On February 13, 2008, the Securities and Exchange Commission (“SEC” or the “Commission”) proposed rule amendments requiring investment advisers to prepare and deliver to clients and prospective clients a narrative brochure written in plain English. The brochure would be made available to the general public through the SEC sponsored Investment Adviser Public Disclosure website. The SEC is proposing amendments to Part 2 of the Form ADV and related rules under the Investment Advisers Act of 1940.
Under the proposed rule amendments, investment advisers registered with the SEC would be required to provide clear, current and meaningful disclosure in narrative form to advisory clients. The plain English narrative proposed by the Commission would require investment advisers to provide investors with more detailed information about the adviser’s business practices, including the types of advisory services, fees charged and the risks that clients can anticipate. The narrative would also disclose: (i) the disciplinary history of the investment adviser, including any violation of securities laws; (ii) any conflicts of interest such as the use of affiliates to execute transactions; (iii) the use of client brokerage to obtain “soft dollars benefits”; and (iv) the adviser’s interest in certain transactions.
Much of that information is already required in the current version of Part 2 of Form ADV, although not in the “plain English” format now propo sed. However, the proposed rule amendments would also require new disclosures, such as: (i) descriptions of the conflicts of interests that could arise when an investment adviser represents hedge funds and other clients that pay performance fees, at the same time the investment adviser represents clients who don’t pay performance fees; (ii) disclosure of commissions an investment adviser receives for recommending a financial product; and (iii) the qualifications of a firm’s employees who give advice to clients.
The public will have 60 days to comment on the proposed rule amendments after it is published to the Federal Register. Foley Hoag will continue to monitor the situation and advise our clients on any further developments.