November 5, 1993
TO: INVESTMENT ADVISERS COMMITTEE NO. 33-93
SEC RULES COMMITTEE NO. 100-93
RE: PROPOSED NASAA AMENDMENTS TO FORM ADV RELATING TO WRAP FEE
DISCLOSURES
__________________________________________________________
The Board of Directors of the North American Securities Administrators
Association ("NASAA") has issued for comment proposed revisions to Form ADV and
the instructions thereto, as well as proposed revisions to Rule 203(b)-2 of the
NASAA Model Amendments to the Uniform Securities Act. These revisions were
developed by the NASAA Financial Planners/Investment Advisers Committee to define
the disclosures which should be made to investors by sponsors of wrap fee
programs. It is our understanding that these revisions were prepared jointly
with the staff of the Securities and Exchange Commission ("SEC"). The SEC is
expected to propose similar revisions for public comment. A copy of these
proposed revisions is attached.
Revisions to the Form ADV
As proposed by NASAA, the Form ADV would be amended to add a new Schedule
H. Schedule H must be completed by investment advisers in connection with any
wrap fee program in which the adviser is a participant or sponsor. Unlike the
other Schedules to the Form ADV, Schedule H is not designed as a form to be
completed by the adviser; but rather, it lists information which must be
presented by an adviser in a separate brochure. A copy of this brochure must be
filed with the SEC and the jurisdictions in which the adviser seeks registration.
It also must be provided to clients of the adviser’s wrap fee programs in lieu
of Part II of the Form ADV.
If there are multiple sponsors to a single wrap fee program, Schedule H
need only be completed by one such sponsor, which sponsor shall be chosen by the
multiple sponsors.
Contents of the Brochure
Item 8 of Schedule H lists the contents of the brochure which must
accompany Schedule H. According to Item 8, the brochure must include the
sponsor’s name, address, phone number along with a legend set forth in paragraph
(a); detailed information on fees and costs (see paragraphs (b), (c), and (d));
an explanation of how the program’s managers are selected and reviewed and the
circumstances under which they will be replaced; information about verification
of performance, or, if performance is not verified, a statement to that effect;
a description of the client information provided to the portfolio manager; and,
any restrictions on the ability of clients to contact and consult with portfolio
managers. Advisers that sponsor or participate in mutual fund wrap fee programs
are not required to include information on portfolio managers in their brochures,
however they must explain how the adviser develops recommendations regarding the
allocation of client assets among mutual funds.
In addition to this information, the adviser must, in narrative form in the
brochure, include certain specified information from Part II of the Form ADV.
This information includes the items from Part II relating to: other business
activities and time spent thereon; other financial industry activities or
affiliations; education and business standards and background; participation or
interest in client transactions as a principal or as a broker or agent for a
third party; conditions for managing an account; review of accounts; additional
compensation; and, a balance sheet.
While Schedule H does not require the information required thereby be
presented in any specified format, "the brochure should not be organized in such
a manner that important information . . . is obscured". Item 9 of Schedule H
requires an adviser to specify the pages of the brochure on which the various
disclosures required by each paragraph of Item 8 may be found.
NASAA Rule 203(b)-2
Along with the revisions to the Form ADV, NASAA has proposed that the NASAA
Model Amendments to the Unifom Securities Act be amended to add a new Rule
203(b)-2. This new rule, which includes definitions of "wrap fee program",
"portfolio manager", and "sponsor", provides that sponsors of a wrap fee program
provide disclosure to clients in accordance with the proposed amendments to the
Form ADV. In addition to providing a copy of this
disclosure to the state securities administrators, an adviser shall deliver the
wrap fee disclosure statement to each client or prospective client not less than
48 hours prior to entering into a wrap fee agreement with the client, or at the
time of entering into such agreement if the client has five days to terminate the
contract without penalty.
* * * * * * *
While NASAA has requested that comments on the proposed revisions be
submitted by November 29, 1993, comments may be accepted up until the time these
amendments are considered by the NASAA membership at their 1994 Spring
Conference. If you have any comments on the proposed revisions amendments,
please provide them to me by Friday November 19, 1993. My direct dial number is
202/955-8432.
Tamara K. Cain
Assistant Counsel
Attachment