Understanding the New ADV Part 2

Transcription

1 Understanding the New ADV Part 2

2 Copy of Slides To access a copy of the slides from today s presentation please go to: Consultants.com/New_ADV_Part2.html

3 Presenters Jarrod James Vice-President RIA Compliance Consultants Tammy Emsick Senior Compliance Consultant RIA Compliance Consultants

4 Presentation Disclosures Although the sponsor of this presentation, RIA Compliance Consultants, Inc. ( Sponsor ), is an affiliate of a law firm and Sponsor may have an individual on its staff that is also licensed as an attorney providing legal services in a completely separate capacity, Sponsor is not a law firm and does not provide legal services or legal advice. A consulting relationship with Sponsor does not provide the same protections as an attorney-client relationship. This presentation is offered for educational purposes only and should not be considered an engagement with Presenter or Sponsor. This presentation should not be considered a comprehensive review or analysis of the topics discussed today. These materials are not a substitute for consulting with an attorney or compliance consultant in a one-on-one context whereby all the facts of your situation can be considered in their entirety. Despite efforts to be accurate and current, this presentation may contain out-of-date information. Additionally, Presenter and Sponsor will not be under an obligation to advise you of any subsequent changes. Information provided during this presentation is provided "as is" without warranty of any kind, either express or implied, including, without limitation, warranties and merchantability, fitness for a particular purpose, or noninfringement. Presenter and Sponsor assume no liability or responsibility for any errors or omissions in the content of the presentation. There is no guarantee or promise that concepts, opinions and/or recommendations discussed will be favorably received by any particular court, arbitration panel or securities regulator or result in a certain outcome. To the extent that you provide RCC with your address, it will be added to RCC s electronic newsletter mailing list regarding compliance issues for investment advisors. You may opt out at any time by calling RCC at or clicking at any time the unsubscribe link on the electronic newsletter. Communication with today s webinar presenter is not protected by attorney-client privilege. Please keep questions during this seminar in a hypothetical form. This seminar session and/or the presentation materials may be recorded, copied and/or shared with third parties and/or posted to our public website.

5 Agenda Overview Timeline for Implementation New Part 2 Format and Content Delivery Requirements Amendments Filing Requirements

6 Overview On July 21, 2010 the SEC voted unanimously to adopt the long awaited amendments to the Form ADV Part 2 and related rules under the Investment Advisers Act of These changes will require investment advisers registered with the SEC to provide new and prospective clients with a brochure and brochure supplements written in plain English. These amendments are designed to provide new and prospective advisory clients with clearly written, meaningful, current disclosure of the business practices, conflicts of interest and background of the investment adviser and its advisory personnel. SEC advisers must begin filing their brochures electronically through the IARD system and they will be made available to the public through the IAPD system.

7 Overview The current ADV Part II format requires advisors to respond to a series of multiplechoice and fill-in-the-blank questions organized in a check-the-box format. The advisor is then required to provide additional disclosure on the Schedule F based on the items marked in the Part II.

8 Overview The new Part 2 will require a plain English narrative brochure. According to the SEC, the amendments adopted will: Improve the format and update the requirements of the brochure Expand the content to better include details most relevant to the clients of investment advisors

9 Overview Require brochure supplements to be delivered to new and prospective clients to give resume-like information about the individuals at an investment advisory firm who will provide services to clients.

10 Timeline for Implementation The effective date of the changes will be October 12, The following compliance dates will apply: Each advisor applying for SEC registration after January 1, 2011 will be required to submit the new Form ADV Part 2A as part of the advisor s registration and must deliver the Part 2A and Part 2B to its clients and prospective clients.

11 Timeline for Implementation Each advisor registered with the SEC whose fiscal year ends on or after December 31, 2010, must include in its next annual updating amendment to its Form ADV a brochure or brochures that meet the requirements of the amended form. Accordingly, each adviser with a fiscal year end of December 31, 2010 must file an annual updating amendment with the new brochures no later than March 31, 2011.

12 Timeline for Implementation Within 60 days of filing such amendment, the advisor must deliver to its existing clients a brochure and brochure supplement (Part 2A and 2B) that meet the requirements of amended Form ADV. Each adviser must, after the initial filing of the brochures, begin to deliver to new clients and prospective clients a new brochure and brochure supplements in order to satisfy its obligations under the brochure rule.

13 New ADV Part 2 Format New Part 2 includes 2 sub-parts: Part 2A- Contains 18 disclosure items about the advisory firm that must be included in an advisor s brochure Part 2B- Referred to as the brochure supplement which includes information about certain advisory personnel on whom the clients rely for investment advice

14 Part 2A- Format and Content Narrative brochure written in plain English Information must be provided in the specified format Advisors must respond to each item in the brochure and must present the information in order of the items in the form, using the headings provided by the form If an item is inapplicable to an advisor, the advisor must include the heading and an explanation that the information is inapplicable If the information provided to one item is also responsive to another item, the advisor may cross-reference the information in the other item

15 Part 2A- Format and Content Advisors must use short sentences; definite, concrete, everyday words; and the active voice. An advisor s brochure should discuss only conflicts the advisor has or is reasonably likely to have and practices in which it engages in or is reasonably likely to engage in. If a conflict arises or the advisor decides to engage in a practice that it has not disclosed, supplemental information must be provided to the client.

16 2A- Brochure Items 18 different required disclosure items, each covering a different disclosure topic: Item 1- Cover Page Item 2- Material Changes Item 3- Table of Contents

17 2A- Brochure Items Item 4- Advisory Business Item 5- Fees and Compensation Item 6- Performance-Based Fees and Side-by-Side Management Item 7- Types of Clients Item 8- Methods of Analysis, Investment Strategies, and Risk of Loss

18 2A- Brochure Items Item 9- Disciplinary Information Item 10- Other Financial Industry Activities and Affiliations Item 11- Code of Ethics, Participation or Interest in Client Transactions, and Personal Trading Item 12- Brokerage Practices

19 2A- Brochure Items Item 13- Review of Accounts Item 14- Client Referrals and Other Compensation Item 15- Custody Item 16- Investment Discretion Item 17- Voting Client Securities Item 18- Financial Information

20 Additional State Disclosure Requirements Item 19- Additional Requirements for State- Registered Advisors Identify each principal executive officer and management person, describe their formal education and business background. Describe any business in which you are actively engaged (other than giving investment advice) and the approximate amount of time spent on that business.

21 Additional State Disclosure Requirements If you or a supervised person are compensated for advisory services with performance-based fees, explain how these fees will be calculated. Disclose specifically that performance-based compensation may create an incentive for the adviser to recommend an investment that may carry a higher degree of risk to the client. Additional disclosures required regarding certain arbitration, civil, self-regulatory, or administrative proceedings claims. Any relationship or arrangement that the advisor or any of its management persons have with any issuer of securities that is not already listed in Item 10.

22 Part 2A- Appendix 1: The Wrap Fee Program Brochure Advisors that sponsor wrap fee programs continue to be required to prepare a separate, specialized firm brochure for clients of the wrap fee program in lieu of the sponsor s standard brochure

23 Delivery Requirements Initial Delivery- Before or at the time the advisor enters into an advisory contract with the client Annual Delivery- No later than 120-days after the advisor s fiscal year end an advisor must provide to each client to whom they must deliver a brochure either: A copy of the current (updated) brochure that includes or is accompanied by the summary of material changes; or A summary of material changes that includes an offer to provide a copy of the current brochure

24 Delivery Requirements Interim Delivery- Whenever the advisor amends its brochure to add a disciplinary event or to change material information already disclosed in response to Item 9 of Part 2A, an updated brochure or a document describing the material facts relating to the amended disciplinary event must be promptly delivered to the client.

25 Amendments Similar to the existing requirements, Advisors are required to keep the brochures current by updating them at least annually, and updating them promptly when any information in the brochures (except the summary of material changes and the amount of assets under management, which only has to be updated annually) becomes materially inaccurate.

26 Part 2B: The Brochure Supplement Each Advisor s brochure must be accompanied by brochure supplements providing information about the advisory personnel on whom the particular client receiving the brochure relies for investment advice

27 Part 2B Format Advisors are required to write the brochure supplements in plain English but offers flexibility in presenting information in a format that is best suited to the advisory firm. Advisors may include supplement information within the firm s brochure. Advisors may elect to prepare a supplement for each supervised person. Alternatively, they can prepare separate supplements for different groups of supervised persons (e.g., all supervised persons in a particular office or work group). However, a brochure supplement must be organized in the same order, and contain the same headings, as the items appear in the form, whether provided in a brochure or separately.

28 Part 2B-Supplemental Items Item 1- Cover Page Item 2- Educational Background and Business Experience Item 3- Disciplinary Information Item 4- Other Business Activities Item 5- Additional Compensation Item 6- Supervision

29 Additional 2B Disclosures for State Registered Firms Item 7- Additional disclosure events required for state registered firms

30 Part 2B- Delivery Each client must be given a brochure supplement for each supervised person who: (i) formulates investment advice for that client and has direct client contact; or (ii) makes discretionary investment decisions for that client s assets, even if the supervised person has no direct client contact. If investment advice is provided by a team comprised of more than five supervised persons, brochure supplements need only be provided for the five supervised persons with the most significant responsibility for the day-to-day advice provided to the client.

31 Part 2B-Delivery The supervised person s supplement initially must be given to each client at or before the time when that specific supervised person begins to provide advisory services to that specific client.

32 Part 2B- Updating Advisors are required to deliver an updated supplement to clients only when there is new disclosure of a disciplinary event, or a material change to disciplinary information already disclosed, in response to Item 3 of Part 2B.

33 Delivery Requirements Part 2A and Part 2B can be delivered using electronic media so long as it meets the regulatory requirements for electronic delivery. The SEC has published interpretive guidance on delivering documents electronically, which can be found at

34 Filing Requirements Advisors are required to file their new brochures (Part 2A) electronically through the IARD system. SEC advisors are not required to file brochure supplements (Part 2B) or supplement amendments with the SEC, and they will not be available on the SEC s public website. Advisors are required to maintain copies of all. supplements and amendments in their files. State registered firms will be required to file the brochures through the IARD system.

35 About Us Serve Over 300 Investment Advisor Firms Principals Are Industry Experienced Working in Compliance or Law Departments & Hold Professional Credentials Consult with Retail & Institutional Firms Offer Full Array of IA Compliance Services Reasonably Priced at Midwest Rates RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services.

36 Copy of Slides To access a copy of the slides from today s presentation please go to: Consultants.com/New_ADV_Part2.html

37 Schedule Introductory Call via Online Appointment System

38 Thank You Tammy Emsick Senior Compliance Consultant RIA Compliance Consultants, Inc x 102 temsick@ria-compliance-consultants.com