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.
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.
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)
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
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
Preparing Brochure Supplements
Delivery of Brochure Supplements
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.