Client Alerts

SEC Adopts Amendments to Part 2 of Form ADV

Client Alerts | January 24, 2011 | Securities and Corporate Finance | Hedge Funds

The Securities and Exchange Commission (the “SEC”) adopted amendments (the “Amendments”) to Part 2 of Form ADV (commonly referred to as the “brochure” and currently designated Part II of Form ADV).1 The Amendments are intended to provide advisory clients with clearly written, meaningful, current disclosure of the business practices, conflicts of interest and background of SEC-registered investment advisers and their advisory personnel. While much of the substantive disclosures under the Amendments are similar to disclosure currently required, the format of the amended Part 2 has changed. Instead of a predominantly check-the-box format, Part 2 now requires advisers to prepare a narrative brochure in plain English.

Part 2 of Form ADV is made up of two parts, Part 2A, or the “Brochure,” and Part 2B, or the “Brochure Supplement,” which includes information about certain advisory personnel. In addition, Part 2A of Form ADV will now have to be filed electronically with the SEC and will be publically available on the SEC’s Investment Adviser Public Disclosure website (“IAPD”).

Compliance with the Amendments

An adviser applying for registration with the SEC as an investment adviser after January 1, 2011, must file a Brochure that meets the requirements under the Amendments as part of its application for registration, and begin delivering its Brochure to clients upon registration.

The SEC recently extended the deadline for advisers to initially deliver Brochure Supplements.2 An adviser that applies for registration after January 1, 2011 but prior to April 30, 2011 will have until May 1, 2011 to deliver its Brochure Supplements to new and prospective clients, and until July 1, 2011 to deliver its Brochure Supplements to existing clients. An adviser that applies for registration after April 30, 2011 will have to deliver its Brochure Supplements to new and existing clients at the same time that it is required to deliver its Brochure.

An adviser that is currently registered with the SEC as an investment adviser must include a Brochure that meets the requirements under the Amendments as part of its next annual updating amendment (generally required by March 31, 2011, for advisers with fiscal years ending on December 31). Such adviser must then deliver its revised Brochure to existing clients within 60 days of filing such amendment, and begin delivering its revised Brochure to new or prospective clients once its Brochure has been filed. However, any such adviser will generally have until July 31, 2011 to deliver its Brochure Supplements to new and prospective clients, and until September 30, 2011 to deliver its Brochure Supplements to existing clients (assuming its fiscal year ends between December 31, 2010 and April 30, 2011). Advisers whose fiscal years end after April 30, 2011, must deliver their Brochure Supplements at the same times that they are required to deliver their Brochures.

Given the expanded disclosure (including disclosures about conflicts and related policies and procedures), Brochures will take longer to prepare than in prior years. We therefore recommend that advisers begin preparing their Brochure and Brochure Supplements well in advance of registering with the SEC or amending their current Form ADV.

Part 2A, the Firm Brochure

The Brochure is comprised of 18 disclosure items about the advisory firm. In responding to these disclosure items, advisers must follow the specified order of the items in the SEC’s form, and use the headings provided in the form. The SEC believes that the use of a consistent format among registered advisers “will facilitate investors’ comparison of multiple advisers.”

Much of the disclosure required in the Brochure addresses an adviser’s conflicts of interest with its clients, and is disclosure that the adviser, as a fiduciary, must make to clients in some manner regardless of the form requirements.

The Brochure requires that an adviser identify conflicts that it has or is reasonably likely to have, and requires that an adviser describe business practices in which it engages in or is reasonably likely to engage (including risks associated with such practices), and describe the procedures that it uses to address such conflicts.

Part 2B, The Brochure Supplement

Pursuant to the Amendments, an adviser must also give clients a “Brochure Supplement” describing certain information about each individual who: (1) formulates investment advice for that client and has direct client contact; or (2) makes discretionary investment decisions for that client’s assets, even if the supervised individual has no direct client contact (each, a “Covered Person”). If investment advice is provided by a team of more than five Covered Persons, Brochure Supplements need only be provided for the five Covered Persons with the most significant responsibility for the day-to-day advice provided to the client.

The Brochure Supplement is comprised of six items which disclose information relating to the Covered Person’s educational background and business experience; disciplinary history;3 other business activities; additional compensation paid to the Covered Person by non-clients for advisory services; and the name and contact information for such Covered Person’s supervisor and information regarding how the firm supervises the Covered Person. A Brochure Supplement may be prepared as a separate document or incorporated into the adviser’s Brochure. Advisers with few employees may consider incorporating their Brochure Supplements into their Brochure, while larger advisers with more Covered Persons who provide services to different clients or funds may consider using separate documents for each Brochure Supplement.

An adviser does not have to file its Brochure Supplements with the SEC; however, advisers are required to maintain copies of all Brochure Supplements and any amendments in their files.

Delivery, Amendments and Filing

Initial Delivery

Prior to the Amendments, an adviser was required to deliver Part II of its Form ADV at least 48 hours before entering into an advisory contract with a client or at the time it entered into the advisory contract as long as the client was permitted to revoke the advisory contract within 5 days. The Amendments require an adviser to deliver its Brochure to a client before or at the time it enters into an advisory contract (or subscription agreement in the case of fund investors) with such client.4

In the adopting release for the Amendments, the SEC confirmed that Part 2 of an adviser’s Form ADV does not have to be provided to an underlying investor in a private investment fund unless the adviser also provides advice to such investor separately from the advice provided to the fund. Nevertheless, since an adviser is a fiduciary and has a duty to disclose “all material facts relating to the advisory relationship” to investors in such funds, to ensure that advisers make appropriate disclosure, advisers to private investment funds should consider delivering Part 2 of their Form ADV to underlying investors in such funds.5

Timing of Amendments

Advisers must amend and file their Brochures within 90 days after the end of their fiscal year (typically by March 31), and within 30 days after that filing, the adviser must deliver to its existing clients either:

  1. a copy of its then-current (updated) Brochure that includes or is accompanied by a summary of material changes; or
  2. a summary of material changes together with an offer to provide a copy of its then current Brochure.

As part of an adviser’s annual update of its Brochure, the adviser must include a summary of material changes that identifies and broadly discusses the material changes since its last annual update. This summary can be included in the Brochure itself or can be a separate document accompanying the Brochure. This summary should contain no more information than is necessary to inform clients of the substance of the changes. The summary is intended to highlight material changes so that clients may determine whether to review the Brochure in its entirety or to contact the adviser with questions about the changes.

If there have been no material changes to an adviser’s Brochure since its last annual update, then the adviser does not have to prepare a summary of material changes or deliver its Brochure to its existing clients or submit an amended Part 2 of Form ADV to the SEC.

An adviser does not have to deliver its Brochure Supplements to its clients on an annual basis. Instead, an adviser must deliver any update to a Brochure Supplement only if it amends the disciplinary information in the Brochure Supplement.6

In addition to the annual amendment of an adviser’s Brochure, an adviser must promptly amend its Brochure and Brochure Supplements, respectively, whenever the information therein becomes materially inaccurate, but does not have to deliver the amended Brochure to existing clients until its annual update, unless it amends the disciplinary information. Nevertheless, an adviser may wish to deliver its amended Brochure and Brochure Supplement to existing clients on an interim basis, and must deliver the amended Brochure and Brochure Supplement to any new clients.

Electronic Delivery and Filing

An adviser may deliver its Brochure (and/or summary of material changes) and its Brochure Supplement to clients in paper form or electronic form (in accordance with the SEC’s guidance on electronic delivery).

1 See Final Rule Release of the SEC No. IA-3060, http:/, and the SEC’s Investor Bulletin,

2 See Final Rule Release of the SEC No. IA-3129,

3 If the Covered Person is subject to disclosure of disciplinary information through BrokerCheck or IAPD, then the adviser may include a hyperlink to these systems (with a brief explanation of how the client can access the disciplinary history) instead of disclosing such disciplinary information in the Brochure Supplement, provided, that the Brochure Supplement is delivered electronically and also includes a statement that the Covered Person has a disciplinary history, the details of which can be found on BrokerCheck or IAPD (as the case may be).

4 An adviser does not have to deliver its Brochure or Brochure Supplements to certain types of clients, including, clients that are investment companies registered under the Investment Company Act of 1940, as amended (the “1940 Act”), or business development companies subject to section 15(c) of the 1940 Act.
In addition, an adviser does not have to deliver a Brochure Supplement to clients who receive solely
impersonal investment advice or certain “qualified clients” who are officers, employees or other related
persons of the adviser as set forth under Rule 205-3(d)(1)(iii) of the 1940 Act.

5 If an adviser determines not to provide Part 2 of its Form ADV to underlying investors, it must at least provide its Brochure and Brochure Supplements to the fund itself, which in the case of most offshore funds means provision to the fund’s directors, and for most domestic funds, provision to the fund’s general partner or managing member.

6 If a Brochure Supplement discloses disciplinary information by reference to BrokerCheck or IAPD and BrokerCheck or IAPD is updated with new disciplinary information or material changes to previously disclosed information, then the adviser must deliver an updated Brochure Supplement which indicates that the disciplinary information on such system has changed and include a hyperlink to the system.