On December 28, 2010, the Securities and Exchange Commission published a final rule extending the date by which a registered investment adviser must begin delivering new Part 2B of Form ADV (the “Brochure Supplement”) to new, existing and prospective clients.
A registered investment adviser is required to prepare a Brochure Supplement for (i) any supervised person who formulates investment advice for a client and has direct client contact and (ii) any supervised person who has discretionary authority over a client’s assets. For each person, the adviser must disclose, among other things: (i) his or her formal education and business background for the past five years; (ii) certain legal or disciplinary events; (iii) other capacities in which he or she participates in any investment-related business and any conflicts of interest such participation may create; (iv) any compensation he or she receives based on the sales of securities or other investment products, as well as an explanation of the incentives this type of compensation creates; (v) economic benefits he or she receives from someone other than a client for providing advisory services; and (vi) how the firm monitors the advice he or she provides, including the name, title and telephone number of his or her supervisor. Brochure Supplements are not required to be filed electronically and will not be publicly available on the SEC’s website.
As the rule was originally adopted, an investment adviser that is currently registered with the SEC and whose fiscal year ends on or after December 31, 2010, was required to prepare Brochure Supplements (and begin delivering them to new and prospective clients) in connection with the adviser’s next annual updating amendment of Form ADV, and was required to deliver Brochure Supplements to existing clients within 60 days after filing the annual updating amendment. For example, a registered investment adviser with a fiscal year ending December 31, 2010, was required to file the annual updating amendment and begin delivering Brochure Supplements to new and prospective clients by March 31, 2011, and was required to deliver Brochure Supplements to existing clients no later than May 31, 2011. An investment adviser registering on or after January 1, 2011, was required to provide Brochure Supplements to new, existing and prospective clients upon registering.
The SEC has revised the delivery requirements as follows:
Note that an adviser is only required to deliver Brochure Supplements to each of its “clients.” With respect to private funds (including hedge funds and private equity funds), the adviser’s “client” is the fund. Accordingly, an adviser to a private fund is only required to deliver Brochure Supplements to the fund, and not to investors in the fund. However, advisers may wish to consider providing Brochure Supplements to investors in the private funds they advise. Advisers are not required to prepare and deliver Brochure Supplements for their clients that are registered investment companies.
Please note that the SEC is not extending the compliance date for the filing and delivery of Part 2A of Form ADV (the “Brochure”), which requires an adviser to provide information about a variety of topics relating to its business practices and conflicts of interest. An investment adviser registering with the SEC on or after January 1, 2011, must still file the Brochure with its application for registration on Form ADV Part 1. An investment adviser that is currently registered and whose fiscal year ends on or after December 31, 2010, must still include the Brochure as part of the next annual updating amendment of its Form ADV Part 1. In general, a Brochure must be delivered to new and prospective clients before or at the time the adviser enters into the advisory contract. Brochures must be delivered to existing clients within 60 days after filing, but are not required to be delivered to clients that are registered investment companies.
Please click here for our alert on the Brochure Supplements and other requirements of new Form ADV Part 2. Click here for the full text of the new final rule.
For assistance, please contact the following lawyers:
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
Tim Burke, Practice Group Leader, Broker-Dealer Group; Co-chair, Financial Services Area
timothy.burke@bingham.com, 617.951.8620
This article was originally published by Bingham McCutchen LLP.