The US Securities and Exchange Commission (the “SEC”) adopted on 28 July 2010 long-anticipated amendments to Part 2 of Form ADV, the registration form for investment advisers, and certain related rules under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The amendments will require almost every registered investment adviser to prepare, file with the SEC and distribute to existing and prospective clients a narrative-style brochure and brochure supplements containing information about the business practices, conflicts of interest and background of the investment adviser and its advisory personnel.

Format

Unlike the current Form ADV Part 2, the brochure and brochure supplements required by the new Form ADV Part 2 must be fully narrative, in plain English1 and in a format that follows the order of the form, using the form headings as section headings and cross-referring where necessary. These requirements are meant to make the brochure and brochure supplements easy to read and understand and to allow potential clients to compare investment advisers side-by-side on the basis of their responses. An investment adviser may choose to include its brochure supplements in the brochure itself or as a separate document or documents.

Further to its efforts to promote clear disclosures for clients and prospective clients, the SEC will require investment advisers to limit disclosures of their conflicts of interest to those which the investment adviser has or is reasonably likely to have and the disclosure of their practices to those practices in which the investment adviser engages or in which it is reasonably likely to engage. An amendment to the brochure will then be required where a new conflict arises or the investment adviser decides to engage in a previously undisclosed practice.

Content of Brochure

The brochure is divided into 18 items applicable to investment advisers registering or registered with the SEC, many of which will be familiar to investment advisers already using the old Form ADV Part 2. These disclosure items include requirements to disclose, among other things: a description of the adviser’s advisory business; fees and compensation;2 performance-based fees and side-by-side management; types of clients; methods of analysis, investment strategies and risks; disciplinary information; codes of ethics and personal trading; brokerage practices; compensation paid for referrals; custody arrangements; voting of client securities; and financial information.

The new Form ADV Part 2 also introduces a requirement to identify and discuss any material changes made to the Form ADV Part 2 since the last annual update. The SEC has made clear that this discussion should be a brief summary and not a repetition of the brochure contents reflecting all changed information. This information must appear on the cover page, on the page following the cover page of the brochure or as a separate document accompanying the brochure. If presented as a separate document, the investment adviser must file that document with the relevant brochure through IARD. However, when presented as a separate document, the material changes disclosure does not need to be provided to first-time brochure recipients.

Investment advisers that are already registered may want to use their existing disclosure from Schedule F of the current Form ADV Part 2 as a start towards preparing the new Form ADV Part 2. However, much of that disclosure will probably need to be re-arranged into the required order and augmented to comply with the new disclosure requirements.

The adopting release does address commenters concerns that the requirement to file Form ADV Part 2 and the subsequent public availability of that information would negatively impact the ability of funds to rely on private placement exemptions requiring no general solicitation (Regulation D) or no directed selling efforts (Regulation S). In this regard, the SEC states in the adopting release:

We believe registrants can provide information required by Part 2 without jeopardizing reliance on those exemptions. The inclusion of private fund information beyond that required in Part 2, however, such as subscription instructions, performance information, and financial statements, may jeopardize such reliance by constituting a public offering or conditioning the market for the securities issued by those funds.

Investment advisers to funds that rely on the private placement rules are therefore cautioned to limit the information about the funds in their brochures to that which is strictly required by the Form ADV Part 2.

Content of Brochure Supplements

Another new feature introduced by the SEC is the requirement that investment advisers prepare and file brochure supplements about the advisory personnel that will be providing services to clients. A brochure supplement must be prepared for each “supervised person” providing advisory services to clients. “Supervised persons” include any officers, partners, directors (or other persons occupying a similar status or performing similar functions) or employees, or any other person who provides investment advice on the investment adviser’s behalf and is subject to the investment adviser’s supervision or control (e.g., consultants and advisory personnel of non-US affiliates providing services to US clients of the investment adviser through a participating affiliate arrangement).

The brochure supplement with respect to each supervised person must provide disclosure regarding that supervised person’s educational background, business experience and disciplinary history (if any), as well as information regarding how that person is supervised. These disclosure requirements are similar to the requirements of Item 6 of the old Form ADV Part 2.

The brochure supplement must also describe any arrangements whereby someone other than the client gives the supervised person an economic benefit for providing advisory services. Bonuses based in whole or in part on sales, client referrals or new accounts will trigger the disclosure requirement but other bonuses will not. Regular salaries need not be disclosed.

Updating and Filing Requirements

As is the case currently, investment advisers will be required to update their Forms ADV Part 2, including both the brochure and any brochure supplements, annually within 90 days of their fiscal year ends and promptly when any information in the brochure or brochure supplement (other than the material changes summary or the assets under management figure) becomes materially inaccurate.

Currently, Form ADV Part 2 and any amendments have to be prepared and kept with the records of the investment adviser but they need not be filed with the SEC. The new rules require an investment adviser to file its brochure and any amendments to the brochure in PDF format via the Investment Adviser Registration Depository (“IARD”), the same filing system where Form ADV Part 1 is currently required to be filed.

Investment advisers registered with the SEC will not be required to file their brochure supplements or any amendments to the brochure supplements but will be required to keep such documents in their records.

Delivery Requirements

Brochure

Under the new Form ADV Part 2 requirements, a registered investment adviser will be required to deliver its then-current brochure before or at the time it enters into an advisory contract with a client. In addition, the investment adviser must deliver (or offer in writing to deliver) its then-current brochure to existing clients annually within 120 days of the investment adviser’s fiscal year end. However, for initial Part 2 filings on the new form by current registrants, delivery must be made within 60 days after such filing, giving such investment advisers up to 150 days following their fiscal year ends to deliver their brochure to existing clients. Each annual update of the Form ADV Part 2 (or offer in writing to provide the update) thereafter must be accompanied by the summary of material changes.

Notwithstanding the above, the brochure is not required to be delivered to clients who either: (i) receive only impersonal investment advice and pays the investment adviser less than $500 per year; or (ii) are either US registered investment companies or business development companies and the advisory contracts meet the requirements of Section 15(c) of the US Investment Company Act of 1940, as amended. An investment adviser that does not have any clients to whom a brochure would be required to be delivered is not required to prepare or file Form ADV Part 2.

Investment advisers will also be required to deliver a statement describing the material facts related to a disciplinary event promptly whenever the investment adviser amends its brochure to add the disciplinary event or change material information about disciplinary events that has already been disclosed. Investment advisers may choose to include an updated brochure with this statement.

For investment advisers to private funds, the delivery obligation under SEC rules extends to the funds and not to investors in those funds. However, fund investors often request a copy of the Form ADV Part 2 as part of their due diligence process and investment advisers may choose to provide a copy of the Form ADV Part 2 in response to such requests.

Brochure Supplements

Subject to the exceptions discussed below, a client must be given a brochure supplement for each supervised person who: (i) formulates investment advice for that client and has direct client contact; or (ii) makes discretionary investment decisions for that client’s assets, even if that supervised person has no direct client contact. Where a team of supervised persons is jointly responsible for the day-to-day advice provided to a client, the client need only be provided with the brochure supplements of the five supervised persons with the most significant responsibility for the day-to-day advice provided to the client.

Any relevant brochure supplements must be given to each client at or before the time when that specific supervised person begins providing advisory services to that specific client. Investment advisers will also be required to deliver a statement describing the material facts related to the disciplinary event promptly whenever the investment adviser amends a brochure supplement to add a disciplinary event or change material information about disciplinary events that has already been disclosed. Investment advisers may choose to include an updated brochure supplement with this statement. No annual offer of delivery is required for brochure supplements.

Investment advisers will not be required to deliver the brochure supplements to three types of clients: (i) clients to whom the investment adviser is not required to deliver a brochure; (ii) clients who receive only impersonal investment advice (even if they receive a brochure); and (iii) individuals who would be “qualified clients”3 of the investment adviser. An investment adviser who has no clients to whom a brochure supplement is required to be deliver will not need to prepare or file any brochure supplements.

Effective Date, Compliance Date and Transition Requirements

New Form ADV Part 2 will become effective 11 October 2010.

Investment advisers already registered with the SEC having fiscal year ends on or after 31 December 2010 must include in their next annual updating amendment a brochure meeting the new requirements for Form ADV Part 2, and registrants will have 60 days from that filing to deliver the new brochure and any brochure supplements (each meeting the new form requirements) to existing clients, although investment advisers may choose to file and begin to use the new Form ADV Part 2 prior to that annual updating amendment.

Beginning 1 January 2011, new registrants must prepare and file Part 2 of the Form ADV in compliance with the new form requirements and must, at that time, begin delivering brochures and brochure supplements that comply with the new requirements to clients and prospects.

Between 11 October 2010 and 31 December 2010, new registrants will have the option to prepare Part 2 of the Form ADV in accordance with either the new form requirements (which require Part 2 to be filed) or the current/old form requirements (which do not require Part 2 to be filed). However, a registrant choosing to rely on the old form requirements will nevertheless be required to prepare and file Part 2 of Form ADV in accordance with the new form requirements in respect of its annual updating amendment, which, for advisers with a 31 December fiscal year end, would be due by 31 March 2011.