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October 12, 2010 at 02:00 PM
July 21, 2010 will be remembered for years to come as the day that President Obama signed the Dodd-Frank Act. On the same day, however, the SEC gave its approval to an overhaul of Form ADV Part 2. While it didn’t make headlines the same way Dodd-Frank did, all investment advisory firms should be aware of the potentially far-reaching consequences of this new regulation.
More than a decade earlier—on April 5, 2000—Chairman Arthur Levitt and his cohorts at the SEC unanimously approved a proposal to revamp Form ADV, the basic disclosure document for investment advisory firms. The final revisions to Part 1 of the form were approved and implemented promptly. This included a requirement that all investment advisory firms submit their filings via a new electronic system, the Investment Advisor Registration Depository (IARD). Beginning in 2001, the IARD, and the public Website that displays information to anyone who knows how to use the Internet, ushered in a new and unprecedented level of transparency.
If you have never taken a look at the public disclosure Website, you should do so. With just a few clicks, you can retrieve a lot of basic information about any SEC-registered advisory firm: address, phone number, URL, types and number of clients, assets under management, ownership of the firm, key personnel, disciplinary history, and much more. And remember that this info is required to be truthful under penalty of law.
For the past decade, the other half of Form ADV (some would say the better half) has languished. Form ADV Part II is also called the “brochure.” The idea of the brochure is to give both current and prospective clients appropriate disclosure about the advisory firm’s business, the qualifications of its principals, and potential conflicts of interest. Anyone who has any real experience with old Part II would agree that it has outlived its usefulness. It does not serve the basic purpose of giving investors something meaningful that they will actually read – and understand.
Here is one big-picture observation about the changes to Part 2. (I’ll make another observation in a separate, second post):
For starters, this is not just a cosmetic makeover.
