Commenters Address Investment Adviser Disclosure Changes

In connection with an initiative to create an electronic filing system for investment advisers, the SEC proposed rule changes aimed at increasing investment adviser disclosure and investment advisers' clients' access to that information. The SEC proposed substantial revisions to Form ADV, the uniform application for investment adviser registration. Eventually, Form ADV will be filed on an electronic system called the Investment Adviser Registration Depository ("IARD"), where investors will have easy access to certain information regarding investment advisers. The SEC also proposed that an informative brochure, which would provide a "plain English" summary of an investment firm's operations, fees and compensation, types of clients, methods of analysis and disciplinary information, be created and distributed by individual firms.

In addition, the SEC proposed to require investment firms to provide a supplement to the brochure that would give detailed information about individual investment advisers. The SEC envisioned that advisers would each have a form, something akin to a resume, outlining their formal education, background and disciplinary history for the past five years. Advisers would be required to distribute their supplement to each of their clients, but would not have to file the supplement on the IARD. According to the SEC, filing the supplements on the IARD is not practical because the information is substantially already available in the disciplinary reporting page in Part 1 of Form ADV and because there would be significant costs in building the IARD to accept supplements.

For the same reasons the SEC does not intend to require firms to file the brochure supplements on the IARD—cost and redundancy—many of those who commented on the proposed changes argued that investment firms and investment advisers should not be required to make brochure supplements at all.

The Securities Industry Ass'n. ("SIA") predicts that the costs of producing, maintaining and monitoring brochure supplements will be particularly daunting for large investment firms. The SIA also states that the proposal may have the unintended effect of increasing investment adviser disclosure obligations. The SIA wrote that it believes that requiring investment advisers to make additional employee-specific disclosures would not materially contribute to the wealth of substantive information already disclosed by advisers to clients, and that in light of the extreme cost and administrative burdens it would impose, the SEC should reconsider this portion of its proposal.

Similarly, the Investment Co. Institute ("ICI") feels that the disciplinary information required in the brochure supplement is more invasive than what is currently required. "The lack of uniformity between the disciplinary disclosures…will increase a firm's compliance burdens and make it more difficult to ensure that it provides the requisite disclosure in the brochure supplement," according to ICI. However, ICI also stated that the information required by the brochure supplement would seem unnecessary and meaningless to clients and its potential benefits would therefore not outweigh the costs of maintaining the brochure supplements.

The Investment Counsel Ass'n. of America ("ICAA") argued that, while the proposed brochure supplement may be "well-tailored" to small advisory firms, the idea does not translate well to larger firms, where as many as a dozen employees may communicate with one client. As an alternative, ICAA suggests that the brochure contain a statement that further employee information is available and instruct clients on where to retrieve that information. If the SEC insists on a brochure supplement, ICAA suggests that advisers only be required to distribute it to retail clients and not to sophisticated clientele. According to ICAA, either of these alternatives will reduce costs for firms. n