adviser
advisers who have more than 1,000 These revisions should actually have the effect of cost related to preparation of Form ADV
employees.225 Moreover, the paperwork reducing the number of advisers who are required may range from as little as $1,200 for
burden of preparing a narrative firm to prepare and update brochures, and thus may smaller advisers, to $4,400 for medium-
actually reduce somewhat the burden of the revised
brochure is likely to vary substantially Form ADV from what was originally proposed.
sized advisers, to as much as $10,400 for
among advisers, in part because 227 For purposes of this estimate, we have larger advisers.234 Similarly, whether an
proposed Part 2A would give an adviser categorized small advisers as those with 10 or fewer
considerable flexibility in structuring its employees, medium-sized advisers as those with 231 Based on historic IARD registration data, we
between 11 and 999 employees, and large advisers estimate that approximately 1,000 new applicants
disclosure, and also because the amount as those with 1,000 or more employees. for registration with the Commission each year.
of disclosure required would vary 228 Unless otherwise noted, the IARD data cited (10,817 current registrants × 22.25 hours) + (1,000
below is based on advisers’ responses to questions new applicants × 22.25 hours) = 240,678.25 hours
223 In the Proposing Release we estimated that on Part 1A of Form ADV as of September 30, 2007. + 22,250 hours = 262,928.25 hours.
during the first year, advisers’ use of the revised 229 [8,835 small advisers × an estimated 5 hours/ 232 262,928.25 hours/3 years = 87,642.75 hours/
form would result in an average annual collection adviser] + [1,952 medium-sized advisers × an year.
burden of 22 hours per adviser. See Section IV of estimated 50 hours/adviser] + [30 large advisers × 233 87,643 hours/11,817 advisers = 7.42 hours/
the Proposing Release. In conjunction with an estimated 3,296 hours/adviser] = 240,655 hours adviser.
adoption of our rule requiring advisers to adopt total. 240,655 hours/10,817 total advisers = 22.25 234 Outside legal fees are in addition to the
codes of ethics, we amended this estimated burden hours/adviser. projected hourly per adviser burden discussed
by adding 0.25 hours to reflect the requirement that 230 In the Proposing Release, the Commission staff above. $400 per hour for legal services × 3.0 hours
an adviser’s Part 2 contain a description of its code chose a fifteen-year amortization period to reflect per small adviser = $1,200. $400 per hour for legal
of ethics and a statement that a copy of the code the anticipated period of time that advisers would services × 11 hours per medium-sized adviser =
is available upon request. See Code of Ethics use the revised form. However, for purposes of our $4,400. $400 per hour for legal services × 26 hours
Adopting Release above note 78. current proposal, we are amortizing the estimated per large adviser = $10,400. The hourly cost
224 See, e.g., Crist Letter; SIFMA Letter; Comment
burden over a shorter period of time—three years— estimate of $400 is based on our consultation with
Letter Dechert Price and Rhoads (June 14, 2000). and have submitted to OMB an amendment to this advisers and law firms who regularly assist them in
225 See note 176 above. collection of information to reflect this approach. compliance matters.
adviser even seeks outside legal services ethics.240 Thus, the estimated revised make and keep certain records for
in drafting their Form ADV will depend total annual hourly burden under this prescribed periods, generally for a
on the size, complexity and nature of collection of information would be period of at least five years, and must
their advisory business. We believe that 112,947 hours.241 This represents an make and disseminate certain reports.
a substantial percentage of advisers, increase of 3,269 hours per year from Rule 204–2 sets forth the requirements
particularly smaller advisers, are the currently approved burden.242 for maintaining and preserving specified
unlikely to seek such outside legal books and records.
2. Rule 206(4)–4 The amendments to rule 204–2 that
services. We estimate that only a quarter
of smaller advisers, or about 2,209 Rule 206(4)–4 currently requires we are proposing today would require
advisers, are likely to seek outside legal advisers to disclose certain disciplinary SEC-registered advisers to prepare and
services. Similarly, we estimate that and financial information to clients. We preserve a memorandum describing any
approximately half of medium-sized are proposing to rescind rule 206(4)–4 legal or disciplinary event listed in Item
advisers, or 976 advisers, are likely to and to incorporate its substantive 9 in Part 2A and Item 3 in Part 2B of
seek such services.235 On the other provisions into Part 2A of Form ADV. Form ADV, if the event is not disclosed
hand, advisers with more significant The collection of information burden in the adviser’s brochure or the relevant
conflicts are more likely to engage associated with the requirements of rule brochure supplement. This revision is
outside legal services to assist in 206(4)–4 has been incorporated into the the same as originally proposed.
preparation of Form ADV. On this basis collection of information requirements Additionally, the amendments would
we estimate that all of the 30 larger for Form ADV, discussed above. Thus, also require SEC-registered investment
advisers registered with the Commission the currently approved burden estimate advisers to prepare and preserve
are likely to incur costs related to such for Form ADV already includes an documentation of the method they use
outside legal services. Thus, we estimate estimate of the burdens associated with to compute managed assets for purposes
that approximately 3,215 advisers, will the disclosure of disciplinary and of Item 4.E. in Part 2 of Form ADV, if
elect to obtain outside legal assistance, financial information connected with that method differs from the method
for a total cost among all respondents of proposed Part 2. used to calculate ‘‘assets under
$7,257,200.236 management’’ in Part 1A of Form ADV.
B. Rule 204–2 These records would be required to be
In addition to the burdens associated This requirement is found at 17 CFR maintained in the same manner, and for
with initial completion and filing of the 275.204–2 and is mandatory. The the same period of time, as other books
revised form, we estimate that on Commission staff uses the collection of and records required to be maintained
average, each adviser filing Form ADV information in its examination and under rule 204–2(a).
through the IARD system will likely oversight program, and the information As discussed in the Proposing
amend its form 1.5 times during the generally is kept confidential.243 The Release, Commission staff had estimated
year.237 We estimate that the collection likely respondents to this collection of that the proposed amendments to rule
of information burden for amendments information requirement are all of the 204–2 would result in a burden increase
would be 0.75 hours per amendment. approximately 10,817 advisers currently of four hours for each of the then
Thus, we estimate that advisers will file registered with the Commission. estimated 110 Commission-registered
an estimated total of 17,725.5 Under section 204 of the Advisers advisers that would be required to
amendments per year for an estimated Act, investment advisers required to prepare and preserve additional records
total paperwork burden of 13,294 hours register with the Commission must as a result of the amendments. We
per year.238 continue to believe that the proposed
Therefore the total annual collection 240 See Code of Ethics Adopting Release, above
amendments to rule 204–2 will result in
of information burden for advisers to note 78. The current approval of this collection
estimates that ten percent of an adviser’s clients
an increased burden of four hours for
file and complete the revised Form ADV would make such requests, however, subsequently each adviser subject to the additional
(Parts 1 and 2), including the initial obtained information based on discussions with the requirements.244
burden for both existing and anticipated industry regarding actual practice indicates that We estimate that 325 advisers will use
new registrants plus the burden such requests occur significantly less frequently a method for computing managed assets
than previously estimated, thus, we have modified
associated with amendments to the our estimate. We now estimate that only one in Part 2 that differs from the method
form, is estimated to be approximately percent of an adviser’s clients actually request a used to compute assets under
100,976 hours per year.239 In addition to copy the adviser’s code of ethics. 0.01 × 1,013 (the management in Part 1A and thus would
these estimated burdens, under this estimated average number of clients per adviser) = be required to prepare and preserve
10.13 requests per registrant. See note 258 below
collection of information there is also a regarding the estimated average number of clients. documentation describing the method
burden of 11,971 hours associated with We continue to estimate that responding to each used in Part 2.245 We also estimate that
advisers’ obligations to deliver to clients such request involves a burden of 0.10 hours,
copies of their adviser codes of amounting to an annual burden of 1.013 hours for 244 The proposed rule did not require
each adviser stemming from the obligation to documentation for Item 4.E computations that
deliver copies of their codes of ethics to clients. differed from Part 1A, Item 5.F of Form ADV. We
235 8,835 small advisers × 0.25 = 2,208.75. 1,952
10.13 requests per adviser × 0.10 hours = 1.013 estimate that the additional recordkeeping
medium-sized advisers × 0.5 = 976. hours/adviser. This obligation applies to both requirement applicable to advisers who use an
236 ($1,200 × 2,209 advisers) + ($4,400 × 976 currently-registered (10,817 respondents) and alternative method of asset calculation will take
advisers) + ($10,400 × 30 advisers) = $7,257,200. newly-registered advisers (1,000 respondents), for a approximately the same amount of time (4.0 hrs) as
237 This estimate is based on IARD system data total annual burden of 11,971 hours. 11,817 that required by advisers who compose memoranda
regarding the number of filings of Form ADV respondents × 1.013 hours = 11,970.621 hours. with respect to undisclosed legal/disciplinary
amendments. 241 11,971 hours + 100,976 hours = 112,947 hours.
events.
238 11,817 advisers × 1.5 amendments per year =
242 Revised burden 112,947 hours ¥ currently 245 Based on the Commission staff’s conversations
17,725.5 amendments per year. 17,725.5 approved burden of 109,678 hours = 3,269 hours. with industry professionals, we anticipate that
amendments × 0.75 hours = 13,294.125 hours. As discussed above, the currently approved burden approximately three percent of the 10,817 advisers
239 13,294 hours per year attributable to includes the estimated paperwork burdens registered with us as of September 30, 2007 will use
amendments + (1,000 new registrants each year × associated with all the revisions to Form ADV that a method for computing managed assets in Part 2
7.42 hours) + (10,817 currently-registered advisers were proposed in 2000. of Form ADV that differs from the method used to
× 7.42 hours) = 13,294 hours + 7,420 hours + 243 See section 210(b) of the Advisers Act (15 compute assets under management in Part 1A of
80,262.14 hours = 100,976.14 hours. U.S.C. 80b–10(b)). Continued
162 advisers will conclude that the including outside legal fees in containing the updated information.
materiality presumption in Part 2 is connection with preparation of a This represents a departure from the
overcome with respect to a legal or memorandum explaining their basis for originally proposed requirements which
disciplinary event, will determine not to not disclosing a legal event listed in Part would have required an ongoing
disclose that event, and therefore would 2 in their brochures or supplements. We obligation to deliver updates involving
be required to prepare and preserve a estimate this one-time cost would any material information in the
memorandum describing the event.246 include fees for approximately three brochure or supplement, not just
As discussed earlier, in the Proposing hours of outside legal review and would disciplinary information.
Release Commission staff had estimated amount on average to approximately
that 110 advisers would have to prepare The total annual burden currently
$1,200 per adviser.252 We believe that
and preserve additional records in approximately 80 percent of the approved by OMB for rule 204–3 is
accordance with the amendments to advisers preparing such memoranda 6,902,278 hours and is based on the
rule 204–2. However, we now estimate would likely to engage outside legal requirements of the rule as proposed in
that a total of 487 advisers will have to services to assist in their preparation. 2000.256 This currently approved
prepare and preserve additional records Thus, we estimate that approximately burden is based on each adviser having,
in accordance with amendments to rule 130 advisers, will incur these costs, for on average, an estimated 670 clients.257
204–2.247 Only 110 of these are already a total cost among all respondents of Our records now currently indicate that
accounted for in the currently approved $156,000.253 the 10,817 advisers registered with the
burden estimate. We estimate that the Commission have, on average, 1,013
additional 377 advisers whom we C. Rule 204–3 clients.;258 These changes, along with
anticipate will be subject to the Rule 204–3 contains a collection of our proposal to require annual brochure
amended provisions of rule 204–2, will information requirement. This delivery along with interim delivery
yield a 1,508 hour burden increase collection of information is found at 17 only of brochure and supplement
under rule.248 CFR 275.204–3 and is mandatory. updates that involve disciplinary
The approved annual aggregate Responses are not kept confidential. The information (in lieu of the originally
burden for rule 204–2 is currently likely respondents to this information proposed ongoing delivery obligation)
1,762,267 hours based on an estimate of collection are the approximately 10,817
9,728 registered advisers, or 181.15 per investment advisers registered with the 256 Following issuance of the Proposing Release,
registered adviser.249 Taking into Commission. OMB approved a burden of 411,075 hours. That
account the estimated increased burden Rule 204–3 currently requires an estimate assumed, in part, that approximately 8,100
of 1,508 hours as discussed above, as advisers were registered with us and that each
investment adviser to deliver to clients, adviser had, on average, 49 clients. OMB
well as an increase of 1,089 registered at the start of an advisory relationship, subsequently approved an increase in the annual
advisers,250 the revised annual aggregate a copy of Part 2 of Form ADV or a burden to 6,902,278 hours to reflect assumptions
burden for all respondents to the written document containing at least the regarding an increased number of SEC-registered
recordkeeping requirements under rule information required by Part 2 of Form advisory firms and an increased estimate with
204–2 is therefore estimated to be respect to the average number of clients per adviser.
ADV. The rule currently requires no This currently approved burden is based on the
1,961,048 total hours.251 further brochure delivery unless the proposed delivery requirements (initial delivery
We further estimate that some client accepts the adviser’s required plus interim stickering) and assumptions (an initial
advisers may incur a one-time cost annual offer. The brochure assists the bulk mailing at 0.25 hours and 2 stickers per year
for each SEC-registered firm at 0.5 hours per sticker)
client in determining whether to hire or that were discussed in the Proposing Release.
Form ADV. 10,817 advisers x 0.03 = 324.51
advisers. retain an adviser. 257 This average was based on advisers’ responses
246 Approximately 1,620 advisers registered with The amendments to rule 204–3 would to Item 5.C of Part 1A of Form ADV as of October
the Commission report disciplinary information in require advisers registered with us to 5, 2001.
258 This average is based on advisers’ responses
Part 1A of their Form ADV as of September 30, deliver their brochures and brochure
2007. We anticipate that most of these advisers will to Item 5.C of Part 1A of Form ADV as of September
include all disciplinary information in their supplements at the start of an advisory 30, 2007, excluding the two advisers that reported
brochures and supplements, but that approximately relationship and to deliver their firm the largest number of clients. Those advisers
10 percent of these advisers, or 162, will need to brochure annually thereafter.254 The account for over 43 percent of all advisory clients
prepare and preserve a memorandum explaining of SEC registrants and not excluding them would
their basis for not disclosing a legal or disciplinary
amendments also would require that raise the average client count to 1,778 clients. These
event listed in Part 2 that is not disclosed in their advisers deliver updates of the brochure two firms provide advisory services primarily over
brochures and supplements. 1,620 advisers × 0.10 and brochure supplements to clients the Internet and currently meet their brochure
= 162 advisers. only when disciplinary information in obligations electronically, thus essentially entirely
247 325 advisers that we estimate would prepare eliminating for these advisers any PRA burden
memoranda regarding alternative method for
the brochure or supplements becomes associated with delivery under this rule. Therefore,
calculating assets under management + 162 advisers materially inaccurate.255 The updates we believe that it is appropriate to exclude these
that we estimate would prepare memoranda could take the form of a revised firms from our calculations. Even removing these
regarding unreported nonmaterial disciplinary brochure (or supplement) or a ‘‘sticker’’ advisers discussed above, the ‘‘typical’’ adviser
events = 487 advisers. registered with the Commission, has far fewer
248 487 advisers ¥ 110 advisers = 377 advisers. clients than suggested by this average. The average
252 Outside legal fees are in addition to the
377 advisers × 4.0 hours = 1,508 hours. is still heavily weighted by the responses received
249 1,762,267 hours / 9,728 registered advisers = projected hourly per adviser burden discussed from the few largest advisers. We note that the next
181.15 hours per adviser. above. $400 per hour for legal services × 3 hours five advisory firms with the largest numbers of
250 As stated above, our IARD data show that as
per adviser = $1,200. The hourly cost estimate is clients account for more than an additional 15
based on our consultation with advisers and law percent of all clients. In contrast, the majority (over
of September 30, 2007 there were 10,817 advisers
firms who regularly assist them in compliance 60 percent) of advisers registered with us have 100
registered with the SEC. 10,817 ¥ 9,728 = 1,089.
251 1,762,267 current burden hours + 1,508 hours
matters. or fewer clients, and the vast majority (over 90
253 162 advisers x 0.80 = 129.6. $1,200 × 130 =
due to an increase in the estimated number of percent) have 500 or fewer. Based on a median, we
registered advisers subject to additional $156,000. estimate that the ‘‘typical’’ adviser registered with
254 Proposed rule 204–3(b).
recordkeeping under the amendments + (1,089 due us has approximately 63 clients—that is, half of
255 Proposed rule 204–3(e). We received Commission-registered advisers have more than 63
to an increase of total number of registered advisers
× 181.15 hours per adviser) = 1,961,048. The annual comments that were critical of that proposal and clients and half have fewer. This median is
average burden per SEC-registered adviser is that also suggested alternative approaches. In consistent with advisers’ modal response (the most
therefore 181.29 hours. 1,961,048 total hours / response to those comments, we are now proposing common response) to Item 5.C of Part 1A, which
10,817 advisers = 181.29 hours per adviser. a narrower scope of the updating requirement. was ‘‘26 to 100 clients.’’
alter the collection of information hours per year, or 279 hours per be in writing, with reference to File No.
burden from that currently approved. respondent.265 This represents a S7–10–00, and be submitted to the
We expect that advisers will send decrease of 3,888,586 hours from the Securities and Exchange Commission,
their brochures annually in a ‘‘bulk currently approved PRA burden.266 The Records Management, Office of Filings
mailing’’ to clients. We estimate that, reduced burden results primarily from and Information Services, 100 F Street,
with a bulk mailing, an adviser will our proposal to replace the originally NE., Washington, DC 20549–1090. As
require no more than 0.25 hours to send proposed requirement to deliver OMB is required to make a decision
the adviser’s firm brochure to each brochure and supplement updates on an concerning the collections of
client, or an annual burden of 253.25 ongoing basis, with a requirement to information between 30 and 60 days
hours per adviser.259 Thus, we estimate only deliver brochure updates once after publication, a comment to OMB is
the total burden hours for 10,817 annually and interim amendments to best assured of having its full effect if
advisers to distribute their firm brochures and supplements only when OMB receives it within 30 days of
brochure to existing clients initially and such updates involve disciplinary publication.
annually thereafter to be 2,739,405 information. This change thus
hours per year.260 significantly reduces the estimated total VII. Cost-Benefit Analysis
Advisers also will be required to number of updates advisers will be A. Background
distribute interim updates disclosing required to deliver annually.267
new or revised disciplinary information The Commission is sensitive to the
D. Request for Comment
in their brochure or supplements. We costs and benefits of its rules. As
anticipate that in any given year, the With respect to the above-described proposed, this rulemaking would revise
number of such interim updates that collections of information and pursuant Part 2 of Form ADV to require advisers
advisers will be required to deliver is to 44 U.S.C. 3506(c)(2)(B), the to prepare plain English narrative
approximately 541.261 We further Commission solicits comments to: (i) brochures discussing their business
estimate that an adviser will require no Evaluate whether the proposed
practices and conflicts of interest and to
more than 0.5 hours per client for collections of information is necessary
prepare brochure supplements
delivery of each such update.262 This for the proper performance of the
discussing the background and
represents about 507 hours per interim functions of the agency, including
disciplinary history of certain
update.263 Thus, the aggregate annual whether the information shall have
supervised persons who formulate
hour burden for affected advisers to practical utility; (ii) evaluate the
accuracy of the Commission’s estimates investment advice or exercise
deliver interim updates to their investment discretion for clients. The
brochures and supplements will be of the burdens of the proposed
collections of information; (iii) revisions to the form would essentially
approximately 274,287 hours per move into the form itself existing rule
year.264 determine whether there are ways to
enhance the quality, utility, and clarity provisions that require advisers to
Thus, the rule amendments requiring disclose certain disciplinary and
annual delivery and interim updating of of the information to be collected; and
(iv) evaluate whether there are ways to financial information. In conjunction
advisers’ brochures and supplements with these revisions the Commission is
yields a total collection of information minimize the burdens of the collections
of information on those who are to proposing to withdraw rule 206(4)–4 as
burden for rule 204–3 of 3,013,692 duplicative.
respond, including through the use of
259 (0.25 hours per client × 1,013 clients per automated collection techniques or The proposed rulemaking would
adviser) = 253.25 hours per adviser. This is the other forms of information technology. require advisers to deliver the narrative
same estimate we made in the 2000 proposal and Persons submitting comments on brochures to clients at the outset of the
for which we received no comment. We note that these collections of information
the burden for preparing brochures is already advisory relationship and annually
incorporated into the burden estimate for Form
requirements should direct them to the thereafter, and to deliver to each client
ADV discussed above. We anticipate that most Office of Management and Budget, an initial brochure supplement for each
advisers will make their annual delivery of their Attention: Desk Officer for the supervised person who provides
brochure as part of the annual bulk mailings they Securities and Exchange Commission,
already make to clients. advisory services to that client. Advisers
260 (0.25 hours per client × 1,013 clients per
Office of Information and Regulatory would be required to deliver to clients
adviser) × 10,817 advisers = 2,739,405.25 hours. Affairs, Washington, DC 20503, and interim updates to their brochure and
261 Just under fifteen percent of the advisers should also send a copy of their brochure supplements that involve a
currently registered with the Commission report comments to Nancy M. Morris, change to certain disciplinary
any disciplinary events at all on their Form ADVs Secretary, Securities and Exchange
(as of September 30, 2007, only 1,620 of all 10,817 information required by Part 2. The
registered advisers indicated at least one ‘‘yes’’
Commission, 100 F Street, NE., rules would provide exceptions to the
answer to a question related to disciplinary events Washington, DC 20549–1090, with brochure and supplement delivery
in Form ADV, Part 1A, Item 11). Thus, we reference to File No. S7–10–00. requirements for certain types of clients,
anticipate that a correspondingly small number of Requests for materials submitted to
advisers will be required to disclose new or and would excuse the adviser from
updated disciplinary information. The Commission
OMB by the Commission with regard to preparing a brochure or supplement if
staff estimates that in any given year, five percent these collections of information should there is no client to whom it must be
of advisers, will be required to deliver a single
interim update to each of their clients, resulting in 265 2,739,405 hours (initial and annual delivery)
delivered. The proposed rule
a total of approximately 522 interim updates per + 274,287 hours (interim delivery of updates to amendments would also require
year. 0.05 × 10,817 × 1 update = 540.85 updates. disciplinary information) = 3,013,692 hours. advisers to file their narrative brochures
262 This burden estimate relates only to the 3,013,692 hours / 10,817 advisers = 278.61 hours electronically through the IARD, and to
amount of time it will take advisers to deliver per adviser. keep certain records relating to the
interim updates to clients, as required by the rule 266 6,902,278 hours – 3,013,692 hours = 3,888,586
amendments. The burden for preparing interim hours.
brochures and supplements.
updates is already incorporated into the burden 267 This reduction in hours is offset somewhat by We have identified certain costs and
estimate for Form ADV discussed above. the fact that we have increased the estimated
263 0.5 hours per client × 1,013 clients per adviser
benefits, discussed below, that may
number of clients per adviser who will receive
= 506.5 hours per update. brochures and supplements and interim updates to
result from the proposed rule and form
264 541 updates × 507 hours = 274,287 hours. these. amendments. In the Proposing
Release,268 we analyzed costs and substantial, are difficult to quantify. The cost of preparing a narrative
benefits of the proposed amendments to Most commenters strongly supported brochure likely would vary significantly
Part 2 and the related rules and the narrative, plain English format, and among advisers, depending on the
requested comment and data on the viewed it as an improvement over the complexity of their operations and
effect they would have on individual current form. They agreed that the new because Part 2 would give advisers
investment advisers and on the advisory brochures would greatly benefit clients considerable flexibility in structuring
industry as a whole. We are now able by requiring advisers to present their disclosure. Some firms may choose
to make more detailed estimates of important information about their firms to prepare multiple brochures for
costs, based on data available through in a clear and more meaningful way. several different services. These firms
the IARD system, and we provide those They observed that the enhanced likely would face only incrementally
below.269 We request comment on the disclosure required by the revised form higher drafting costs than an advisory
costs and benefits of the proposed would benefit clients by better firm that uses a single brochure to make
amendments. We encourage equipping them with the knowledge to the required disclosure about the
commenters to identify, discuss, make informed decisions about whether services it provides.
analyze, and supply relevant data to hire or retain a particular adviser. Similarly, the costs of preparing
regarding these or any additional costs Advisers themselves would also brochure supplements would vary from
and benefits. benefit from the flexibility the new one adviser to the next. Costs would
narrative brochures would give them. vary most significantly depending on
B. Form ADV Part 2 and IARD Filing the number of supervised persons for
Advisers would be able to organize their
As discussed above, the proposed brochures in the manner that they whom an adviser must provide
revisions to Part 2 would require most believe best communicates the required disclosure.272 An adviser with very few
advisers to prepare plain English disclosure to their clients. Advisers supervised persons for whom a
narrative brochures.270 Advisers would would also only be required to respond supplement must be prepared would
file their brochures electronically to items that apply to their business, incur lower costs than a large adviser.
through the IARD in a process much thus substantially enhancing the Costs associated with preparing
like attaching a file to an e-mail. efficiency and minimizing the costs of supplements also would vary greatly
The new narrative brochures and preparing brochures and supplements. depending on the amount of
electronic filing would provide Moreover, the new amendments provide disciplinary information, if any,
substantial benefits to advisory clients. significant guidance to advisers in terms required to be disclosed about a
The brochures would present clients of highlighting the types of disclosures particular supervised person. The
with critically important information they, as fiduciaries, are already required preparation of brochure supplements
they need to determine whether to hire to make. We believe the flexibility would be most demanding for those few
or continue the services of a particular created by the revisions, as well as the advisers whose supervised persons have
adviser. This information would be enhanced clarity the new form provides lengthy disciplinary records that must
presented in a format easy for most will yield substantial benefits for be disclosed, and less taxing for the vast
investors to understand. Investors advisers. majority of advisers, whose supervised
searching for an adviser would be able We recognize, however, that revised persons have no disciplinary records
to access the firm’s brochures through Part 2 would also impose costs on and whose supplements would
our public disclosure Web site even advisers. Advisers would be required to therefore likely be a page or less in
before contacting the firm, and thus replace their current Part 2 with the new length.273
would be in a better position to know narrative brochure and supplements, We expect that only a few advisers
whether they wish to inquire further and would be required to file their would incur substantial costs in
about the services the firm is offering. brochures with us. In addition, the preparing supplements. Although some
We believe these benefits to advisory disclosure in the new brochure may be commenters representing large advisers
clients will be a significant more complete than that existing Form argued that the supplement proposal
enhancement to the adviser disclosure ADV Part 2 currently requires. Thus, would unduly burden advisers that have
regime. These benefits, while drafting the new narrative brochure will ‘‘thousands’’ of employees, IARD data
likely entail additional expenses. As indicate that fewer than one third of one
268 See above note 5. discussed in the Proposing Release, we percent of advisers registered with us
269 As discussed above in note 2 of this Release
believe that most of the costs that have over 1,000 employees performing
and unless otherwise noted, the IARD data cited
below is based on advisers’ responses to questions advisers will incur in connection with investment advisory functions on their
on Part 1A of Form ADV as of September 30, 2007. preparation of the new narrative firm behalf.274 Indeed, less than five percent
270 Under the amendments, advisers that are not
brochure and brochure supplements of our registrants have over 50
required to deliver a brochure to clients would not will be in the initial drafting of these employees performing investment
be required to prepare one. Advisers that provide advisory functions. The vast majority of
only impersonal advice costing less than $500 per documents.271 We do not expect that
year per client, and advisers only to registered revised Part 2 would result in a
272 In response to comments we received, we
investment companies, would therefore not be significant cost increase on a long-term
required to prepare a brochure. We estimate, based narrowed the scope of supervised persons for whom
basis. a brochure supplement must be delivered. In
on information filed with us on Form ADV, that
approximately 295 advisers provide their services addition, an adviser that is not required to deliver
only to registered investment companies and 271 Proposing Release at Section III.B.2. We do a brochure supplement for a particular supervised
therefore would not need to prepare a brochure. not, however, expect advisers to face substantial person is not required to prepare a supplement for
Based on Form ADV filings, we estimate that less costs in gathering the required disclosure. Advisers that individual. See Section II.B of this Release.
273 IARD data indicate that in response to Item 11

than 10 advisers offer advisory services only by already are required to provide us and/or their
publishing periodicals and newsletters; we estimate clients with much of the information required in in Part 1A of Form ADV, only 1,620, or just under
that approximately half of these charge less than the new narrative brochure. In addition, much of 15 percent, of the 10,817 advisers registered with
$500 per year per client and would not need to the information needed for the brochure us report any disciplinary information about their
prepare a brochure. Moreover, because advisers supplements can be found in an adviser’s current firms or advisory affiliates, including their advisory
need not deliver supplements to clients that do not Form ADV or an investment adviser employees.
receive a brochure, these advisers would also be representative’s registration application (i.e., Form 274 Moreover, it may not be necessary to prepare
excused from preparing any brochure supplements. U–4) filed with state securities authorities. a brochure supplement for all of these employees.
SEC-registered advisers—nearly 82 Finally, advisers would incur some believe that it is unlikely that there will
percent—have 10 or fewer employees costs in filing their brochures with us be any new costs associated with
performing advisory functions on their through the IARD. Advisers would delivery of this information.
behalf. We believe most, if not all, of prepare their brochures on their own As discussed above, delivery of the
these firms may choose to incorporate computers, and as noted earlier, the new narrative brochures would provide
required information about their filing of a brochure would be similar to substantial benefits to advisory clients.
supervised persons into their firm attaching a file to an e-mail.278 We The brochures would present clients
brochures instead of preparing separate believe conversion of an adviser’s with important information they need to
brochure supplements, thus reducing brochure to PDF format and filing of determine whether to hire or continue
costs of preparation. We request that brochure through the IARD would the services of a particular adviser.
comment on the number of supplements impose minimal costs on advisers. Currently, advisers must annually offer
that advisers of varying sizes would to deliver their brochure to existing
need to prepare, and how that number C. Brochure and Supplement Delivery
clients, however, clients who never
compares to the number of advisory Advisers would be required to deliver request a brochure may not necessarily
employees at the firm. their revised brochures to existing see important amendments. Under the
For purposes of the Paperwork clients annually.279 The amended rules proposed approach, each year clients
Reduction Act and taking into account would require that, between annual would automatically receive advisers’
the widely varying numbers of advisory deliveries, advisers deliver brochure brochures and the valuable information
employees among the thousands of and supplement amendments to existing contained therein. Although we believe
different advisory firms registered with clients only if there is an addition or these benefits to advisory clients will be
us, we have estimated the number of change to disciplinary disclosure. substantial, they are difficult to
hours the average adviser would spend Advisers already are required to deliver quantify.
in the initial preparation of their a copy of Part 2 to new clients. Thus, Although advisers are already
brochures and supplements.275 Based this requirement should present no new currently required to deliver a revised
on those estimates, we estimate that costs to advisers. Moreover, we believe brochure to clients upon request,
advisers would incur costs of that because advisers must deliver advisers would incur additional
approximately $14,723,982 in drafting brochures to new clients, the cost of delivery costs under the amended rule
these documents in the first year.276 delivering brochure supplements to new (particularly in connection with the
Furthermore, for Paperwork Reduction clients should increase the existing cost initial and annual delivery obligations).
Act purposes we also have estimated of delivery only incrementally. New We expect these additional costs,
that advisers may incur approximately clients would receive brochures and however, to be less than under the
costs of $7,257,200 in connection with supplements that are current as of the original proposal.280 Certain
their use of outside legal services to time of delivery. commenters raised particular concerns
assist in preparation of their Form ADV. Annual brochure delivery would about the scope of the brochure
Advisers would incur annual benefit advisory clients by ensuring that supplement and its delivery, and the
expenses in addition to the initial costs they are kept apprised of their advisers’ costs associated with ensuring proper
of preparing firm brochures and business practices and procedures for distribution of supplements. In response
brochure supplements, but we believe managing conflicts and enable clients to to comments, we have both proposed to
these costs would be modest and similar make decisions with respect to the narrow the group of supervised persons
to current costs. The rule amendments, adviser with the most currently who would need a brochure
similar to the current requirements, available information. Changes to supplement, and to eliminate the need
would require advisers to revise their disciplinary information disclosed in
disclosure documents promptly when to send supplements to certain
the brochure and supplement are of institutional or sophisticated clients.
any information in them becomes
such importance to clients that we For Paperwork Reduction Act Purposes,
materially inaccurate, and would
believe interim delivery of these we have estimated that the total annual
require advisers to update their
amendments is necessary. Moreover, paperwork burden associated with
brochures and brochure supplements
advisers currently are already required annual and interim delivery of
each year at the time of their required
to make disclosures regarding brochures and supplements is
annual updating amendment. For
disciplinary information under existing approximately 3,013,692 hours. We
Paperwork Reduction Act purposes, we
rule 206(4)–4. Based on the experiences estimate this would represent an annual
have estimated that advisers would
of examination staff, we believe that cost of $168,766,752.281
need to prepare brochure amendments,
on average, one and one half times per most advisers likely already make these Advisers may significantly minimize
year, and spend three quarters of an disclosures in writing so that they can the costs associated with annual
hour on each amendment. We estimate demonstrate compliance with the delivery of their brochures and
that advisers would incur annual costs requirements of rule 206(4)–4. Thus, we supplements by arranging to deliver
of $744,471 in meeting these
professionals at an estimated cost for a Compliance 280 We are proposing the annual brochure
requirements.277 Clerk of $56 per hour. 17,725.5 amendments × 0.75 delivery requirement (and the requirement that
hours per amendment × $56 = $744,471. advisers deliver any interim amendments that
275 See Section VI.A of this Release. 278 We note that all advisers registered with the disclose additional or revised disciplinary
276 We expect that this function will most likely Commission currently file Form ADV electronically information) in lieu of our original proposal, which
be performed by compliance professionals. Data via the IARD system and that since implementation would have required advisers to deliver all
from SIFMA’s Report on Office Salaries in the of the electronic filing requirements in 2000 no brochure and supplement updates to clients on a
Securities Industry 2006, modified to account for an adviser has applied for a permanent hardship continuous basis whenever any information in their
1,800-hour work-year and multiplied by 2.93 to exemption available to advisers for whom filing brochures or supplements became materially
account for bonuses, firm size, employee benefits electronically would constitute an undue hardship. inaccurate.
and overhead, suggest that cost for a Compliance See rule 203–3(b) [17 CFR 275.203–3(b)]. 281 We expect that delivery of amendments to Part
Clerk is approximately $56 per hour. 262,928.25 279 Currently, an adviser must offer its brochure 2 will also most likely be performed by compliance
hours × $56 per hour = $14,723,982. to clients annually, and must deliver a revised professionals at an estimated cost for a Compliance
277 Similarly, we expect that amendments to Part brochure only if the client accepts the adviser’s Clerk of $56 per hour. 3,013,692 hours × $56 =
2 will also most likely be performed by compliance offer. $168,766,752.
their brochures and supplements to E. Total Estimated Costs and Benefits of A. Need for the Rule and Form
some or all clients by electronic This Rulemaking Amendments
media.282 Advisers also may minimize
As discussed above, the proposed rule The proposed rule and form
delivery costs by mailing their
and form amendments are expected to amendments are necessary to improve
brochures and supplements along with
have both benefits and costs for the quality of disclosure that advisers
quarterly statements or other routine
investors and the advisory industry as a provide to their clients.288 Form ADV
mailings they already send to clients.283
whole. We believe the benefits to was adopted by the Commission in
The extent to which advisers will take
advisory clients in the form of 1985 289 and advisers currently use it to
advantage of these and other techniques
register with the Commission (Part 1)
to reduce costs is difficult to predict but significant enhancements to the adviser
and to provide clients disclosure about
we believe it will be significant. We disclosure regime will be quite
their advisory firm and personnel (Part
request comment about the percentage substantial, but are difficult to quantify.
2). Over the years, however, experience
of clients to whom advisers are likely to Similarly difficult to quantify are the has shown that the format and content
make electronic delivery. We also expected benefits to the advisory of current Part 2 of Form ADV do not
request comment about the extent to industry that we believe would result lend themselves to disclosure that is
which advisers may minimize delivery from the proposed rules in the form of easy for clients to understand. Clients
costs by mailing their brochures and enhanced flexibility with respect to need clearer information about an
supplements along with quarterly their obligations to prepare and deliver adviser’s services, fees, business
statements or other routine mailings. brochures and supplements. Moreover, practices, and conflicts of interests to be
D. Amendments to Rule 204–2 not all of the costs we anticipate to able to make an informed decision about
result from this rulemaking are whether to hire or retain that adviser.
The proposed amendments to rule
quantifiable. Based on the figures
204–2 would require SEC-registered B. Objectives and Legal Basis
discussed above, however, we estimate
advisers to retain certain records
that the first year quantifiable costs The primary objective of the proposed
relating to brochures and supplements.
One of the proposed revisions to the related to this proposed rulemaking to form and rule amendments is to provide
rule would require advisers to retain be approximately $191,492,405.285 advisory clients and prospective clients
copies of brochures and supplements with access to meaningful and up-to-
VIII. Initial Regulatory Flexibility
prepared as required by Part 2. This date disclosure, as well as to provide for
Analysis
provision is designed to conform that filing of this disclosure with the
rule to our proposed changes to Form We have prepared this Initial Commission.290 By requiring advisers to
ADV and generally would impose no Regulatory Flexibility Analysis (IRFA) provide current narrative brochures and
additional costs because advisers are in accordance with section 3(a) of the brochure supplements written in plain
already currently required to retain Regulatory Flexibility Act (RFA).286 It English, the amendments are intended
records relating to materials they relates to proposed amendments to rules to improve the quality of information
distribute to their clients. Other 203–1, 204–1, 204–2, 204–3, and investors receive from advisers about
proposed revisions to the rule would 206(4)–4, and Form ADV under the their services, fees, business practices
require advisers to maintain certain and conflicts of interest. Also, by
Advisers Act. The rule and form
records in the event they use an requiring advisers to file their brochures
amendments are designed to improve
alternative method to calculate assets (and any amendments) with the
the disclosure that investment advisers
under management in response to Item Commission electronically using IARD,
provide to their clients. These proposed the proposal would make full use of
4.E of Part 2A and if they do not amendments would also revise the
disclose in their brochure any legal or existing and new information
instructions for updating and filing technologies to aid the Commission staff
disciplinary event listed in Part 2. These Form ADV (including adviser
provisions would benefit advisers by in its oversight efforts and provide ready
brochures). We also are proposing public access to advisers’ brochures.
permitting them flexibility in drafting conforming rule amendments that
their firm brochures while providing for We are proposing these amendments
would revise the recordkeeping under section 19(a) of the Securities Act
maintenance of records needed by our requirements relating to Part 2 of Form
examination staff. Moreover, because we of 1933 [15 U.S.C. 77s(a)], sections 23(a)
ADV. and 28(e)(2) of the Securities Exchange
anticipate that only a relatively small
number of advisers would be subject to We prepared an IRFA in conjunction Act of 1934 [15 U.S.C. 78w(a) and
these provisions we expect that the cost with the release proposing amendments 78bb(e)(2)], section 319(a) of the Trust
of maintaining these records will be to Part 2 of Form ADV in April 2000, Indenture Act of 1939 [15 U.S.C.
relatively minimal.284 and made it available to the public. A 77sss(a)], section 38(a) of the Investment
summary of that IRFA was published Company Act of 1940 [15 U.S.C. 78a–
282 Proposed Instruction 3 for Part 2A of Form with the Proposing Release.287 We 37(a)], and sections 203(c)(1), 204,
ADV expressly notes that Commission interpretive received no comments specifically on 206(4), and 211(a) of the Investment
guidance permits advisers to deliver their brochures that IRFA. Advisers Act of 1940 [15 U.S.C. 80b–
electronically upon client consent. 3(c)(1), 80b–4, 80b–6(4), and 80b–11(a)].
283 As noted above, annual brochure delivery
285 Estimated costs related to initial preparation of
must be made within 120 days of the adviser’s fiscal
year end. We have designed this deadline so that Form ADV (including Part 2) of $14,723,982 + 288 Sections I through IV, above, of this Release,
advisers can include the brochure in a routine estimated one-time outside legal costs associated describe in more detail the reasons for the proposed
mailing to clients. with this initial preparation of $7,257,200 + amendments.

284 For Paperwork Reduction Act purposes we estimated costs of $744,471 related to annual 289 Uniform Investment Adviser Registration
estimate that only 487 advisers would be required updating of Form ADV (including Part 2) + Application Form, Investment Advisers Act Release
to prepare additional records in accordance with estimated costs associated with delivery of No. 991 (Oct. 15, 1985) [50 FR 42903 (Oct. 23,
the amendment to rule 204–2 and that each adviser brochures and supplements of $168,766,752 = 1985)].
would spend approximately four hours to satisfy $191,492,405. 290 Sections I through IV, above, of this Release,
286 5 U.S.C. 603(a).
the obligation for a total burden of 1,948 hours per describe in more detail the objectives of the
year. 287 See above note 5. proposed amendments.
C. Small Entities Subject to the Rules clients and to file them electronically an adviser may minimize its burden by
In developing the proposals, we have through the IARD. The proposals would using a ‘‘sticker’’ containing the updated
considered their potential impact on also impose new recordkeeping information instead of reprinting its
small entities that may be affected. The requirements. These requirements and entire brochure and supplements.
proposed rule and form amendments the burdens on small advisers are The amendments would require
would affect all advisers registered with discussed below.294 advisers to deliver a current brochure to
the Commission, including small clients annually and to deliver interim
1. Amendments to Part 2 of Form ADV
entities. Under Commission rules, for updates of the brochure and
The amendments to Part 2, because supplements to clients to disclose new
purposes of the Regulatory Flexibility
Act, an investment adviser generally is they require registered advisers to or revised disciplinary information.
a small entity if it: (i) Has assets under prepare and disseminate narrative These delivery requirements would
management having a total value of less brochures, would impose additional replace the current requirement that
than $25 million; (ii) did not have total costs on all registered advisers, advisers offer clients a revised brochure
assets of $5 million or more on the last including small advisers. We assume annually. To minimize the burden of
day of its most recent fiscal year; and that all small advisers currently delivery, advisers would be permitted
(iii) does not control, is not controlled distribute Part 2 of Form ADV and with client consent to deliver brochures
by, and is not under common control would have to redraft their brochures and supplements, as well as updates,
with another investment adviser that completely to comply with the proposed electronically. To the extent that small
has assets under management of $25 new format, although some information advisers are more likely to have fewer
million or more, or any person (other in current Part 2 may be transferable to advisory clients (and fewer supervised
than a natural person) that had $5 the new narrative brochures. persons) than larger advisers, the
million or more on the last day of its The costs associated with preparing proposed delivery requirements should
most recent fiscal year.291 the new brochures will depend on the impose lower variable costs on small
Our rule and form amendments size of the adviser, the complexity of its advisers than on larger firms.
would not affect most advisers that are operations, and the extent to which its
operations present conflicts of interest 3. Recordkeeping Requirements
small entities (‘‘small advisers’’) because
they are generally registered with one or with clients. Many of the new items The proposed amendments would
more state securities authorities and not imposing the most rigorous disclosure impose new recordkeeping
with us. Under section 203A of the requirements may not apply to certain requirements on advisers, including
Advisers Act, most small advisers are small advisers because, for example, small advisers. As under the current
prohibited from registering with the those advisers may not have soft dollar rules, advisers would be required to
Commission and are regulated by state or directed brokerage arrangements, or maintain copies of their brochures. The
regulators.292 Those small advisers that may not have custody of client assets. proposed amendments would also
register with us are located in Wyoming To the extent that some of the new require all advisers to maintain copies
(which does not have an investment disclosure burdens would apply to of their brochure supplements. In
adviser statute), or are eligible for an small advisers, these advisers are addition, the proposed amendments
exemption that permits SEC registration. already obligated to make the would require advisers, including small
The Commission estimates that as of disclosures to clients under the advisers, to maintain certain records if
September 30, 2007, of the 10,449 Advisers Act’s anti-fraud provisions, they determine that a disciplinary event
registered with us, there were although the disclosure is not required that is presumptively material does not
approximately 634 that were small to be in the firm’s written brochure. have to be disclosed, or if they calculate
entities that would be affected by the For the first time, advisers also would their managed assets for purpose of their
proposed amendments.293 We request be required to prepare and disseminate brochures differently than in Part 1A of
comment on the effect and costs of the brochure supplements for certain Form ADV.
proposed amendments on small entities. supervised persons of their firm. To
reduce the burdens on small advisers, E. Duplicative, Overlapping, or
D. Reporting, Recordkeeping, and Other however, we have drafted the new Conflicting Federal Rules
Compliance Requirements supplement rules so that firms with few The Commission believes that there
The proposed rule and form employees would be permitted to are no rules that duplicate or conflict
amendments would impose certain include supplement information in their with the proposed rule.295
reporting and compliance requirements firm brochures and avoid preparing and
on small advisers, requiring them to distributing separate brochure F. Significant Alternatives
create and update narrative brochures supplements. We believe many small We have considered various
containing certain information regarding advisers would take advantage of this alternatives in connection with the
their advisory business. The option and reduce their compliance proposed rule and form amendments
amendments also would require burden. that might minimize their effect on
advisers to deliver their brochures to small advisers, including: (i)
2. Updating and Delivery Requirements
Establishing different compliance or
291 Rule 0–7 [17 CFR 275.0–7]. The amended rules, like the current reporting requirements or timetables
292 National Securities Markets Improvement Act
rules, would require advisers to update that take into account the resources
of 1996 (Pub. L. 104–290, 110 Stat. 3438) (1996) their brochures whenever information
(‘‘NSMIA’’). As a result of NSMIA, advisers with available to small advisers; (ii)
less than $25 million of assets under management in them becomes materially inaccurate. clarifying, consolidating, or simplifying
The proposed amendments would also
generally are regulated by one or more state compliance and reporting requirements
securities authority, while the Commission implement the same updating under the proposed amendments for
generally regulates those advisers with at least $25 requirements for supplements. In
million of assets under management. See section small advisers; (iii) using performance
203A of the Advisers Act [15 U.S.C. 80b–3a]. updating its brochure and supplements,
293 This estimate is based on information advisers 295 As discussed above, the Commission is
have filed with the Commission on Part 1A of Form 294 SectionsI through IV, above, of this Release, proposing to withdraw as duplicative current rule
ADV. describe these requirements in more detail. 206(4)–4.
rather than design standards; and (iv) amendments clarify that advisers may, brochure supplements written in plain
exempting small advisers from coverage with client consent, deliver their English.
of all or part of the proposed brochures and supplements, along with The brochure rule and form
amendments. any updates, to clients electronically. amendments that we are proposing
Regarding the first alternative, the Regarding the fourth alternative, it today would promote efficiency and
Commission believes that establishing would be inconsistent with the competition in the marketplace by
different compliance or reporting purposes of the Advisers Act to exempt improving the disclosure that advisers
requirements for small advisers would must provide to clients.298 These
small advisers from the proposed rule
be inappropriate under these amendments are designed to require
and form amendments. The information
circumstances. The amendments are advisers to provide clients and
in an adviser’s brochure is necessary for
designed to improve the quality and prospective clients with clear, current,
the client to evaluate the adviser’s
timeliness of critically important and more meaningful disclosure of the
services, fees, and business practices,
disclosure that advisory clients receive business practices, conflicts of interest,
and to apprise the client of potential
from their advisers. To establish and background of investment advisers
conflicts of interest and, when
different disclosure requirements for and their advisory personnel. Advisers
necessary, of the adviser’s financial
small entities would diminish this would file their brochures with us
condition. Since we view the
investor protection for clients of small electronically, and we would make
advisers. We note, however, that small protections of the Advisers Act to apply
equally to clients of both large and small them available to the public through our
advisers, by the nature of their business, Web site. With the public availability of
likely would spend fewer resources in advisers, it would be inconsistent with
the purposes of the Act to specify more thorough and current disclosure of
completing their brochures and any
different requirements for small entities. advisers’ services, fees, business
brochure supplements. Moreover,
practices and conflicts of interests,
certain rule and form amendments were G. Solicitation of Comment investors will be able to make more
designed specifically to reduce the
The Commission encourages the informed decisions about whether to
burden on small advisers. For example,
submission of comments on matters hire or retain a particular adviser. A
the proposed Part 2 instructions would
discussed in the IRFA. Comment is more informed investing public will
give advisers the flexibility to
requested particularly on the number of create a more efficient marketplace and
incorporate required information about
small advisers that would be affected by strengthen competition among advisers.
their supervised persons into their firm
brochures rather than presenting it in the proposals, the burdens the proposals Moreover, the electronic filing
separate brochure supplements, thereby would impose on small advisers, and requirements are expected to expedite
saving additional printing and mailing whether the effects of the proposed rule and simplify the process of filing firm
costs. and form amendments on small advisers brochures and amendments for the
Regarding the second alternative, the would be economically significant. advisory firms, thus further improving
proposed amendments would clarify Commenters are asked to describe the efficiency. We believe, however, that the
requirements for all advisers, including nature of any effect and provide proposed brochure amendments are
small advisers. The proposed Part 2 empirical data supporting the extent of unrelated to and will have little or no
instructions are designed to present the effect. These comments will be effect on capital formation.
requirements for advisers’ brochures placed in the same public comment file The Commission requests comment
and supplements clearly and simply to as comments on the proposals. whether the above proposals, if adopted,
all advisers, including small entities. would promote efficiency, competition,
For purposes of the Small Business
Regarding the third alternative, the and capital formation. Commenters are
Regulatory Enforcement Fairness Act of
Commission believes that the proposed requested to provide empirical data to
1996, the Commission is also requesting
amendments already appropriately use support their views.
information regarding the potential
performance rather than design
impact of the proposals on the economy X. Statutory Authority
standards in many instances. The
on an annual basis. Commenters should
amendments would permit advisers We are proposing amendments to rule
provide empirical data to support their
considerable flexibility in designing 203–1 under sections 203(c)(1), 204, and
their brochures and supplements so as views.
211(a) of the Investment Advisers Act of
best to communicate the required IX. Efficiency, Competition, and Capital
information to clients. In preparing Formation 298 Along with the proposed brochure
brochure supplements, advisers would amendments, the Commission also is proposing
also have the flexibility of adapting the Section 202(c) of the Advisers Act conforming amendments to the General Instructions
format of the supplements to best suit requires the Commission, when and Glossary of Form ADV to include instructions
engaging in rulemaking that requires it regarding brochure filing requirements and to add
their firm: an adviser may: (i) Prepare a glossary terms and definitions that are used in Part
separate supplement for each to consider or determine whether an 2. Additionally, the Commission also is proposing
supervised person; (ii) prepare a single action is necessary or appropriate in the conforming amendments to the Advisers Act books
supplement containing the required public interest, to consider, in addition and records rule. These proposed amendments
to the protection of investors, whether would require advisers to maintain copies of their
information for all of its supervised brochures, supplements, and amendments, and are
persons; (iii) prepare multiple the action will promote efficiency, intended to update the books and records rule in
supplements for groups of supervised competition, and capital formation.297 light of our proposed changes to Part 2. None of
persons (e.g., all supervised persons in Today the Commission is proposing these proposed conforming amendments are
amendments to Part 2 of Form ADV and expected to have an independent impact on
a particular office or work group); or (iv)
efficiency, competition, or capital formation. To the

include all information about related Advisers Act rules that would extent that they facilitate the purposes of the
supervised persons in the firm brochure require investment advisers registered proposed brochure amendments, the conforming
and prepare no separate with us to deliver to clients and amendments may, however, contribute to the
prospective clients, brochures and expected effects on efficiency, competition and
supplements.296 The proposed capital formation that would stem from the
proposed brochure amendments and which are
296 See Section II.B of this Release. 297 15 U.S.C. 80b–2(c). discussed below.
1940 (15 U.S.C. 80b–3(c)(1), 80b–4, and Adviser Registration Depository (IARD) amendment or revision to the brochure
80b–11(a)). unless you have received a hardship and brochure supplements, required by
We are proposing amendments to rule exemption under § 275.203–3. Part 2 of Form ADV (17 CFR 279.1); any
204–1 under sections 203(c)(1) and 204 Note to paragraph (a)(1): Information on summary of material changes that is
of the Investment Advisers Act of 1940 how to file with the IARD is available on the required by Part 2 of Form ADV but is
(15 U.S.C. 80b–3(c)(1) and 80b–4). Commission’s Web site at http:// not contained in the brochure or
We are proposing amendments to rule www.sec.gov/iard. brochure supplements; and a record of
204–2 under section 204 and 206(4) of (2) After [INSERT DATE SIX the dates that each brochure and
the Investment Advisers Act of 1940 (15 MONTHS AFTER EFFECTIVE DATE OF brochure supplement, each amendment
U.S.C. 80b–4 and 80b–6(4)). RULES/FORM] the Commission will not or revision thereto, and each summary
We are proposing amendments to rule accept any initial application for of material changes was given to any
204–3 under section 204, 206(4), and registration as an investment adviser client or to any prospective client who
211(a) of the Investment Advisers Act of that does not include a brochure that subsequently becomes a client.
1940 (15 U.S.C. 80b–4, 80b–6(4), and satisfies the requirements of Part 2A of (ii) Documentation describing the
80b–11(a)). Form ADV. method used to compute managed
We are proposing amendments to rule (b) Special rule for Part 2B. You are assets for purposes of Item 4.E of Part
279.1, Form ADV, under section 19(a) of not required to file with the 2A of Form ADV, if the method differs
the Securities Act of 1933 (15 U.S.C. Commission the brochure supplements from the method used to compute assets
77s(a)), sections 23(a) and 28(e)(2) of the required by Part 2B of Form ADV. under management in Item 5.F of Part
Securities Exchange Act of 1934 (15 1A of Form ADV.
* * * * * (iii) A memorandum describing any
U.S.C. 78w(a) and 78bb(e)(2)), section 3. Section 275.204–1 is amended by
319(a) of the Trust Indenture Act of legal or disciplinary event listed in Item
revising the note to paragraph (a), and
1939 (15 U.S.C. 77sss(a)), section 38(a) 9 of Part 2A or Item 3 of Part 2B of Form
paragraphs (b) and (c) to read as follows:
of the Investment Company Act of 1940 ADV (Disciplinary Information) and
(15 U.S.C. 78a–37(a)), and sections § 275.204–1 Amendments to application presumed to be material, if the event
203(c)(1), 204, and 211(a) of the for registration. involved the investment adviser or any
Investment Advisers Act of 1940 (15 * * * * * of its supervised persons and is not
U.S.C. 80b–3(c)(1), 80b–4, and 80b– disclosed in the brochure or brochure
Note to paragraph (a): Information on how
11(a)). to file with the IARD is available on our Web supplements described in paragraph
We are proposing to remove and site at http://www.sec.gov/iard. (a)(14)(i) of this section. The
reserve rule 206(4)–4 under section memorandum must explain the
(b) Electronic filing of amendments.
206(4) of the Investment Advisers Act of investment adviser’s determination that
(1) Subject to paragraph (b)(2) of this
1940 (15 U.S.C. 80b–6(4)). the presumption of materiality is
rule, you must file all amendments to
overcome, and must discuss the factors
List of Subjects in 17 CFR Parts 275 and Part 1A of your Form ADV and all your
described in Item 9 of Part 2A or Item
279 amended firm brochure(s) required by
3 of Part 2B of Form ADV.
Part 2A of Form ADV electronically
Reporting and recordkeeping * * * * *
with the Investment Adviser
requirements, Securities. 5. Section 275.204–3 is revised to read
Registration Depository (IARD), unless
Text of Rule and Form Amendments you have received a continuing as follows:
For the reasons set out in the hardship exemption under § 275.203–3. § 275.204–3 Delivery of firm brochures and
(2) Transition to electronic filing. You brochure supplements.
preamble, Title 17, Chapter II of the
must amend your Form ADV by (a) General requirements. If you are
Code of Federal Regulations is proposed
electronically filing with the IARD one registered under the Act as an
to be amended as follows:
or more brochures that satisfy the investment adviser, you must deliver a
PART 275—RULES AND requirements of Part 2A of Form ADV firm brochure and one or more
REGULATIONS, INVESTMENT (as amended effective [INSERT supplements to each client or
ADVISERS ACT OF 1940 EFFECTIVE DATE OF RULES/FORM]) prospective client as required by this
as part of the next annual updating section. The brochure and
1. The general authority citation for amendment you are required to file after supplement(s) must contain all
Part 275 continues to read as follows: [INSERT DATE SIX MONTHS AFTER information required by Part 2 of Form
Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b– EFFECTIVE DATE OF RULES/FORM]. ADV (17 CFR 279.1).
2(a)(17), 80b–3, 80b–4, 80b–4a, 80b–6(4), Note to paragraph (b): Information on how (b) Delivery requirements. You (or a
80b–6a, and 80b–11, unless otherwise noted. to file with the IARD is available on our Web supervised person acting on your
2. Section 275.203–1 is amended by site at http://www.sec.gov/iard. behalf) must deliver to a client or
revising paragraphs (a) and (b) to read (c) Special rule for Part 2B. You are prospective client:
as follows: not required to file with the (1) Your current brochure before or at
Commission amendments to brochure the time you enter into an investment
§ 275.203–1 Application for investment advisory contract with the client and,
supplements required by Part 2B of
adviser registration. after that, an updated brochure annually
Form ADV.
(a) Electronic Filing of Form ADV. (1) within 120 days after the end of your
* * * * *
To apply for registration with the fiscal year;
4. Section 275.204–2(a)(14) is revised
Commission as an investment adviser, (2) A current brochure supplement for
to read as follows:
you must complete Form ADV (17 CFR a supervised person before or at the time
279.1) by following the instructions in § 275.204–2 Books and records to be that supervised person begins to provide
the form and you must file Part 1A of maintained by investment advisers. advisory services to the client. For
Form ADV and the firm brochure(s) (a) * * * purposes of this section, a supervised
required by Part 2A of Form ADV (14)(i) A copy of each brochure and person will provide advisory services to
electronically with the Investment brochure supplement, and each a client if that supervised person will:
(i) Formulate investment advice for supplements. You must provide a brochure supplement, including all
the client and have direct client contact; current brochure and current brochure amendments to date.
or supplements to any new clients or (3) Sponsor of a wrap fee program
(ii) Make discretionary investment prospective clients. If an amendment means an investment adviser that is
decisions for the client, even if the adds disclosure of an event, or compensated under a wrap fee program
supervised person will have no direct materially revises information already for sponsoring, organizing, or
client contact. disclosed about an event, in response to administering the program, or for
(c) Exceptions to delivery Item 9 of Part 2A or Item 3 of Part 2B selecting, or providing advice to clients
requirements. of Form ADV (Disciplinary regarding the selection of, other
(1) You are not required to deliver a Information), then you must provide the investment advisers in the program.
brochure to a client: current brochure or current brochure
(i) That is an investment company (4) Supervised person means any of
supplements (or the amendment), as your officers, partners or directors (or
registered under the Investment applicable, to all existing clients to
Company Act of 1940 (15 U.S.C. 80a–1 other persons occupying a similar status
whom you are required to deliver a or performing similar functions) or
to 80a–64) or a business development brochure or brochure supplement under
company as defined in that Act, employees, or any other person who
this section. provides investment advice on your
provided that the advisory contract with (f) Multiple brochures. If you provide
that client meets the requirements of behalf.
substantially different advisory services
section 15(c) of that Act (15 U.S.C. 80a– (5) Wrap fee program means an
to different clients, you may provide
15(c)); or advisory program under which a
them with different brochures, so long
(ii) Who receives only impersonal specified fee or fees not based directly
as each client receives all information
investment advice for which you charge upon transactions in a client’s account
about the services and fees that are
less than $500 per year. is charged for investment advisory
applicable to that client. The brochure
(2) You are not required to deliver a services (which may include portfolio
you deliver to a client may omit any
brochure supplement to a client: management or advice concerning the
information required by Part 2A of Form
(i) To whom you are not required to selection of other investment advisers)
ADV if the information does not apply
deliver a brochure under paragraph and the execution of client transactions.
to the advisory services or fees that you
(c)(1) of this section; will provide or charge, or that you § 275.206(4)–4 [Removed and reserved]
(ii) Who receives only impersonal
propose to provide or charge, to that 6. Section 275.206(4)–4 is removed
investment advice;
client. and reserved.
(iii) Who would be a ‘‘qualified
(g) Other disclosure obligations.
purchaser’’ under section 2(a)(51)(A) of
Delivering a brochure or supplement in PART 279—FORMS PRESCRIBED
the Investment Company Act of 1940
compliance with this section does not UNDER THE INVESTMENT ADVISERS
(15 U.S.C. 80a–2(a)(51)(A)); or
relieve you of any other disclosure ACT OF 1940
(iv) Who would be a ‘‘qualified
obligations you have to your advisory
client’’ of your firm under § 275.205–
clients or prospective clients under any 7. The authority citation for Part 279
3(d)(1)(iii).
(d) Wrap fee program brochures. (1) If federal or state laws or regulations. continues to read as follows:
(h) Transition rule. (1) Within 30 days Authority: 15 U.S.C. 80b–1, et seq.
you are a sponsor of a wrap fee program,
after the date by which you are first
then the brochure that paragraph (b)(1)
required by § 275.204–1(b)(2) to 8. Form ADV (referenced in § 279.1) is
of this section requires you to deliver to
electronically file your brochure with amended by:
a client or prospective client of the wrap
the Commission, you must deliver to a. In the instructions to the form,
fee program must be a wrap fee
each of your existing clients your revising the section entitled ‘‘Form
brochure containing all information
current brochure and all current ADV: General Instructions.’’ The revised
required by Part 2A Appendix 1 of Form
brochure supplements as required by version of Form ADV: General
ADV. Any additional information in a
Part 2 of Form ADV. Instructions is attached as Appendix A;
wrap fee brochure must be limited to
(2) As of the date by which you are b. In the instructions to the form,
information applicable to wrap fee
first required to electronically file your revising the section entitled ‘‘Glossary
programs that you sponsor.
brochure with the Commission, you of Terms.’’ The revised version of Form
(2) You do not have to deliver a wrap
must begin using your current brochure ADV: Glossary of Terms is attached as
fee brochure if another sponsor of the
and current brochure supplements as Appendix B; and
wrap fee program delivers, to the client
required by Part 2 of Form ADV to c. Removing Form ADV, Part II, and
or prospective client of the wrap fee
comply with the requirements of this adding Form ADV, Part 2. Form ADV,
program, a wrap fee program brochure
section pertaining to initial delivery to Part 2 is attached as Appendix C.
containing all the information your
new and prospective clients.
wrap fee program brochure must Note: The text of Form ADV does not and
(i) Definitions. For purposes of this
contain. the amendments will not appear in the Code
section:
Note to paragraph (d): A wrap fee brochure (1) Impersonal investment advice of Federal Regulations.
does not take the place of any brochure means investment advisory services that * * * * *
supplements that you are required to deliver do not purport to meet the objectives or
under paragraph (b)(2) of this section. Dated: March 3, 2008.
needs of specific individuals or
(e) Amendments. Section 275.204–1 accounts. By the Commission.
Florence E. Harmon,
and instructions to Form ADV contain (2) Current brochure and current
instructions that you must follow to brochure supplement mean the most Deputy Secretary.
amend your brochure and brochure recent revision of the brochure or BILLING CODE 8011–01–P
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BILLING CODE 8011–01–C

Proposed Rule: Amendments To Form ADV

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Proposed Rule: Amendments To Form ADV

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Friday,

March 14, 2008

7870 (Feb. 7, 1979)] (adopting rule 204–3 requiring

21 See, e.g., Proposed Items 5, 6, and 11 of Part

requires ‘‘check-the-box’’ disclosure regarding types

involving the adviser’s supervised persons.

188 Determining whether to include disclosure of

273 IARD data indicate that in response to Item 11

mailing to clients. with this initial preparation of $7,257,200 + amendments.

efficiency, competition, or capital formation. To the

[FR Doc. E8–4611 Filed 3–13–08; 8:45 am]

BILLING CODE 8011–01–C

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