% See Memorandum to Investment Advisers Committee No. 12-00, dated April 7, 2000.
[11893]
May 19, 2000
TO: INVESTMENT ADVISERS COMMITTEE No. 15-00
RE: INSTITUTE DRAFT LETTER ON SEC'S PROPOSED REVISIONS TO FORM
ADV
______________________________________________________________________________
As we previously advised you, last month the Securities and Exchange Commission proposed
significant revisions to Form ADV and new rules under the Advisers Act relating to the form.% In
response to the discussion of the Commission's proposal at the April meeting of the Investment
Advisers Committee and comments from members, the Institute has prepared the attached draft
comment letter. The letter is supportive of the Commission's proposal and the implementation of the
Investment Adviser Registration Depository ("IARD"). Notwithstanding our overall support for the
proposal, the Institute recommends various revisions to the proposal, which are discussed below.
Comments are due to the Commission no later than June 13th. Please provide your
comments on the Institute's draft letter to the undersigned no later than Wednesday, May 31st.
Comments may be provided by phone (202-326-5825), fax (202-326-5839) or e-mail (tamara@ici.org).
I. The Need for Flexibility
The Institute's letter discusses the need for the Commission to provide greater flexibility to
advisers under the brochure rule (Rule 204-3 under the Advisers Act). In recognition of the wide variety
of types of advisers that are subject to the Investment Advisers Act of 1940, as well as the wide variety
of their services and types of clients, and the evolving nature of the industry, the Institute's letter
recommends that the Commission build additional flexibility into the brochure rule. In particular, we
recommend that the rule be revised to permit advisers to use multiple brochures, which may be targeted
at specific types of clients or related to specific types of services, so long as the brochure the client
receives complies with the disclosure requirements of proposed Part 2 of Form ADV. In addition, we
recommend that the rule be revised to permit advisers to omit from their brochures any information that
would be irrelevant to the client receiving the brochure. The ability of an adviser to omit irrelevant
information is a necessary adjunct to the rule permitting advisers to produce multiple brochures tailored
to specific clients or services. The Institute also recommends that the Commission clarify the level of
detail of the information that is required to be included in the brochure.
II. Comments on Specific Disclosure Items of Proposed Part 2A
Proposed Part 2A of Form ADV would list the nineteen items of disclosure that must appear in
an adviser's narrative brochure, which must be written in plain-English. Our recommended revisions to
the various proposed disclosure items (in the order in which they appear in Part 2A) are as follows:
! Item 4 -- Advisory Business. The Institute recommends that the Commission eliminate the
requirement that an adviser's brochure include a list and description of each of the
periodicals or periodic reports about securities that the adviser publishes.
! Item 5 -- Fees and Compensation. The Institute recommends that the Commission clarify
the additional fees that would need to be disclosed pursuant to this item and eliminate the
requirement that an adviser disclose the "amount or range" of mutual fund expenses.
! Item 8 -- Disciplinary Information. The Institute strongly opposes the requirement that an
adviser deliver to clients and prospective clients, for a period of one year, a copy of any
Commission order resulting from an administrative proceeding involving the adviser. The
letter states that such a requirement should remain an issue of negotiation between the
adviser and the Commission in an administrative proceeding. In addition, the letter
recommends that the Commission clarify that the brochure disclosure of disciplinary
information should be a succinct summary of any such proceedings and not include the level
of detail set forth on the proposed Disclosure Reporting Pages of Part 1A of the form.
! Item 9 -- Other Financial Activities and Affiliations. The Institute recommends that, in
disclosing the internal procedures the adviser uses to address conflicts of interest, an adviser
not be required to disclose their "procedures for disclosing conflicts to clients."
! Item 11 -- Brokerage Practices; Soft Dollars. The Institute's letter opposes requiring
advisers who receive soft dollar benefits to disclose (1) that they have an incentive to select
certain broker-dealers based on the adviser's interest in receiving soft dollars rather than in
the client's interest in getting best execution at the lowest available commission rate and (2)
whether the adviser seeks to allocate the benefits to client accounts proportionately to the
brokerage credits those accounts generate.
! Item 14 -- Custody. The Institute's letter recommends that Item 14 be revised to expressly
permit an adviser to satisfy the disclosure requirements of Rule 206(4)-2, relating to custody
or possession of customer funds or securities, through this item of the brochure.
! Item 16 -- Proxy Voting. The Institute's letter recommends that the Commission clarify
that an adviser that is an investment manager to an ERISA plan may satisfy its disclosure
requirements under this item by simply stating that it will vote proxies on behalf of any such
plan in accordance with the requirements of ERISA.
! Item 17 -- Investment Performance. The Institute recommends that this item, which
would require an adviser that advertises or reports its investment performance to describe
any standards it uses to calculate or present such performance, permit advisers to provide
such disclosure in either the brochure or in the document containing the performance
information.
! Item 19 -- Index. The Institute recommends that the index that must be provided to the
Commission (but not to clients) pursuant to Item 19, which would detail where in the
adviser's brochure each of the required disclosure items appear, be made uniform and not
left to the discretion of each adviser. In particular, the Institute recommends that the index
be modeled after that of Schedule H of the current Form ADV, which lists each of the
required disclosure items and requires the adviser to insert next to each item the page
number of the brochure where such disclosure appears.
III. Comments on Proposed Part 2B, the Brochure Supplement
Under the proposal, a brochure supplement must be prepared for each supervised person who
on a regular basis communicates investment advice to a client. The Institute's letter questions how this
requirement would apply when the activities of the person communicating with the client are more akin
to those of marketing or solicitation and such person has no involvement in the rendering of the
investment advice. In those instances, the Institute recommends that the Commission not require such
persons to deliver a brochure supplement about themselves, inasmuch as it would likely consist of
information that is irrelevant to the client. (The letter also notes that the rule would not require
brochure supplements to be prepared for third-party solicitors.) Should the Commission determine,
however, that a disclosure document on these supervised persons is necessary, we recommend that the
required disclosure be limited to only information about the supervised person that may be relevant to
the client.
With respect to the specific items of disclosure under proposed Part 2B of the form, the
Institute's letter recommends the following:
! Item 1 -- Cover Page. The letter recommends that the Commission clarify that the name
and contact information on the supervised person's supervisor (which is required by Item 6
of Part 2B) may be placed on the cover page.
! Item 3 -- Disciplinary Information. The Institute recommends that the required
disciplinary disclosure not go beyond the disclosure currently required pursuant to Form U-
4, the Uniform Application for Securities Industry Registration.
! Item 6 -- Investment Advice and Supervision. The Institute's letter recommends that the
Commission clarify that this item, which requires disclosure of the name, title, and telephone
number of the supervised person's supervisor, does not require an adviser to list multiple
supervisors of the supervised person, but rather, the person or persons who, in the view of
the adviser, are the appropriate contact person(s).
! Item 7 -- Financial Information. The Institute recommends that the Commission
eliminate, as unduly prejudicial or invasive, the requirement that a supervised person disclose
any personal bankruptcies.
IV. Comments on the Revisions Proposed by the Commission to the Brochure Rule
The Institute's letter recommends that the Commission clarify two issues relating to an adviser's
duty to promptly update clients when information in the brochure or brochure supplement becomes
materially inaccurate. First, the Institute seeks clarification that "promptly," as used in the brochure rule,
may mean, for those advisers that deliver quarterly statements, at the time of the next statement.
Second, if the information in the brochure that has become materially inaccurate would only be relevant
to certain of the adviser's clients, the Institute recommends that the prompt updating requirement of the
rule apply only to those clients and that all other clients may be informed of such change during the
annual brochure update.
In addition, the Institute strongly opposes the Commission deeming a brochure filed with the
Commission in order to permit states to require their filing. As discussed in the letter, if the
Commission does not deem it necessary to require federally registered advisers to file with the
Commission their narrative brochures in hard copy between the time such brochures are required to be
created and the time their filing may be accommodated by the IARD, it does not seem necessary for
states to be able to require the filing of such brochures. The Institute's letter notes that, in the absence
of the states being able to require the routine filing of the brochures, states may obtain them when
investigating or bringing an enforcement action with respect to fraud or deceit.
V. Comments on the Registration Portion of Form ADV
Part 1A of Form ADV would be the portion of the form that advisers must file with the
Commission to obtain or maintain registration. The Institute recommends that the disciplinary
information that must be disclosed pursuant to Item 11 of Part 1A be revised to eliminate disclosure
relating to certain "advisory affiliates" unless: (1) such person is required to be listed on Schedule A or B
of the form; (2) such person is affiliated with the adviser in a managerial or supervisory capacity; or (3)
such person is not covered by (1) or (2) but the disciplinary information would be material to the
Commission's evaluation of the adviser's advisory business or the integrity of management. To
determine the materiality of the disciplinary information for persons in category (3), the Institute
recommends that the Commission use the same standards set forth in Item 8 of Part 2B of the proposed
form.
In addition, the Institute recommends that advisers that have not been the subject of any
regulatory proceedings for at least ten years be relieved of having to disclose, pursuant to Items 11(C)-
(G) of Part 1A, any proceedings that occurred more than ten years previously.
VI. Comments on the IARD
The Institute's letter expresses support for the Commission's development and implementation
of the IARD. To ensure maximum utility of the system, the Institute supports requiring those states that
impose notice filing requirements on federally-registered advisers to receive them electronically through
the IARD system.
Tamara K. Reed
Associate Counsel
Attachment