New Amendments to the Form ADV Part 2 Require Greater Plain English Disclosures

The Securities and Exchange Commission ("SEC") has made significant changes to the Form ADV and CCOs of SEC registered investment advisers must review their current disclosure items in light of these changes. On July 21, 2010, the SEC approved changes to the check-the-box format of the Form ADV Part 2 ("ADV Part 2"). On July 28, 2010, the SEC published details regarding the amendments to ADV Part 2, and related rules under the Investment Advisers Act ("Act"), which now requires SEC registered investment advisers to provide new and prospective clients with a brochure and brochure supplements written in plain English.1 "These changes are designed to provide clients with greater information about the individuals who will provide them with investment advice," said SEC Chairman Mary L. Schapiro. "These amendments will help transform the brochure into a plain English narrative that is well-suited to serve investors' needs and describes the adviser's conflicts, compensation, business activities, and disciplinary history."2

In addition to the existing disclosure requirements, the new ADV Part 2 must now:

1.Indicate whether advisers hold themselves out as specializing in any particular type of advisory service.

2.Disclose the total assets under management.

3.Describe how advisers are compensated for advisory services, provide a fee schedule, and disclose whether fees are negotiable. Adviser must also describe the types of other fees or expenses, such as brokerage fees, custody fees, and fund expenses that clients may pay in connection with the services provide.

4.Disclose conflicts of interest that arise from accepting performance based fees, including conflicts of interests related to charging some, but not all, accounts a performance fee.

5.Explain that investing in securities involves risk of loss that a client should be prepared to bear.

6.Describe any material risks that are specific to a particular strategy.

7.Disclose material facts about any legal or disciplinary event that is material to a client's evaluation of the advisory business or the integrity of management personnel.3

Furthermore, advisers must provide expanded responses to certain existing disclosure items, including:

(1) brokerage practices;

(2) whether they participate in or have an interest in client transactions; and/or

(3) whether they invest in the same securities as they recommend for clients.

Any related conflicts of interest must be described fully. To assist clients in evaluating the qualification of the individuals who will be servicing their accounts, supplements to the ADV Part 2 that provide résumé-like information about such individuals, including disciplinary history, now must be delivered to new and prospective clients, in accordance with Rule 204-3 under the Act. Finally, advisers must electronically file the new ADV Part 2, which will be publicly available to potential clients on the SEC's IARD website. Most advisers will begin distributing and electronically filing the new ADV Part 2 in the first quarter of 2011 as part of their annual renewal filings, unless an event that constitutes a material change requires an updated filing before that time.

We recommend that you review your current disclosures and conflicts of interest in light of these new requirements and contact us to discuss required amendments for your next filings. If you have any questions, please contact Dan Viola at 212.573.8038 or dviola@sglawyers.com.

1 See, SEC Release No. IA-3060

2 See, SEC Release 2010-127.

3 Id. ("Investment advisers must update their clients promptly of new disciplinary events or material changes to an existing event.")

Cheryl Spratt