The SEC voted unanimously today to propose changes to Form ADV Part II. The action follows a similar set of proposals in 2000 that were never adopted. The changes would require a registered investment adviser to:
- Rewrite its Form ADV Part II (which would be renamed “Part 2”) as a narrative brochure and drafted in “plain English”;
- Address specific additional disclosure requirements, including with respect to the adviser’s business, services, conflicts of interest, and disciplinary history; and
- Submit the new brochure to the SEC electronically, which would also make the brochure publicly available through the SEC’s website.
In addition, the SEC proposed two requirements that proved somewhat controversial when originally proposed in 2000. First, advisers would be required to actually deliver to clients an updated Part 2 (or an appropriate sticker) following any material change to the disciplinary information contained in the Part 2 brochure. Second, advisers generally would be required to provide each client with an additional “brochure supplement” containing certain background information about every supervised person that provides or helps formulate investment advice for that client.
As noted above, the SEC originally proposed changes to Form ADV Part II in April 2000 as part of broader revisions to the entire document. The SEC ultimately adopted changes to Part I (including that it be filed electronically through the IARD system), but deferred action on Part II. In proposing changes to Part II, the SEC acknowledged that the current version does not lend itself to meaningful, clear disclosure. In addition, the SEC had not made significant, substantive revisions to Form ADV Part II since 1985 and has taken a number of actions since then which impact the contents of Part II. The current instructions do not fully reflect those actions, which include various enforcement cases, no-action letters, interpretive releases and even staff speeches. Any changes ultimately adopted by the SEC should address these concerns.
The changes to Part II would essentially require that advisers provide clients with a narrative brochure written in “plain English.” Rather than rely on the current check-the-box format and Schedule F, Part 2 would specify the minimum disclosures required in a brochure and allow advisers to structure the disclosures and order the topics in a manner that best conveys the required information. The SEC’s new approach to Part 2 would be modeled after current Schedule H to Form ADV, which requires wrap fee program sponsors to give clients a narrative brochure describing the wrap fee program.
Today’s action to re-propose amendments to Part II reflects the SEC’s view that a significant amount of time has passed since April 2000 and that the SEC would be well served by receiving a fresh set of comments. The SEC has not yet issued its proposing release, which will include the date by which any comments are due. Typically, the SEC provides between 30 and 60 days for comment following the issuance of a proposing release. Thereafter, the SEC will consider industry comments for some period of time (usually a few months), schedule a hearing, and then vote on the proposed changes. The SEC likely will also establish a compliance date of up to a fe