More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
The Securities and Exchange Commission (SEC) voted Wednesday, July 21, to adopt long-awaited changes to the Form ADV Part 2 used by advisors, moving the primary disclosure form that advisors use from a check-the-box format to a more robust narrative one.
As it stands now, the SEC approved a single Form ADV Part 2--one that can be used by both SEC and state-registered advisors. During the last minutes of the SEC's open meeting, the Commission approved a five-day window for the SEC and the states to work on technical, state-specific provisions that will enable state and federally registered investment advisors to use a single Form ADV Part 2. The North American Securities Administrators Association (NASAA) was up in arms over the SEC staff recommendation to adopt a version of Form ADV Part 2 to be used by investment advisors registered only with the SEC, and not those that are registered with the states. But Denise Voigt Crawford, Texas Securities Commissioner and president of NASAA, says that the five-day window gives the SEC time to fix a "procedural" snafu that cropped up, and that she's confident state-specific procedural language will be inserted during the five-day timeframe and a single Form ADV Part 2 will be adopted by the SEC. One form "is the right result," Crawford says.
Under the new rules, the SEC says that advisors will have to "provide new and prospective clients with narrative brochures that are organized in a consistent, uniform manner and that include plain English disclosures of the advisor's business practices, fees, conflicts of interest, and disciplinary information." Advisory firms also must provide "brochure supplements," to clients containing information about the employees who will provide the advisory services to that client.
The old check-the-box format, noted SEC Chairman Mary Schapiro, "frequently does not correspond well to an advisor's business. And, in some cases, the required disclosure may not describe the advisor's business or conflicts in a user-friendly manner." Schapiro also said the new narrative form will help investors "shop" for an advisor.
As the form that discloses information to investors about an advisor's services, fees, and investment strategy, ADV Part 2 is an essential element to advisors fulfilling their fiduciary duty, said SEC Commissioner Luis Aguilar, during his remarks at the meeting. The new narrative form "will give life to an advisor's fiduciary duty," he said, "will also require advisors to explain how they will address conflicts of interest they have with clients." The new form, he continued, will require advisors to go beyond "vague descriptions," giving investors in-depth advice on who's providing them advice.
Advisors will also be required to electronically file their Form ADV Part 2 brochures on the SEC's Web site so they can be viewed by investors.