Most investment advisers had to electronically file the new narrative, plain English brochure (Form ADV, Part 2A) by March 31, 2011. I hope that everyone met this deadline. But what is an investment adviser to do now that its brochure has been filed? Is this regulatory burden over? Can you just file it away and glide until your annual updating amendment is due in March, 2012?
As lawyers like to say, it depends. I have gathered some thoughts and information below that may assist you regarding your additional responsibilities. (These responsibilities come from federal law, but state securities regulators are likely to apply the same laws.)
First, what should you do with the new brochure?
If you are an SEC-registered adviser, you must “deliver” a brochure and a brochure supplement(s) to each client or prospective client that contains all information required by Part 2 of Form ADV. 17 C.F.R. § 275.204-3(a).
Please note that the statute says “deliver,” not offer. For more detail on the delivery requirements, see below and/or seek legal advice.
Second, when do I start using the new brochure and brochure supplement?
An SEC-registered investment adviser must begin using the new brochure and brochure supplement by the date that the adviser was required to first electronically file its new brochure. 17 C.F.R. § 275.204-3(g)(2). Therefore, registered advisers with a December 31, 2010 year-end must start using the new brochure and brochure supplement by March 31, 2011. (Note that this is a transition rule.)
When using the new brochure and brochure supplement, an adviser must be using the “current” version. 17 C.F.R. § 275.204-3(g)(2). Therefore, advisers should control all amendments to the brochure and brochure supplement to ensure that only the current versions are being used.
Finally, an adviser must comply with the delivery requirements. See 17 C.F.R. § 275.204-3(g)(2).
Third, in this period of transitioning to the new narrative brochure, when must I provide existing clients with a copy of the new brochure and brochure supplement?
An SEC-registered investment adviser must deliver its current brochure and brochure supplement to its existing clients within 60 days after the date that the adviser was required to electronically file its new brochure. 17 C.F.R. § 275.204-3(g)(1). Therefore, registered advisers with a December 31, 2010 year-end must deliver the new brochure and brochure supplement to their existing clients by May 30, 2011. (Note that this is a transition rule.)
Fourth, what are the delivery requirements for the brochure?
For new clients, an adviser must deliver “your current brochure” before or at the time you and the new client execute an investment advisory contract. 17 C.F.R. § 275.204-3(b)(1).
For existing clients, see the transition rule above that requires advisers to provide the new brochure and brochure supplement within 60 days after the brochure and brochure supplement were required to be electronically filed. Thereafter, for existing clients, the annual delivery requirement is triggered ONLY “if there are material changes in the brochure since the adviser’s last annual updating amendment.” 17 C.F.R. § 275.204-3(b)(2). If these material changes exist, the adviser must deliver annually within 120 days after the end of the adviser’s fiscal year (April 30, 2011 for advisers with a December 31, 2010 year-end) the following:
• A current brochure or
• The summary of material changes to the brochure with (1) an offer to provide your current brochure, (2) the telephone number (and website address or email address, if available) by which a client may obtain the current brochure from you, and (3) the website address for obtaining information about you through the Investment Adviser Public Disclosure (IAPD) system.
17 C.F.R. § 275.204-3(b)(2)(i), (ii).
To simplify: For new clients, give a copy of your current brochure before the new client signs the advisory contract. For existing clients (where the adviser has a December 31 year –end):
• In 2011, give all existing clients a copy of your current brochure and brochure supplement by May 30, 2011.
• Thereafter, give all existing clients a copy of your current brochure by April 30, 2011.
Also an SEC-registered adviser may deliver its brochure electronically, but, as expected, electronic delivery brings its own set of regulations. (The SEC has published interpretive guidance regarding electronic delivery by investment advisers. Study this guidance or consult legal counsel before attempting electronic delivery of a brochure.)
Fifth, what are the delivery requirements for the brochure supplements?
The general rule is that an investment adviser (remember, the IA is the firm) must deliver to each client of prospective client a current brochure supplement for a supervised persons (usually the person who is giving the investment advice – that is, the investment adviser representative) before or at the time the supervised person begins to provide advisory services to the client. 17 C.F.R. § 275.204-3(b)(3). (However, keep in mind the transition rule stated above, that requires advisers to provide the brochure supplement to existing clients by May 30, 2011.)
However, the SEC has extended the compliance dates by which some advisers must deliver the brochure supplement as follows:
• Advisers registered with the SEC as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, must prepare and begin delivering brochure supplements to new and prospective clients by July 31, 2011, and must deliver brochure supplements to existing clients by September 30, 2011.
• Newly-registered advisers filing applications for registration from January 1, 2011 through April 30, 2011, have until May 1, 2011 to prepare and begin delivering brochure supplements to new and prospective clients and have until July 1, 2011 to deliver brochure supplements to existing clients.
Based on the general rule, BEFORE a new individual begins to serve a particular advisory client, the investment adviser must consider whether that individual is a supervised person and, if so, whether the adviser has provided the brochure supplement of that supervised person to the client.
Please note that the brochure supplement(s) may be part of the brochure, so the client may have been provided the brochure supplement(s) when he was provided the brochure.
Sixth, how often do I have to amend my brochure?
An SEC-registered investment adviser must amend its brochure as follows:
• At least annually, within 90 days of the end of its fiscal year; AND
• More frequently, if required by the instructions to Form ADV.
17 C.F.R. § 275.204-1(a).
Seventh, according to the instructions to Form ADV, Part 2, when must I amend my brochure?
According to the instructions for Part 2A of Form ADV, an investment adviser must update its brochure as follows:
• Each year at the time the adviser files its annual updating amendment (i.e., within 90 days after year-end) AND
• Promptly whenever any information in the brochure becomes materially inaccurate. (An adviser is not required to update its brochure between annual updating amendments solely because the amount of client assets it manages has changed or because its fee schedule has changed. However, if the adviser updates its brochure for a separate reason in between annual updating amendments and the amount of client assets managed or its fees schedule has become materially inaccurate, the adviser should update these items in the interim amendment.
Eighth, can I amend my brochure other than when the instructions to Part 2 require an amendment?
Yes, an adviser can amend its brochure at any time to add or correct non-material items. I’ve already seen amendments to correct typos, to improve readability, and to insert additional explanation about an adviser’s business.
Ninth, do all amendment to my brochure – material and non-material – have to be filed through the IARD system?
All amendments to the brochure (i.e., Part 2A of Form ADV) must be filed electronically with the IARD (unless the adviser has received a hardship exemption). 17 C.F.R. § 275.204-1(b). Therefore, even if an adviser amends its brochure for minor things, such as to correct a typo, the adviser must file the amended brochure in the IARD system.
Tenth, what are the delivery requirements for amendments to the brochure or brochure supplement?
The delivery requirements for amendments to the brochure and brochure supplement are triggered ONLY if the amendment adds disclosure of a disciplinary event or materially revises information already disclosed about a disciplinary event. If this is the case, an investment adviser must deliver to each client “promptly after you create an amended brochure or brochure supplement” one of the following;
• The amended brochure or brochure supplement, as applicable, and a statement describing the material facts relating to the change in disciplinary information, or
• A statement describing the material facts relating to the change in disciplinary information.
17 C.F.R. § 275.204-3(b)(4).
The delivery requirements for interim amendments (i.e., any amendments between annual updating amendments) differ. If an adviser amends its brochure because information in the brochure became materially inaccurate (see the Seventh note above), the adviser should immediately begin to use the newly amended brochure, but it does not have to promptly provide the newly amended brochure to all existing clients. However, if an adviser amends its brochure because of disciplinary events or disciplinary disclosures described above, the adviser must promptly provide the appropriate document(s) to each client.
Eleventh, what are the primary recordkeeping requirements related to brochures?
An SEC-registered investment adviser must make and keep the following records related to brochures and brochure supplements:
• A copy of each brochure and brochure supplement and each amendment or revision thereto;
• Any summary of material changes that is not contained in the brochure; and
• A record of the dates that each brochure and brochure supplement, each amendment or revision thereto, and each summary of material changes not included in a brochure was given to any client or to any prospective client who subsequently became a client.
17 C.F.R. § 275.204-2(a)(14)(i).
These records must be maintained “in an easily accessible place for a period of not less than five years.” 17 C.F.R. § 275.204-2(e)(1).
