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Client alert: SEC Revises Form ADV

Holland & Knight LLP – The Securities and Exchange Commission (“SEC”) has adopted two different amendments to the Form ADV, Parts 1 and 2.  On December 30, 2009, the SEC amended the custody rule for SEC-registered investment advisers (“RIAs”) and announced revisions to Part 1 of Form ADV to require RIAs to report custody practices.

On July 21, 2010, the SEC adopted amendments to Part 2 of Form ADV, the written disclosure statement commonly known as the “brochure.” The amendments to Part 2 change the format of the brochure from the previous “check the box/fill in the blank” format to a uniform narrative format to allow clients to more easily compare the brochures of multiple investment advisers.  As a result of the adopted amendments, RIAs will be required to report new information about their advisory business practices and to provide their clients with narrative brochures written in plain English.  Specifically, these amendments will require RIAs to provide the following:

Part 1

Custody Practices – Disclosure of custody practices, identification of accountants and qualified custodians, and a determination if clients’ assets are subject to a surprise examination or are exempt under the amended custody rule.

Part 2

Narrative Format – Concise narrative, plain English descriptions regarding the advisory business, fees and compensation, methods of analysis, investment strategies, disciplinary information, interest in client transactions or personal trading, code of ethics, brokerage practices, conflicts of interests, and ways the RIA addresses such conflicts.

Brochure Supplement – A “brochure supplement” disclosing resume-like information about the specific individuals providing investment advice to, or having direct contact with, the client.  This information includes the employee’s educational background, business experience, disciplinary history, compensation, other business activities, and contact information of the employee’s supervisor.

Electronic Filing – Electronically file the brochure and any amendments with the SEC via the Investment Adviser Registration Depository (IARD) system, making them publicly available.  Note, however, the brochure supplement will not be required to be filed with the SEC, but rather must maintained by the adviser and available for SEC examination.

Delivery – Delivery of the brochure and brochure supplements to clients before or at the time the RIA enters into an advisory contract with a client or, in the case of a brochure supplement, before or at the time the specific employee begins to provide investment advisory services to that client.

Amendments – (a) Deliver a summary of material changes to its brochure or brochure supplement on an annual basis and (b) Provide, or offer to provide, clients with a revised brochure reflecting those changes.  RIAs must also deliver interim updates upon material changes to a disciplinary event or the occurrence of a new disciplinary event.

Effective Date – RIAs who have a fiscal year end date of December 31 must electronically file this revised Form ADV, including the new brochure, by March 31, 2011 (the next annual updating period).  Further, RIAs must deliver the new Part 2 to their clients by May 31, 2011.

About Alex Akesson

Alex has been specializing in hedge fund and alternative investment news since April 2006. Working mainly in research and manager interviews, she has published breaking news on the hedge fund industry on her blog, as well as several industry publications. Her access to hedge fund managers gives her insight into news stories as well, and the ability to track press releases and other breaking news in real time.
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