[9671]
February 11, 1998
TO: INVESTMENT ADVISERS COMMITTEE No. 7-98
RE: RECOMMENDATIONS FOR REVISIONS TO THE ADVISERS ACT
ANTI-FRAUD RULES AND FORM ADV
______________________________________________________________________________
The Institute is in the process of developing proposals to submit to the SEC for revisions to the
anti-fraud rules under the Investment Advisers Act and to Form ADV. We have retained outside
counsel to assist us in both of these projects. Set forth below is an outline of our proposals, which we
plan to discuss at the upcoming Investment Advisers Committee meeting on February 17. If you are
not planning to attend the meeting, please provide your comments on the proposals outlined below
to me by the morning of February 17. I can be reached at 202/326-5824, by e-mail at amy@ici.org or
by fax at 202/326-5827.
A. Proposed Revisions to the Advisers Act Anti-Fraud Rules
Section 206(4) of the Investment Advisers Act grants the SEC authority to adopt rules to
“define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of
business as are fraudulent, deceptive, or manipulative.” Pursuant to this authority, the SEC has adopted
rules that include specific, detailed prohibitions that go beyond the SECGs statutory authority and impose
undue (and, in many cases, outdated) burdens on advisers.
The Institute plans to propose that the SEC revise the rules adopted under Section 206(4) and
return to the general anti-fraud principles upon which they are based. Specifically, we will propose that
the SEC amend the anti-fraud rules as follows:
1. Advertising Rule (Rule 206 (4)-1) - The SEC should repeal the specific restrictions and
prohibitions in the rule and replace them with general guidelines for advisers to follow to ensure that
they do not disseminate false and misleading advertising materials. The rule should be patterned after
Rule 156 under the Securities Act of 1933, which contains general guidelines for the preparation of
investment company advertising materials.
2. Custody Rule (Rule 206(4)-2) - The rule should be revised to broaden the list of eligible
entities that may be utilized by an adviser that maintains custody of customer funds or securities. The
rule should require that the account be maintained for the exclusive benefit of the adviserGs customers,
and that the adviser could not commingle its own proprietary funds or securities with this account. In
addition, the adviser or the designated custodian should be required to maintain current and accurate
records reflecting the holdings of each individual account. The rule also should define “custody” to
include only those situations where the adviser has actual physical custody of customer funds or
securities. Finally, we would recommend that the custody rules not apply where the custody
arrangement is governed by the contract between the adviser and the client, providing there is full and
fair disclosure concerning the arrangement.
3. Cash Referral Fee (Rule 206(4)-3) - The SEC should repeal the rule. To the extent deemed
necessary, state law should govern any disclosure requirements applicable to third-party solicitors.
4. Financial and Disciplinary Disclosure (Rule 206(4)-4) - The SEC should repeal the rule and
require appropriate disciplinary/financial condition disclosures in the brochure delivered to clients.
B. Proposed Revisions to Form ADV
The Institute would recommend that the brochure be required to be in narrative format and that
advisers have the option of using a two-part brochure, similar to the prospectus and SAI format. The
first part of the brochure would include key information and would be required to be provided to
clients. The second part of the brochure would supplement the information included in the first part
and would be made available promptly upon request. A separate document with appropriate
information should be required to be filed with the SEC.
The brochure provided to clients should include information regarding: (a) the nature of
services offered; (b) the type of clients to whom the adviser provides services (e.g., pension plans) and
any minimum requirements for assets under management; (c) the fees and expenses; (d) the background
of the adviser; (e) material conflicts of interest; and (f) disciplinary history and financial condition.
In addition, the Institute would recommend that advisers file their Form ADVs and brochures
electronically, such as through EDGAR or other means.
Attached is an outline prepared by outside counsel regarding the proposed revisions to Form
ADV.
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Amy B.R. Lancellotta
Associate Counsel
Attachment