SEC gives OK to major redesign of ADV Part 2

Revisions to disclosure form seen as better for investors; could create headaches for advisers, though

By Jed Horowitz

Jul 21, 2010 @ 2:37 pm (Updated 9:49 am) EST

It's been a busy day for the Securities and Exchange Commission. Along with announcing a proposal to ditch 12(b)-1 fees for mutual funds, the agency's commissioners unanimously adopted rules to redesign Form ADV Part 2, the key disclosure document provided by advisers to clients.

The SEC said the ADV Part 2 redesign is a major advance in helping consumers shop for an investment adviser. But it may also place a burden on advisers who must figure out how much information to divulge.

The rules would require advisers to send prospects and clients in narrative form a “brochure” with information on 18 different areas of their practices before engagement contracts are signed. What's more, the SEC wants advisers to provide regular updates of the brochures in electronic format for public viewing on the SEC's website — rather than merely providing the info to new clients. Advisers will have to prepare “plain-English" written narratives for the new form.

The current ADV Part 2 form is largely a check-the-box, multiple-choice document that does not present information in a way that “enhances investor understanding,” Andrew "Buddy" Donohue, director of the SEC's Division of Investment Management, said in presenting the rule changes.

Disclosure about conflicts of interest, one of the benchmarks of advisers' fiduciary duty to clients, more often confuses clients under the current form, added SEC member Elisse Walter.

Adviser groups for years have been urging the SEC to take action on the redesign of the ADV Part 2. They contend that the new narrative form will be more investor-friendly than the old check-the-box format.

Nevertheless, the new disclosure document means advisers must present relevant information about fees, investment styles, disciplinary histories and conflicts of interest — all without overwhelming investors.

The change "will require a significant effort by all investment advisers to revise their current Part 2 forms," David Tittsworth, executive director of the Investment Adviser Association, wrote in an e-mail earlier this week..

[InvestmentNews senior editor Dan Jamieson contributed to this story]

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