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Form ADV Part 2 Questions & Answers

SEC Provides Guidance on ADV Part 2

Many SEC and state registered investment advisers have completed the new Form ADV 2 as part of the annual updating amendment.*  The SEC recently published guidance with respect to certain aspects of the new form.  The question and answer style guidance deals with such topics as: IARD submission deadlines, delivery of the brochure, and the Part 2B brochure supplement (for certain “supervised persons” with client contact).  For hedge fund managers, the most important points include:

  • Fund managers do not need to provide investors in the fund with copies of Form ADV Part 2.
  • In Part 2A, hedge fund managers are required to only briefly discuss the major risks of the fund’s investment strategy and then may direct investors to the fund’s offering documents for more detailed information on the risks of the program.
  • Offshore hedge fund managers who only provide advice to offshore funds do not have to file or prepare an ADV Part 2.
  • Part 2B Brochure Supplements (for “supervised persons”) do not need to be delivered until later this year.

Below we have reprinted some of the more applicable portions of the guidance.  The full set of questions and answers can be found here.

For additional information on preparation and delivery of the new form, please also see Form ADV Instructions for Part 2A.

* Note: most state registered advisers were required to complete the new Part 2 by March 31 as required by the state securities administrator.  Some states, such as Colorado, do not require the new Part 2 until later this year.  If you are a state or SEC registered adviser who has not submitted the new Part 2, please feel free to contact us and we can help you with this process.

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Updated as of March 18, 2011

Staff Responses to Questions About Part 2 of Form ADV

The staff of the Division of Investment Management has prepared the following responses to questions about Part 2 of Form ADV, under the Investment Advisers Act of 1940 and expects to update from time to time our responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Securities and Exchange Commission, and the Commission has neither approved nor disapproved this information. The adopting release for the most recent Amendments to Form ADV (dated July 28, 2010, the “Adopting Release”) can be found at: http://www.sec.gov/rules/final/2010/ia-3060.pdf.

Compliance Dates

Question I. 1

Q: The Commission has extended the compliance dates for certain advisers to deliver Part 2B, the brochure supplement. What are the new compliance dates?

A: On December 28, 2010, the Commission extended the compliance dates for delivery of Part 2B for certain investment advisers. (See IA-3129 athttp://www.sec.gov/rules/final/2010/ia-3129.pdf)

  • All advisers registered with the Commission as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011, to prepare and begin delivering brochure supplements to new and prospective clients and have until September 30, 2011 to deliver brochure supplements to existing clients. The compliance dates for delivering brochure supplements for all other advisers registered with the Commission as of December 31, 2010 remain unchanged. Upon filing their new brochures through the IARD, they must start to provide to their new clients a brochure supplement for a supervised person before or at the time that supervised person begins to provide advisory services to the client. In addition, they must deliver brochure supplements to their existing clients within 60 days of when they are required to file their new brochures with the Commission.
  • All newly registered advisers filing their 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. The compliance dates for delivering brochure supplements for newly registered advisers filing applications for registration after April 30, 2011 remain unchanged. (Posted March 18, 2011)

Question I. 2

Q: Has the Commission also extended the compliance dates for filing and delivering Part 2A, the brochure (“new brochure”)?

A: No. The compliance dates for delivering new brochures remain unchanged for both newly registered advisers and existing advisers.

  • Each adviser currently registered with the Commission whose fiscal year ends on or after December 31,

    2010 must include in its next annual updating amendment to its Form ADV a new brochure. (Rule 204-1(c)) Upon filing its new brochure with the Commission, an adviser must (i) begin to deliver the new brochure to new clients and prospective clients in lieu of its old brochure in accordance with its obligations under rule 204-3, and (ii) deliver to its existing clients within 60 days of when an adviser is required to file it. (Rule 204-3(g)).

  • Each adviser applying for registration with the Commission after January 1, 2011 must file a brochure or brochures that meet the requirements of amended Part 2A as part of the application for registration on Form ADV. (Rule 203-1(b)). Such an adviser must, upon registering, begin to deliver to its clients and prospective clients the new brochure or brochures in accordance with rule 204-3(a). (Posted March 18, 2011)

Preparing Brochures

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Question II. 4

Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses pooled investment vehicles as a significant investment strategy or method of analysis to duplicate the risk disclosures contained in a prospectus or other offering document for the pooled investment vehicle?

A: An adviser may satisfy the requirement of Item 8.B 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. (Posted March 18, 2011)

Question II. 5

Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses multiple investment strategies or methods of analysis to explain the material risks for each significant investment strategy or method of analysis in the brochure?

A: Yes, an investment adviser using multiple significant investment strategies or methods of analysis must explain the risks for each significant investment strategy or method of analysis it uses. An adviser using multiple strategies or methods of analysis may satisfy the requirements of Item 8.B by summarizing the strategies and methods and their material risks and referring clients and prospective clients to a separate disclosure document that the client has or will receive that sets out a more detailed explanation of the material risks of investment strategies or methods of analysis that are or will be used to manage the client’s account. (Posted March 18, 2011)

Question II. 6

Q: The staff has previously stated its view that an offshore adviser to an offshore private fund does not have an obligation to deliver a brochure under rule 204-3 to the offshore fund or to any investors in an offshore private fund it advises. ABA Subcommittee on Private Investment Entities, SEC Staff Letter (Aug. 10, 2006). The note to rule 203-1 states that an adviser that does not have to deliver a brochure to any clients does not have to prepare or file a brochure with the Commission. Does the 2006 staff response and the note work together such that an offshore adviser whose only clients are offshore funds would not have to prepare or file a brochure as part of its Form ADV?

A: Yes. (Posted March 18, 2011)

Filing and Delivering Brochures

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Question III. 2

Q: Rule 204-3 requires an adviser to deliver a brochure and one or more brochure supplements to each client or prospective client. Does rule 204-3 require an adviser to a hedge or other private fund to deliver a brochure and supplement(s) to investors in the private fund?

A: Rule 204-3 requires only that brochures be delivered to “clients.” A federal court has stated that a “client” of an investment adviser managing a hedge fund is the hedge fund itself, not an investor in the hedge fund. (Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006)). An adviser could meet its delivery obligation to a hedge fund client by delivering its brochure to a legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity. (Posted March 18, 2011)

Question III. 3

Q: Must an adviser to a hedge fund or other private fund file as part of its Form ADV the brochure it is required to deliver to the hedge fund or other private fund?

A: Yes. (Posted March 18, 2011)

Covered Persons for Brochure Supplements

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Preparing Brochure Supplements

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Delivery of Brochure Supplements

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Cole-Frieman & Mallon LLP is a boutique hedge fund law firm.  We provide investment adviser registration and compliance services to SEC and state registered hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345.

New Form ADV Part 2 Update & Overview

Registered investment advisers (both SEC and state) will need to file their annual form ADV update within 90 days of the end of the fiscal year, which for most firms will be March 31, 2011.  For many firms this will mean that they will also need to draft and submit the new Form ADV 2 which was adopted by the SEC in July of 2010 (see previous post). As many firms have had many questions about the new form, including what new content is required and how long it will take to complete the new form, this article will provide a summary of:

  • Background on the new Part 2
  • The structure and disclosure items of the Firm Brochure (Part 2A)
  • The structure and disclosure items of the Brochure Supplement (Part 2B)
  • Overview of states which have adopted new Part 2

Background

On July 21, 2010, the Securities and Exchange Commission (“SEC”) adopted a new Part 2 that became effective October 12, 2010.  The old Part II (and Schedule F which qualifies much of the information on the old Part II) contained a series of check-the-box options and also provided much of the same information which is also provided on Form ADV.  The new Part 2 will no longer be in the check-the-box format.  Instead, it will take the form of a narrative brochure written in plain English–the purpose of which is to provide clients with a more clear disclosure of the adviser’s business practices, conflicts of interest, and background.

The new Part 2 consists of three parts:

  1. The “Firm Brochure” (Part 2A)
    • SEC-registered firms and firms registered in states that have adopted the new Part 2 must complete.
    • Filed electronically on the IARD system.
    • Publicly available.
  2. A Wrap Fee Program Brochure (Part 2A, Appendix 1)
  3. The “Brochure Supplement” (Part 2B)
    • SEC-registered firms and firms registered in states that have adopted the new Part 2 must complete.
    • Not filed electronically.
    • Not publicly available.

The SEC has not provided a specific form that IAs must use when preparing the new Part 2.  The following provides general guidelines on how to structure the Firm Brochure and Brochure Supplement, as well as what content to include.  A full version of the new Part 2 instructions is available here.  Firms applying for SEC registration for the first time after January 1, 2011 are required to use the new Part 2.  Existing SEC-registered firms may use either the old Part II or the new Part 2 between October 12, 2010 and December 31, 2010.  However, beginning January 1, 2011, firms will have to use the new Part 2 for their 2011 annual updating amendment.

More information about the filing and delivery deadlines for the new Part 2A and 2B are available here.

Firm Brochure (Part 2A)

The Firm Brochure requires an adviser to provide information about the firm’s business practices and conflicts of interest. Many of the disclosure items are similar to those required in the old Part II, such as a discussion of the advisory business and the types of clients.  However, new disclosure items include a discussion of material changes since the last annual amendment as well as a discussion of potential conflicts of interest and how the firm will address such conflicts.

The Brochure consists of 18 separate disclosure items for SEC-registrations and additional items specifically for state-registrations.  Each item must be addressed, even if it is not applicable to the adviser.  The adviser may simply state it is not applicable.  The following is a summary of the disclosure items in the Firm Brochure:

  • Item 1 – Cover Page
    • Firm name, business address, contact information, website (if any) and the date of the Brochure.
    • Specific disclaimer stating the Brochure was not approved by the SEC or any state authority.
    • If the firm refers to itself as a “registered investment adviser,” a specific disclaimer that registration does not imply a certain level of skill or training.
  • Item 2 – Material Changes
    • If the firm is making an annual update, the Brochure must discuss material changes in the Brochure since the last annual update in a summary.  The summary can also be a separate document attached to the Brochure.
  • Item 3 – Table of Contents
    • Must be detailed enough so that clients can locate topics easily.
    • Must list items in the same order as they are listed in the Brochure, and contain the same headings.
  • Item 4 – Advisory Business
    • Describe the firm, how long it’s been in business, and identify the principals.
    • Describe the types of advisory services offered.
      • If the firm specializes in a particular type of services, e.g. financial planning, quantitative analysis, etc. provide greater detail.
      • If the firm provides investment advice only with respect to limited types of investments, explain and disclose that advice is limited in such way.
    • Explain whether the firm tailors advisory services and whether clients can impose restrictions on investments.
    • If the firm participates in wrap fee programs, describe the differences in how such accounts are managed versus other accounts and disclose that the firm receives a wrap fee.
    • If the firm manages client assets, disclose the amount managed on a discretionary basis and the amount managed on a non-discretionary basis.
  • Item 5 – Fees and Compensation
    • Describe how the firm is compensated and provide a fee schedule.  Note: This requirement is not required for Brochures delivered solely to qualified purchasers.
    • Provide other compensation-related disclosures: whether fees are deducted from client assets or whether clients will be billed for fees; any other types of fees (custodian fees, mutual fund expenses, brokerage/transaction costs); payment of fees in advance or arrears; and asset-based sales charges or service fees.
  • Item 6 – Performance-Based Fees and Side-By-Side Management
    • Discuss whether the firm charges performance-based fees or supervised persons manage accounts that pay such fees; and discuss how the fees are charged.
    • In addition, if the firm or supervised persons also manage accounts that do not charge such fees, discuss the potential conflicts of interest and how the firm will address such conflicts.
  • Item 7 – Types of Clients
    • Describe the firm’s clients.
    • Describe any requirements for opening/maintaining an account.
  • Item 8 – Methods of Analysis, Investment Strategies and Risk of Loss
    • Describe the methods of analysis and investment strategies used to formulate investment advice.  Disclose that investing in securities involves risk of loss.
    • For significant investment strategies or methods of analysis, discuss material risks involved with such strategies and methods.  If there are significant or unusual risks, discuss in detail.  If strategies involve frequent trading, discuss how frequent trading affects performance.
    • If the firm recommends primarily a particular type of securities, explain the material risks.  If there are significant or unusual risks, discuss in detail.
  • Item 9 – Disciplinary Information
    • Disclose material facts about legal or disciplinary events about the firm or a management person.  This item lists events that are presumed to be material if they occurred in the prior 10 years, unless (1) the event was resolved in the firm’s or the management person’s favor, or was reversed, suspended or vacated, or (2) the firm rebutted the presumption of materiality to determine that the event is not material.
    • In the interest of full and fair disclosure of material facts, disclose events not on the list, events not presumed material, and/or events that are more than 10 years old.
    • The Firm can rebut events that are presumed material.
  • Item 10 – Other Financial Industry Activities and Affiliations
    • Discuss whether the firm or management persons are registered or have pending applications to register as broker-dealers, broker-dealer reps, FCMs, CPOs, CTAs, or associate persons.
    • Describe material relationships with related financial industry participants (e.g. broker-dealers, registered reps of broker-dealers, investment companies or other pooled investment vehicles, FCMs, CPOs, CTAs, accounting firms, law firms, real estate brokers, etc.).
    • Describe material conflicts of interest that arise from such relationships and how those conflicts are addressed.
    • If the firm selects or recommends other investment advisers for clients, the firm must disclose compensation arrangements (if any) with those advisers and any other business relationships with such advisers, as well as any material conflicts of interest and how the firm address them.
  • Item 11 – Code of Ethics, Participation or Interest in Client Transactions and Personal Trading
    • Include a summary of the code of ethics and state a copy is available upon request.
    • If the firm or a related person:
      • (i) recommends to clients, or buys or sells for client accounts, securities in which the firm or a related person has a material financial interest;
      • (ii) invests in the same securities (or related securities, e.g., warrants, options or futures) that the firm or a related person recommends to clients; or
      • (iii) recommends securities to clients, or buys or sells securities for client accounts, at or about the same time that the firm or a related person buys or sells the same securities for the firm’s own (or the related person’s own) account, then the firm must describe the practice and discuss conflicts of interest (including how such conflicts are addressed).
  • Item 12 – Brokerage Practices
    • Describe how the firm selects brokers and determines the reasonableness of brokers’ compensation
    • If the firm receives research or other products or services other than execution from a broker-dealer or a third party in connection with client securities transactions (“soft dollar benefits”), disclose the firm’s practices and discuss the conflicts of interest they create.  Provide more detail for products/services that do not qualify under the Section 28(e) safe harbor.
    • If the firm considers, in selecting or recommending broker-dealers, whether the firm or a related person receives client referrals from a broker-dealer or third party, disclose this practice and discuss the conflicts of interest it creates.
    • If the firm routinely recommends, requests or requires that a client direct the firm to execute transactions through a specified broker-dealer, describe the firm’s practice or policy.
    • If the firm permits a client to direct brokerage, describe the practice.
    • Describe whether and under what conditions the firm aggregates the purchase or sale of securities for various accounts.
  • Item 13 – Review of Accounts
    • If the firm periodically reviews client accounts, describe the frequency and nature of review, as well as the titles of the persons who conduct the review.
    • If accounts are reviewed on other than a period basis, describe what triggers review.
    • Describe the content and indicate the frequency of regular reports.
  • Item 14 – Client Referrals and Other Compensation
    • If a non-client provides economic benefit to the firm for providing investment advice or services to clients, describe the arrangement, potential conflicts of interest and how such conflicts are addressed.
    • If the firm or related persons compensate any non-supervised persons for referrals, describe the arrangement and compensation.
  • Item 15 – Custody
    • If the firm has custody of client assets and a qualified custodian sends quarterly, or more frequent, account statements directly to your clients, explain that clients will receive account statements from the broker-dealer, bank or other qualified custodian and that clients should carefully review those statements.
    • If the firm also provides statements, urge clients to compare such statements with those provided by the qualified custodian.
  • Item 16 – Investment Discretion
    • If the firm has discretionary authority over accounts, disclose this, along with any limitations clients may place on that authority.
    • Discuss procedures before discretionary authority is assumed.
  • Item 17 – Voting Client Securities
    • Describe voting policies for client securities, if any.  Discuss any conflicts of interest and how such conflicts are addressed.  Explain that a copy of the policies are available upon request.
    • If the firm does not vote client securities, disclose that fact.
  • Item 18 – Financial Information
    • If the firm requires or solicits prepayment of more than $1,200 in fees per client, 6 months or more in advance, include a balance sheet for the most recent fiscal year.
    • If the firm has discretionary authority over client assets, custody of client funds or securities, or require prepayment discussed above, discuss any financial conditions that purchase nolvadex are reasonably likely to impair the ability to meet contractual commitments with clients.
    • Discuss any bankruptcy petitions during the past 10 years.
  • Item 19 – Requirements for State-Registered Advisers
    • Identify and describe the formal education and business background of principal executive officers and management persons.
    • Describe any business in which the firm is actively engaged (other than the provision of investment advice) and amount of time spent.
    • In addition to the fees discussed in Item 5, if the firm or a supervised person is compensated for advisory services with a performance-based fee, explain how the fees are calculated and discuss the conflict of interest.
    • Disclose material facts about certain disciplinary items and other financial industry relationships or arrangements.

Brochure Supplement (Part 2B)

The Brochure Supplement requires an adviser to provide information about the certain advisory personnel.  The following is a summary of the disclosure items in the Brochure Supplement.

The Firm must prepare a Brochure Supplement for (i) any supervised person who formulates investment advice for the client and has direct client contact and (ii) any supervised person who has discretionary authority over the client’s assets.  A Supplement is not required if the supervised person has no direct client contact and has discretionary authority over client assets only as part of a team. Note: If investment advice is provided by a team of more than five supervised persons, Brochure Supplements only need to be prepared for the five supervised persons with the most significant responsibility for the day-to-day advice.

  • Item 1 – Cover Page
    • Identify the advisory firm and the supervised persons covered in the Supplement (include name, business address, and phone number).
    • Standard disclaimer similar to the one in the Firm Brochure.
  • Item 2 – Educational Background and Business Experience
    • Describe the supervised person’s formal education and business background for the past 5 years.
    • Include professional designations, if any.
  • Item 3 – Disciplinary Information
    • Discuss the material facts related to any legal or disciplinary events that are material to a (prospective) client’s evaluation of supervised persons. This item lists events that are presumed to be material if they occurred in the prior 10 years, unless (1) the event was resolved in the supervised person’s favor, or was reversed, suspended or vacated, or (2) the firm rebutted the presumption of materiality to determine that the event is not material.
    • In the interest of full and fair disclosure of material facts, disclose events not on the list, events not presumed material, and/or events that are more than 10 years old.
    • The Firm can rebut events that are presumed material.
    • Disclose any event for which the supervised person has ever resigned or otherwise relinquished a professional attainment, designation or license in anticipation of it being suspended or revoked (other than for suspensions or revocations for failure to pay membership dues), if the firm knows or should have known that the supervised person relinquished his or her designation or license.
    • Note: If a Brochure Supplement is delivered electronically, the firm may disclose that a supervised person has a disciplinary event and provide a ink to BrokerCheck or IAPD (along with an explanation of how the client can access the disciplinary history).
  • Item 4 – Other Business Activities
    • If the supervised person is actively engaged in any investment-related business, including registration (or pending registrations) as a broker-dealer, registered representative of a broker-dealer, futures commission merchant (“FCM”), commodity pool operator (“CPO”), commodity trading advisor (“CTA”), or an associated person of an FCM, CPO, or CTA, disclose this fact and describe the business relationship.
  • Item 5 – Additional Compensation
    • If a non-client provides an economic benefit to the supervised person, describe the arrangement (not including regular salary).
  • Item 6 – Supervision
    • Discuss how supervised persons are supervised, including how the firm monitors advice provided to clients.
    • Provide the name, title, and phone number of the person responsible for supervising the supervised persons.
  • Item 7 – Requirements for State-Registered Advisers
    • Disclose material facts about certain disciplinary items.
    • Discuss any bankruptcy petitions.

[Note: the SEC recently extended the date for compliance with Part 2B.]

States That Have Adopted the New Part 2

The following states have followed suit and adopted the new Part 2 or informally indicated an intent to do so.

  • Alaska – adopted the new Part 2 (more information available here)
    • October 12, 2010 – December 31, 2010: IA applicants and currently registered IAs may use either the old Part II or new Part 2.
    • As of January 1, 2011: IA applicants are required to use the new Part 2 and registered IAs must file the new Part 2 by no later than the registrant’s next amendment filing or its annual updating amendment filing, whichever comes first.
  • Arizona – adopted the new Part 2 (more information available here)
    • October 12, 2010 – January 1, 2011: currently registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update
    • As of January 1, 2011: IA applicants must use the new Part 2.
  • California – adopted the new Part 2 (more information available here)
    • October 12, 2010 – January 1, 2011: IA applicants and currently registered IAs may use either the old Part II or the new Part 2.
    • As of January 1, 2011: IA applicants will have to file the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
  • Colorado – will require but not sure starting when
  • Connecticut – adopted the new Part 2 (more information available here)
    • October 12, 2011 – December 31, 2010: IA applicants and currently registered IAs may use either the old Part II or the new Part 2.
    • As of January 1, 2011: IA applicants will have to use the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
    • As of January 1, 2011: IAs registered on or before December 31, 2010 should file the new Part 2, no later than June 1, 2011.
  • Illinois – will require but not sure starting when
  • Indiana – adopted the new Part 2 (timelines may have been updated) (more information available here)
    • October 12, 2010 – January 1, 2011: IA applicants and currently registered IAs may use either the old Part II or new Part 2.
    • As of January 1, 2011: IA applicants are required to use the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
  • Maine – adopted the new Part 2 (more information available here)
    • October 12, 2010 – January 1, 2011: IA applicants and currently registered IAs may use either the old Part II or new Part 2.
    • As of January 1, 2010: IA applicants must use the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
  • Maryland – adopted the new Part 2 (more information available here)
    • As of October 12, 2010: IA applicants must use the new Part 2 as part of its initial application and any amendment.
    • October 12, 2010 – December 31, 2010: currently registered IAs and those pending registration as of October 12, 2010 may use either the old Part II or the new Part 2 for any amendments
    • As of January 1, 2011: registered IAs must file the new Part 2 by no later than the registrant’s next amendment filing or its annual updating amendment filing, whichever comes first.
  • Massachusetts – adopted the new Part 2 (more information available here)
    • October 12, 2010 – December 31, 2010: currently registered IAs are required to file the registrant’s next annual updating amendment using the new Part 2; until such time, the registrant may use the old Part II for regular amendment filings.
  • Ohio – adopted the new Part 2 (more information available here)
    • October 12, 2010 – December 31, 2010: IA applicants and currently registered IAs filing amendment may use either the old Part II or the new Part 2.
    • As of January 1, 2011: currently registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.  IA applicants are required to use the new Part 2.
    • As of April 30, 2011: registered IAs must have converted to the new Part 2.
  • Oregon – adopted the new Part 2 (more information available here).
    • October 12, 2010 – January 1, 2011: IA applicants and currently registered IAs filing amendment may use either the old Part II or the new Part 2.
    • As of January 1, 2011: IA applicants must use the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
  • Tennessee – adopted the new Part 2 (more information available here).
    • October 12, 2010 – December 31, 2010: IA applicants and currently registered IAs filing amendment may use either the old Part II or the new Part 2.
    • As of January 1, 2011: applicants must use the new Part 2 and registered IAs must file the new Part 2 by no later than the registrant’s next amendment filing or its annual updating amendment filing, whichever comes first.
  • Texas – currently in comment period, final approval expected in mid-2011, encouraging use of the new Part 2 (more information available here).

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Bart Mallon Esq. is a hedge fund attorney and provides hedge fund compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

SEC Extends Compliance Date for “Brochure Supplement,” Part 2B of Form ADV

On July 21, 2010, the Securities and Exchange Commission (“SEC”) adopted amendments to cheap viagra brand Part 2 of Form ADV that became effective October 12, 2010.  Part 2A of Form ADV, the “firm brochure,” contains information about the advisory firm itself.  Part 2B of Form ADV, the “brochure supplement,” contains information about the advisory personnel.

On December 28, 2010, the SEC issued a four-month extension for the Part 2B compliance dates.   The new compliance dates for Part 2B are as follows:

  • New IAs – All newly registered IAs filing their applications for registration with the SEC from January 1, 2011 through April 30, 2011, have until May 1, 2011 to begin delivering Part 2B to new and prospective clients. These advisers have until July 1, 2011 to deliver Part 2B to existing clients. The compliance dates for delivering Part 2B for newly-registered IAs filing applications for registration after April 30, 2011 remain unchanged.
  • Existing registered IAs – All IAs registered with the SEC as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011, to begin delivering Part 2B to new and prospective clients. These advisers have until September 30, 2011 to deliver Part 2B to existing clients. The compliance dates for delivering Part 2B for existing registered IAs with fiscal years ending after April 30, 2011 remain unchanged.

The compliance dates for Part 2A remain unchanged.  More information about the compliance dates initially set by the SEC are available here.

For the full SEC release, please see SEC Extends Compliance Deadline for ADV Part 2.

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Bart Mallon Esq. is a hedge fund attorney and provides hedge fund compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

California Adopts New Part 2 of Form ADV

At the end of July, the SEC adopted amendments to Form ADV Part 2 and the related rules.  The amended Form ADV Part 2 will be used by SEC-registered advisers to meet their disclosure obligations and generally describe the adviser’s services, fees, and strategies.

On September 1, 2010, the California Department of Corporations followed suit and announced its adoption of the new Part 2 as well, effective October 12, 2010 (see California ADV Part 2 Announcement).  This effective date corresponds with the effective date of the SEC’s rule changes.  The Department’s decision will help bring consistency between state and SEC investment adviser registration requirements.

New ADV Part 2

The amended Form ADV Part 2 consists of three parts:

  • the “Firm Brochure” (Part 2A),
  • a Wrap Fee Program Brochure (Part 2A, Appendix 1), and
  • the “Brochure Supplement (Part 2B).

Every investment adviser must complete the Firm Brochure and the Brochure Supplement.  The Firm Brochure, which is filed electronically with the SEC on the IARD system, will include information about the adviser and its business. The Brochure Supplement, which is a brief disclosure document about certain personnel of the adviser, will be provided to clients but not filed with the SEC.

In addition, the new Part 2 will no longer be in the check-the-box format.  Instead, it will take the form of a narrative brochure written in plain English–the purpose of which is to provide clients with a more clear disclosure of the adviser’s business practices, conflicts of interest, and background.

Compliance Dates

Effective October 12, 2010,  for California registered investment advisers, the relevant compliance dates for the new ADV Part 2 are:

  • As of January 1, 2011 all new investment adviser applicants will have to file, through the IARD, the new Part 2 of Form ADV as part of their application.
  • As of January 1, 2011 all licensed investment advisers will need to incorporate the new Part 2 of Form ADV with their next filing of an amendment to Form ADV, or their annual updating amendment to Form ADV.
  • Between October 12, 2010 and January 1, 2011 applicants and current licensed investment advisers filing amendments to their Part II of Form ADV may use either the current Part II or the new Part 2.

With this change, investment advisers should review and become familiar with the new Part 2.  Advisers that are currently registered with the California Securities Regulation Division will have to incorporate the new Part 2 when they file amendments to Form ADV and also when they file the required annual update.  For most advisers with a December 31, 2010 year-end, the deadline for the annual update will be March 31, 2011.

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Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides investment adviser registration and compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

New Form ADV Part 2 Format Released

SEC Announces New Format for ADV Part 2

Advisors registered with the SEC should have received a notification from the SEC about the new Part 2 format.  We have posted that release below and the communication we received from the SEC.  We have also posted the new release as well as the instructions for the new ADV Part 2.  We will be providing an overview and our thoughts on these changes in the coming days.

Complete Release – New Form ADV Part 2

New Form ADV Part 2 Instructions

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Form ADV Part 2: New Format and Brochure Supplements Required

The SEC recently adopted amendments to Part 2 of Form ADV and related rules that require investment advisers to prepare plain English narrative brochures and brochure supplements. You may view the adopting release and amended form at http://www.sec.gov/rules/final/2010/ia-3060.pdf . The revised form and rules require you to file a narrative brochure(s) electronically in a text searchable PDF format on IARD and to deliver the brochure to clients. You must also prepare, and deliver to clients, brochure supplements for certain employees and maintain them in your files. If your fiscal year ends on December 31, you are required to file a narrative brochure(s) with your annual amendment filing that is due by March 31, 2011. If your fiscal year end is other than December 31, you are required to file a narrative brochure(s) with your annual amendment filing for your 2011 year end. Please review the final release, amended rules, and amended Part 2 of Form ADV for additional information on when and how you are required to comply with these amendments. You cannot reply to this email. If you have questions, please email [email protected]

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Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides legal support and hedge fund compliance services to all types of investment managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.