SEC Staff Issues Guidance on Part 2 to Form ADV

On March 18, 2011, the staff of the Securities and Exchange Commission’s Division of Investment Management (the “Staff”) published “Staff Responses to Questions about Part 2 of Form ADV” (the “Q&A”). The Q&A addressed several topics relating to Part 2 of Form ADV, including compliance dates, preparing the Brochure and Brochure Supplements, filing and delivery requirements, and covered persons for Brochure Supplements. The complete Q&A can be found at http://sec.gov/divisions/investment/form-adv-part-2-faq.htm.

Among others, we feel the following topics are of interest to our investment adviser clients:

Compliance Dates

The Staff confirmed that compliance dates for the delivery of Part 2B of Form ADV (the “Brochure Supplement”) have been extended for certain advisers, but that the compliance dates for filing and delivering Part 2A of Form ADV (the “Brochure”) have not changed. We have set these out below.

Delivery of Part 2A — The Brochure

Every investment adviser currently registered with the SEC who files an annual updating amendment for a fiscal year ending on or after December 31, 2010, and every investment adviser first registering with the SEC after January 1, 2011, is required to deliver a Brochure to prospective, new and existing clients upon filing of its annual amendment or initial registration, except that currently registered advisers have 60 days to provide the Brochure to existing clients.

Delivery of Part 2B — The Brochure Supplement

Advisers that were registered with the SEC as of December 31, 2010, and that have a fiscal year ending December 31, 2010, through April 30, 2011, have until July 31, 2011, to begin delivering Brochure Supplements to new and prospective clients, and until September 30, 2011, to deliver Brochure Supplements to existing clients. The timing for when a Brochure Supplement must be delivered for any other investment adviser registered with the SEC as of December 31, 2010, remains unchanged (i.e., it will be required to deliver Brochure Supplements to new and prospective clients after the filing of its annual updating amendment and to existing clients within 60 days of filing such amendment). Advisers first filing their applications for registration from January 1, 2011, to April 30, 2011, have until May 1, 2011, to begin delivering Brochure Supplements to new and prospective clients and until July 1, 2011, to deliver Brochure Supplements to existing clients. The requirements for investment advisers that first file their application for registration after April 30, 2011, remain unchanged (i.e., they will be required to deliver Brochure Supplements to new, prospective and existing clients upon registration).

Preparing Brochures — Summary of Material Changes

The Staff clarified that a currently registered adviser that is transitioning to the new Brochure format may choose not to identify and discuss material changes from its previous brochure in Item 2 of Part 2A. An adviser may choose, however, to highlight under Item 2 any material information contained in its Brochure that is being provided to clients to the first time, such as conflicts of interest or disciplinary information.

Preparing Brochures — Headings and Sub-Parts; Cover Page

While the Staff reconfirmed its position that each item in an adviser’s Brochure is required to include the heading and appear in the same order as provided in Part 2A, it allows an adviser some flexibility with the format of its responses to each item, clarifying that an adviser’s Brochure does not need to include headings of the sub-parts to each item or to follow the order of the sub-parts within each item. In addition, the cover page need not identify it as Item 1, Cover Page.

Preparing Brochures — Risk Disclosure

Many advisers have had questions with respect to the amount of risk disclosure that is required in Item 8.B of Part 2A. To address these questions, the Staff stated that an adviser that “uses pooled investment vehicles as a significant investment strategy or method of analysis” may satisfy the risk disclosure requirements of Item 8.B of Part 2A by “providing a brief explanation of the material risks for each strategy and referring clients to the prospectus, offering memoranda, or other documents that a client participating in the pool will or has received that set out a more detailed discussion of risks.” In addition, the Staff notes that an adviser that uses multiple significant investment strategies or methods of analysis must explain the material risks for each significant investment strategy or method of analysis it uses. It may satisfy the Item 8.B disclosure requirements by summarizing the investment strategies and methods and their materials risks and referring to a separate disclosure document that the client has or will receive that sets out a more detailed explanation of those materials risks.

Brochure Delivery to Clients

The Staff confirmed that an adviser to a hedge fund or a private equity fund (together “Private Funds”) could meet its obligation to deliver a Brochure and Brochure Supplement to its Private Fund “clients” under Rule 204-3 of the U.S. Advisers Act of 1940, as amended (the “Advisers Act”), by delivering such Brochure or Brochure Supplement to a legal representative of the Private Fund, including “the general partner, manager or other person serving in a similar capacity.” As a matter of best practice, we continue to recommend that the Brochure and Brochure Supplement be provided to a legal representative of the Private Fund as well as to all investing in such Private Fund.

The Staff confirmed that a non-U.S. adviser to solely non-U.S. Private Funds, which under the Advisers Act does not have any obligation to deliver a Brochure to its non-U.S. Private Funds or their investors, would not be required to prepare or file a Brochure as part of its Form ADV.

The Staff stated that it expects to update the Q&A from time to time. We will keep you apprised of any material updates to the Q&A as they are published.

Steven M. Giordano, Partner, Investment Management
steven.giordano@bingham.com, 617.951.8205

Richard A. Goldman, Partner, Investment Management
richard.goldman@bingham.com, 617.951.8851

Paul B. Raymond, Partner, Investment Management
paul.raymond@bingham.com, 617.951.8567

Toby R. Serkin,Partner, Investment Management
toby.serkin@bingham.com, 617.951.8760

Stephen C. Tirrell, Partner, Investment Management
stephen.tirrell@bingham.com, 617.951.8833

Roger P. Joseph, Practice Group Leader, Investment Management; Co-chair, Financial Services Area
roger.joseph@bingham.com, 617.951.8247

Edwin E. Smith, Partner, Financial Restructuring; Co-chair, Financial Services Area
edwin.smith@bingham.com, 617.951.8615